I have some sympathy with Mike Ashley’s recent comments about how certain shareholders have treated Sports Direct.
“Sorry, what!?” I hear you say.
Bear with me, I’ll try to explain….
Loyal soapbox readers will recall we referenced Sports Direct in one of our first Soapboxes. Our comments included, ‘A maverick CEO, who blurs his own activities with those of the company’ and ‘alternative retailers do not offer the same forecast EPS growth but compensate by better cash generation, less aggressive strategies and greater respect between shareholders and managers’.
It wasn’t suitable for Kames, but a number of other (active) institutional investors obviously felt the risk reward trade-off was favourable – especially if their ‘engagement’ efforts could lead to improvements in corporate governance. Good luck with that. Yes, the chairman has recently been replaced, but does anybody honestly think that Sports Direct’s governance is really changing? Engagement can be effective, especially when you are a relatively large shareholder and the company in question is receptive. But let’s be honest, engagement can also be a convenient excuse to hold something that’s a wee bit awkward to explain from an ESG perspective.
Love him or loath him, at least Mike Ashley doesn’t pretend to be something he isn’t.
And from an investment perspective, an entrepreneurial spirit is to be encouraged. However, you also have to have certain corporate governance backstops because companies (and omnipotent CEOs) occasionally try to push things through that our experience tells us don’t work (or aren’t in the interests of minority shareholders). These are the things we are never willing to support. As with most cases, “if you believe in nothing, you fall for everything” (ironically taken from the album ‘How you sell to soulless people who sold their soul’ by Public Enemy).
Our approach to reviewing the corporate governance of the companies in which we invest therefore tries to marry evidence of formal corporate governance policies (committees, independence etc.) alongside behaviours (how shareholder friendly is the company?) and always with an eye on ownership. Ideally, we want the right governance framework and evidence of demonstrable shareholder friendly practices, but we are experienced enough to recognise that the two don’t always go hand in hand. Owner/founder managers are good (they know their businesses intricately), providing their egos are kept in check!
I’m off to spend some House of Fraser vouchers…