Sports Direct: What’s going to happen at Wednesday’s all-important AGM

Sports Direct’s problems have deepened with another influential investor sharply criticising founder Mike Ashley and his board.

Hermes EOS, the fund manager’s responsibility and engagement unit, attacked the company’s “poor corporate governance and unacceptable working practices”.

It said that “as a result of the deep concerns regarding Sports Direct’s corporate governance and its response to date to allegations concerning poor working practices”, it was recommending that its clients vote against the re-election of chairman Keith Hellawell as well as non-executive directors Simon Bentley and Dave Singleton. It also said they should vote against chief executive Dave Forsey and interim finance director Matt Pearson.

The firm further said it was urging clients who subscribe to its voting advice service to back a proposal by the Unite union. It calls on the Sports Direct board to commission an independent review of the company’s employment practices and to report to shareholders on the outcome.

Mr Ashley commissioned law firm RPC to conduct a review, but critics argue that it is not sufficiently independent because RPC has worked for Sports Direct in the past.

Big fund managers rarely speak at corporate AGMs, preferring to hold private face-to-face discussions with the bosses of the companies in which they invest. These events, therefore, usually become a forum for small private investors to question boards. Unusually, however, several big guns are understood to be planning to publicly air criticisms of the company and its board on Wednesday.

With the Financial Conduct Authority having introduced rule changes giving minority shareholders the power to vote down directors when faced with a big majority shareholder like Mr Ashley, the meeting will serve as a test of the City’s mettle.

Whether the City will pass that test is open to debate, given that last year a majority of independent shareholders backed the board, and did so at every previous AGM the company has held despite a seemingly never-ending series of controversies and scandals that have dogged Sports Direct ever since it joined the stock market.

With fresh revelations being aired about the company’s operations over the weekend, here is my guide to what may emerge from an event that will be unlike any previous corporate AGM.

1. There is a significant vote against Mr Hellawell and other board members and sizeable vote in favour of Unite’s resolution by independent shareholders, but a majority still back Mr Ashley.

If you find it hard to believe that such an outcome could occur, given what has gone on, this is basically what happened last year.

Such an outcome would represent an abject failure on the part of the City’s institutional investors. It is scarcely credible that they would be willing to tolerate scandals such as the boyfriend of Mr Ashley’s daughter being appointment to oversee the company’s property portfolio, not to mention all those revelations about working practices.

But over the year during which all this has been going on, shares in Sports Direct have halved in value, losing its investors over £2bn. Institutional shareholders would therefore be failing in their fiduciary duties were they unwilling to act. Worse still, this outcome would be seen as a green light to the London Stock Exchange’s other bad boys to thumb their noses at their investors and just about everyone else.

It would demonstrate that the system is failing and demand a response from the Government.

Chris Philip, Conservative MP and Treasury Committee member, has written in favour of creating Swedish-style “shareholder committees” which sounds nice but do-nothing investors could still refuse to serve.

A way to hold the do-nothings to account would require careful thought, but any reforms would also have to include the pension funds and others that put money with institutions and then themselves sit back.

2. Chairman Keith Hellawell is voted off the board by independent shareholders. All other directors re-elected. Unite’s motion fails to win backing from a majority of independent investors.

Mr Hellawell has become a lightning rod for criticisms levelled at Sports Direct, just as Mr Ashley has. As the chairman he has to take responsibility for the failures of governance and oversight at the company. But such an outcome would let the other non-executive directors off the hook.

After this Mr Hellawell would effectively be in purdah for three months before another vote, at which Mr Ashley could force him on the independent shareholders. More likely is that Mr Hellawell would go – his position would be all but untenable – and a new chairman would be appointed.

Whether he or she would be able to change anything with the board as it is currently constituted is open to question. In many ways this would be the worst of all possible outcomes because it would allow the City to show it had used its voting power without anything really changing. Mr Ashley might also feel confident enough to thumb his nose at unions and other critics of labour practices at Sports Direct. Any reforms might only be cosmetic.

3. Chairman Keith Hellawell is voted off the board along with one or more other non-executive directors. Unite motion fails to win support from majority of independent shareholders

This would be a better outcome and ought to send a clear message to Mr Ashley. It’s harder to see it happening because there are differences in approach even among the shareholders that regularly make their votes count and their voices heard. Legal & General, for example, is going to vote against every non-executive director but will back Mr Ashley and Mr Forsey. Its reasoning? Someone has to steer the company during the instability that a vote against every non-executive director would create. As discussed above, Hermes’ strategy is slightly different. This difference in tactics makes it less likely that non-executives other than Mr Hellawell will feel investors’ wrath. Such a vote might prompt Mr Ashley to pay due regard to a number of issues, such as working practices. But it might not.

4. Chairman Keith Hellawell is voted off the board along with one or more other non-executive directors. Unite motion wins support of majority of independent shareholders

This would really put Mr Ashley under the cosh, and ought to force a response. For a majority of independent shareholders in a publicly listed company to vote in favour of a resolution submitted by a union, while opposing the re-election of a chairman and at least one of his fellow directors? All but unprecedented.

Mr Ashley has been thumbing his nose at the City almost from the day Sports Direct was listed and with his voting power he could still defeat the union’s motion. Nonetheless, such a vote would have an impact way beyond Sports Direct. It would probably force a reaction from some of the more conventional companies with “issues”. They might be persuaded to quietly address them if only to avoid similar ructions.

5. Chairman Keith Hellawell is voted off the board along with one or more other non-executive directors and at least one of the company’s executives. Unite motion wins support of majority of independent shareholders

This would be the time to say wow. Sports Direct would be in turmoil. The City would have stepped up to the plate, and people like me would be pinching themselves. The system actually works! Who would have believed it? The chance of this actually happening, however, is negligible. It is about as likely as Boris Johnson saying “you know what, I might just have made a mistake with this Brexit thing”.