Sir Philip Green bought the business — started in south London with all stock sold at a shilling or less — for £200m in 2000. He and his family received £586m in dividends, rental payments and interest on loans before he sold BHS for just £1 last year.
This is the dark side of capitalism: increased borrowing and payment of ever bigger dividends; risk transferred from the private to the public when the business fails; the low paid and the taxpayer left to pick up the bill. It is all worryingly reminiscent of the 2008 banking crash.
Sir Philip, the king of shops, has led a life that would put Louis XIV to shame, acquiring three superyachts and even a solid gold monopoly set with the locations changed to those of the Green family businesses.
Meanwhile, the BHS pension fund fell from a surplus of £17m in 2002 to a potential deficit of £571m today, a sum strikingly similar to the profit taken out of the company by the Greens. BHS has not made a profit since 2008.
How has this happened? By paying bigger dividends than would have been possible without, among other steps, underfunding the pension fund and in effect paying dividends out of borrowed money, the Greens were able to withdraw large sums from the business. Without the necessary investment, and saddled with debt, the company has simply not been able to compete in a highly competitive sector.
Why did the directors permit a serious business, with significant pension liabilities, to be acquired by a group that had no chance of turning it around? Of course, this has not stopped the new owners from taking more than £25m out of BHS for just over a year’s work, albeit including more than £11m for legal and professional fees.
The BHS story is a case study in many unpopular aspects of modern capitalism: exploitation of limited liability, loophole-ridden tax law and intricate accountancy. Is it any surprise that confidence in the system is falling, and that those who offer alternative views, such as Jeremy Corbyn in the UK or Bernie Sanders in the US, have built up large followings?
We must ensure the corporate veil is easier to lift to prevent socialised losses. We should move the economy from tax-subsidised debt finance towards longer-term investment in businesses. We must make it harder for businesses to pay vast sums to shareholders and management when a company is failing. The government must review its approach to the financial engineering of businesses to eradicate tax liability and park financial risks anywhere but on the owners. It should rewrite the companies and finance acts accordingly.
The alternative is that capitalism’s reputation continues to decline.
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