Essay Sample on Corporate Governance in Sports Direct

"Sports Direct" is the United Kingdom's largest sporting goods retailer founded in 1982. It currently retails on fitness, sports, fashion, and lifestyle brands of sports materials. Its market strategy is to be the leading international retailer in sportswear, invest in people, and provide quality brands to its customers. Its annual sales were approximately amounting to over 3 billion pounds (Adams & Prassl, 2019). In this article we shall discuss how Sports Direct has failed to meet the UK corporate governance, making it labeled as an embarrassment.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

The company announced its annual results in July 2019. The results included the multiple delays and a shock revelation of the 614 million Euros tax bill. Financial analysts and UK Investors claimed that these revelations revealed the poor performance of the company's main chain (Adams & Prassl, 2019). The cause of the poor performance attributes to the resignation of top managers, unprofitable acquisitions and the payment of 5.35 million Euros to Mike Ashley's expected son-in-law.

The company was marred by ineffective leadership. Most of the shareholders' complaints were based on the poor leadership of the company. These shareholders had complained yearly of the chairing positions to obtain changes but to no avail (Walker, 2016). The most affected were the independent shareholders who pushed for better governance of the company. They were tired of the mismanagement and were in dire need of reforms.

Independent shareholders alerted the public that the shares categorized under the retail group had reduced by less than half of one share. The expose occurred in mid-July and led to the public getting awareness of the mishaps that were affecting the company. The chain encountered lots of losses that they were unable to rise. The trading conditions were hard on the company as it was facing unrecoverable losses.

The shareholders had appealed to the company to inject more resources into the corporate governance of the company. The shareholders wanted more involvement with the affairs of the company. Mike Ashley, who owns more than half of the shares, controlled most of the issues due to his dominance of the stocks. Additionally, the various departments within the company were facing internal struggles (Clarke, 2015). There were no elaborate systems on how the finance officers were to operate with the other departments. There was a period where the finance department did not have an officer for over eighteen months. These discrepancies were against the laws on corporate governance in the UK.

For a very long time, it was required of the company to conduct corporate governance reviews, which it failed to perform. The report was to be done by an independent legal firm. However, it was after the investors had appealed that the review was conducted (Clarke, 2015). To their surprise, the RPC law firm held the report, which represented them in their legal affairs. The review process lacked outsourcing, although such stunts are against corporate governance rules.

Additionally, there existed leadership disputes in the company. The organizations failed to consider stakeholders' votes (Walker, 2016). Their selected representatives in most cases pulled out their candidature. Such alterations of the views of the shareholders are against the rules of corporate governance. Shareholders have a right to vote for their leaders and to be heard in every instance. Despite the value of shares that they hold, their opinion, through their leaders, should be considered. Sports Direct failed to adhere to the rules of corporate governance. The provisions of corporate governance require accountability and transparency of matters of a company.

The Belgian tax bills

Sports Direct was facing challenges of delays from the Belgian government. The amount was concerning the Value Added Tax, which had been charged on goods that were exported within the European Union. The last-minute Belgian tax liability delayed the results revealing the mess of corporate governance in the company. The company had, for a long time promised the public that they would release the much-awaited results to no avail. The disclosures by the Belgian government came after they had made such promises. It was at this period that the Finance Director, Jon Kempster, announced his resignation from the company in September of 2019 (Clarke, 2015).

Sports Direct was misguided when it lied to the public that t it could address the revelations of the Belgian tax liability claim (Walker, 2016). The company had to persuade their auditor, Grant Thornton, to issue such statements. Concerning the ongoing lies, the company's deputy finance director Chris Wootton admitted to the public of how the company persuaded Mr. Thornton to issues such statements.

The delay was a mishap that had never been experienced in the UK. It should be noted that Sports Direct is not the first company to delay its results. However, companies who have initially delayed their results revealed them in minutes for technical reasons. When the company finally decided to release its findings, the meeting told one of the most misguided corporate governance of the company (Zalata, 2016). The meeting was scheduled late in the evening and was half-empty. The statements released by Mr. Wootton stated that their auditors were handling the Belgian liability at the moment and that there was no material risk at that particular stage.

Investigations by financial regulators

The delays of Sports Direct on that Friday attracted the attention of regulators in the UK. At that moment, Sports Direct was issuing updates at two-hour intervals, which were highly suspicious. After trading for the day, the company's shares were closed at 4% lower at 229 (Walker, 2016). Lawyers have termed the delay of the disclosure by Sports Direct as the degradation of market regulations (Villiers, 2019). The company's deputy finance director continued to lie to the public and the analysts at the state of the company. His statement revealed that the company communicated with FCA daily and that they were aware of the reasons for the delays. However, that was not the case.

Mike Ashley's impact on the business empire

Mike Ashley is the founder and Chief Executive of Sports Direct. Mike was aware that the financial results of the company are to be released annually for the assessment by business analysts, investors, and shareholders. However, he delayed in the release of the results leading to skepticism amongst the auditors. Mike's leadership has been termed to be unconventional over the years. It has periodically been on an acquisition splurge, which financial analysts have termed as problematic to the governance of the company. In 2018, the House of Fraser department store was purchased, leading to many questions and investigations emerging out of the acquisition. The purchase revealed that Sports Direct was going through severe financial problems.

The business reported a 57% drop in its profits within 2016 (Walker, 2016). Keith Hellawell, the former company chairman, had been criticized by shareholders to be destroying the reputation of the company. He influenced the customers and generally had a negative impact of Sports Direct. The sales went down, leading to a drop in profits in less than six months. Additionally, it was revealed that he had negative relations with the staff. Such links led to most teams resigning from their jobs, citing poor corporate governance.

The employees at the company were paid less than the minimum wage required by the employment regulations (Villiers, 2019). Most unions and shareholders criticized this stand for safeguarding the reputation of the company. During this period, Mike Ashley made a statement through the director-general that the company was making changes for a start. They aimed at mitigating the issues that had been exposed.

Mike Ashley has been exposed to be dominating the company. He owns more than half of the total shares and therefore uses this power to manipulate most corporate governance. Mike purchased a new corporate plan which cost the company 40 million Euros. During that purchase, the company already had a helicopter, a fleet of motor vehicles, and an inn workshop. These extraordinary and luxurious purchases were unnecessary. It led to the company losing a lot and getting indebted.

Mike Ashley's involvement of the company with his other family members businesses has also been termed to have impacted on the company's corporate governance (Villiers, 2019). In addition Mike focused his energy on blaming those who claimed he initiated the losses that the company was facing. The investors and shareholders felt that Mike should have focused his energy on reforming corporate governance instead of the blame games.

There have also been allegations that Mike was not in good relations with the City of London. Sports Direct had been accused of flouting the conventional corporate governance rules. The corporate governance rules that Sports Direct defied were quite a number. At one particular time, some sources claim that it operated for 18 months without a finance director (Adams, Adams & Prassl, 2019). Additionally, Mike held the job title of the executive deputy chairman. Mike was the founder and the Chief Executive of the company. Holding two job titles is against corporate governance rules. He was only allowed to keep one job title at the moment, which was being the chief executive officer.

During the release of the financial reports, the company had agreed with journalists would not probe questions. The investors were the only group that was allowed to make inquiries into their investments (Zalata, 2016). However, Mike decided to let journalists ask the questions that they had. He intended to clear all the doubt that was lingering in the minds of the public. He wanted to make a statement that could persuade the analysts, investors, and senior employees that the financial situation was under control.

Mike confirmed that he was not going to convert the company to a private entity. He added that the company's directors and shareholders had not held any general meetings to discuss the conversion (Villiers, 2019). Additionally, no special resolution had been passed by the majority and minority shareholders to guarantee the transformation of the company from public to private.

Conclusion

Finally, Mike assured the shareholders and investors that he would avoid the intermingling of the company's business affairs with that of the family businesses. He aimed to maintain the entity of Sports Direct as a company separate from his family members' businesses. Corporate governance requires that elaborate measures should be taken to separate family businesses from other corporate entities.

References

Adams, A., Adams, Z., & Prassl, J. (2019). Legitimizing Precarity: Zero Hours Contracts in the United Kingdom. Zero Hours and On-call Work in Anglo-Saxon Countries (pp. 41-65). Springer, Singapore.

Akbar, S., Poletti-Hughes, & Shah, S. Z. A. (2016). More on the relationship between corporate governance and firm performance in the UK: Evidence from the application of the generalized method of moments estimation. Research in International Business and Finance, 38, 417-429.

Clarke, T. (2015). Theories of corporate governance. The Philosophical Foundations of Corporate Governance, Oxon.

Dignam, A. J. (2019). Artificial Intelligence: The Very Human Dangers of Dysfunctional Design and Autocratic Corporate Governance. Law and Legal Studies Journal.