Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Mike Ashley, founder and executive deputy chairman of Sports Direct, is keeping it in the family once again.

The company is paying some of its takings from website customers outside the U.K. to a delivery broker owned by his brother, John, according to the Financial Times.

Given existing scrutiny on Sports Direct's corporate governance practices, this arrangement just doesn't pass the smell test. It's making rival JD Sports all the more attractive, and adding to the case for the company to go private, as Gadfly has argued.

Ashley has form in naming family and those close to his relatives to key spots. He put his daughter's boyfriend, a former nightclub promoter, in charge of Sports Direct's property empire. And the same brother, who helped Ashley in the company's early days, ran the company's information technology for many years.

Sports Direct estimates that the broker, Barlin, makes about 300,000 pounds ($393,000) in annual profit from the arrangement, according to the paper. That's small beer compared with its 367.1 million pounds in earnings before interest, tax, depreciation and amortization in its last financial year.

Family Fortunes
Shares in Sports Direct have almost halved this year, taking a toll on Mike Ashley's 55 percent stake

Even though Mike Ashley, who's known for wanting to get his money's worth, probably drove a hard bargain on the arrangement, in this case the money's not the main issue. Sports Direct has had a terrible year, with a string of profit warnings, and lawmakers slamming the "appalling" working conditions at the retailer. The company said last week that it would conduct an external evaluation of its board structure.

That's not enough to quell shareholder disquiet over its governance arrangements -- Pensions & Investment Research Consultants has recommended that investors vote against the re-election of Ashley and chairman Keith Hellawell at the annual meeting in two weeks. The corporate governance advisor's stance stems in part from concerns on Ashley's level of influence over the board and from a lack of confidence in Hellawell's leadership abilities.

And while Sports Direct has been distracted by the probe into its employment practices, rival JD Sports has been quietly making hay. In contrast to Sports Direct's profit warnings, it has twice revised its earnings estimates upwards. It's also exploring sensible acquisitions, such the possible purchase of Go Outdoors, according to Sky.

The diverging fortunes are reflected in the two companies' forward price-earnings ratios. JD's is now at about a 60 percent premium to Sports Direct. Up until last year, it traded as a discount. 

Sports Direct Has Lost Its Edge
Relative price to equity ratios reflect that the company's been missing the mark for a while with shoppers
Source: Bloomberg

 

As with football managers, investors can overlook unacceptable behavior when their team is winning. When it's on a losing streak, they'll be less forgiving.

That's the situation at Sports Direct. Two years ago, when the company was on a roll, investors seemed to dismiss Ashley's employment decisions as just another one of his eccentricities. But with the share price languishing, his foibles aren't likely to be tolerated.

It's understandable that a company's founder names friends and family to key positions -- that's often the nature of entreprenurial businesses. However, it's not appropriate for publicly traded companies, where survival isn't so hand-to-mouth and the aim is to protect the interest of all shareholders, not just the big ones. 

Were Ashley to take Sports Direct private, he could employ whichever family members he wanted. While he's still accountable to minority shareholders, the Ashley family values need to be kept in check.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net