Sports Direct International (SDI) managers and directors were under intense pressure at the British sports retailer's packed annual general meeting (AGM) of shareholders in Shirebrook this week, despite a raft of last-minute reforms announced by the group and its majority shareholder, Mike Ashley, regarding working conditions and corporate governance.
At the unusually well-attended and eventful assembly, nearly 53 percent of independent shareholders voted against the re-election of Keith Hellawell as chairman of SDI. The company had indicated just a few hours earlier that Hellawell had offered to resign, but that the board asked him to stay. He said after the vote that he would leave with immediate effect at next year's AGM, if a majority of independent shareholders again voted against him.
The unrest has been amplified by a sharp decline in the group's share price over the last year and it announced another drop in underlying profits before the start of the AGM. The company indicated that its underlying earnings would reach about £300 million (€353.8m-$398.8m) for the full fiscal year ending in April, down from £381.4 million in the previous fiscal year, which wiped up to 10 percent off SDI's share price on Wednesday morning. These underlying earnings are subject to sales growth of at least 9 percent, a decline in gross margin of “no worse” than 2.75 percentage points and operating costs increasing by no more than 8 percent, as well as the absence of unforeseen significant items or material acquisitions.
While the pressure on profit margins wasn't a huge revelation, some investors were caught off-guard by details on planned investments in property. As part of its trading update, SDI said that capital expenditure should substantially increase with continued investment in freehold property and strategic investments. The group has deployed about £250 million (€294.8m-$332.4m) on such acquisitions since the end of the last fiscal year, including a prominent location on London's Oxford Street. The update added that Ashley would execute the strategic plan over the next two to four years. SDI further denied speculation that Ashley, the group's founder, may want to take it private again.
SDI has been under intense scrutiny since last year over working conditions at its warehouse in Shirebrook, which were at the center of Ashley's hearing before a parliamentary committee in June and were described as “appalling” in the ensuing report. The issues added to growing concern among investors about corporate governance at SDI, which appears to be run to a large extent by Ashley, even though he is formally executive deputy chairman. Matt Pearson has been “acting” chief financial officer for more than two years.
The pressure continued to pile up in the run-up to the AGM, with reports that a company appointed as a distribution agent for online orders to be dispatched to foreign markets was owned by Mike Ashley's brother, John. It had already been reported a few months ago that a property arm of the group was led by Michael Murray, the boyfriend of Ashley's daughter.
About three weeks before the AGM, the sports retailer said that a report about working conditions at the warehouse, to be compiled by its legal advisers Reynolds Porter Chamberlain (RPC), would be published ahead of the AGM. It added that an external review of the board would be conducted later in the fiscal year.
Published the day before the AGM, RPC's findings led to promises of significant changes. SDI said that retail staff on controversial zero-hour contracts would be offered a switch to contracts with a minimum guarantee of twelve hours per week. This does not include workers at the warehouse who are agency staff, but SDI said it was considering a test scheme to transfer ten of these workers per month to SDI.
SDI also wants agencies to abolish the “six strikes” policy, under which workers could be dismissed over offenses such as “excessive toilet breaks” and “chatting.” The RPC report found that the system contributed at times to a “hierarchical and potentially oppressive” model. SDI is hiring a full-time nurse and a welfare officer for the warehouse, and a confidential reporting system is to be put in place for victims of sexual harassment. Warehouse supervisors are to get extra training to make sure “there should be no culture of fear.” The promises continued later the same day, as Ashley issued a statement saying that an employee representative was to be appointed to its board.
Previously, the company had already agreed to a package of compensation for workers who were at some point paid less than the minimum wage due to bottlenecks caused by security checks in Shirebrook. Ashley himself started a review of the working conditions and pledged to raise pay above the minimum wage. Dave Forsey, the group's chief executive, was blamed for some of the failings regarding the warehouse in the RPC report. It was announced in June that he would forfeit a share bonus worth £3.6 million (€4.25m-$4.79m) at the time.
The AGM was an unusually publicized affair, as SDI allowed observers to take part and invited shareholders and other stakeholders to take a tour of the warehouse in Shirebrook after the meeting. Ashley answered most of the pointed questions with good humor, snapping only when confronted by a trade union representative. His bonhomie was back as he headed to the warehouse with a group of journalists. He then nonchalantly pulled a thick wad of £50 notes out of his pocket and dropped it into the tray as he showed off the improved security checks.
After the votes were counted, Ashley pleaded for patience and said he would leave the company if he repeatedly failed to fix the issues at hand. The outcome of the AGM means that another shareholder meeting and vote must be held about Hellawell within three to four months but he will remain in his position at least until then. Legal and General Investment Management already called for Hellawell to step down immediately. A significant share of independent shareholders also voted against the re-election of several other board members: 36 percent against Simon Bentley, senior independent non-executive director and chairman of the audit committee; 35 percent against Dave Singleton, non-executive director and chairman of the remuneration committee; and 34 percent against Claire Jenkins, non-executive director.
Separately, SDI said after the AGM that it was continuing with a share repurchasing program started earlier this year to reduce its share capital. The buyback will be for up 29,825,290 ordinary shares, amounting to about 5 percent of its issued share capital, for an aggregate consideration of up to £89,475,870 (€1,055,218-$1,189,317). The purchases are expected to continue during the period leading up to Oct. 21, when SDI goes into a close period before the release of its half-year results. The shares repurchased by the Company will be held in treasury pending cancellation or re-issue.
