Fashion Retailer Boohoo Asserts New Corporate Governance Rules For Suppliers After Hitting The Headlines For A Major Supply Chain Failure

As part of its attempts to implement stronger governance and repair reputational damage following a headline-hitting corporate governance failure, online fashion retailer Boohoo cut ties with a swathe of suppliers on 25 March 2021 as it seeks to improve factory conditions for workers.

Boohoo: What happened?

• Boohoo saw its stock price plunge last year after poor governance allowed third-party suppliers to pay below the minimum wage to Leicester-based workers.
• A lack of internal controls, an inadequate governance framework and poor ethical leadership has resulted in Boohoo’s governance failings.
• The company instigated an independently-led review to repair reputational damage and introduce strong governance.
• Boohoo insisted all manufacturing was brought in-house by suppliers by 8 March 2021, cut ties with many on 25 March, and appointed additional non-executive directors to bolster governance.

Why corporate governance failures occur

Governance is the responsibility of a board, to ensure that the business is run properly. Failures can occur due to;

• An ineffective board
• Lack of internal controls and or management of internal controls
• By not keeping up with regulatory compliance requirements
• Inadequate performance management framework
• Inadequate or poorly implemented corporate social responsibility policy
• Inadequate risk management framework

Why the Boohoo failure occurred?

Online fast fashion retailer Boohoo admitted that it failed to implement sufficiently robust governance and good corporate practices as it expanded from a small brand to a global player and has taken drastic action to remedy the situation.

Boohoo’s approach to remedying governance failure

In what has become a text book case study of how quickly reputational damage can proliferate without strong governance in place, since the summer of 2020 Boohoo has been working hard to repair the issues caused by failing to act sooner.

• On 25 March it announced that it had “ceased doing business with a number of manufacturers who were unable to demonstrate the high standard of transparency required”. At the same time, Boohoo published a list of 78 approved factories, down from around 200.
• In early February, Boohoo told its Leicester-based suppliers they must bring all clothes-making work in-house by buying out or severing ties with their sub-contractors. The demand followed revelations last summer that some of its third-party suppliers were paying less than half the UK minimum wage to their factory workers and uncovered lax governance by Boohoo. On 25 March, it acted to follow through on this pledge.
• Boohoo founder Mahmud Kamani appointed Shaun McCabe, a former Amazon and ASOS executive, to chair its audit committee. McCabe – the chief financial officer of rail ticketing app Trainline – joined Boohoo as a non-executive director and his appointment is part of a move to alleviate concerns about boardroom governance by recruiting more independent directors.

Examining the impact of a poorly governed organisation

The Manchester-based company, which has enjoyed soaring sales during the COVID-19 pandemic, saw its AIM-listed share price almost halve even while it continued to acquire a raft of well-known high street fashion favourites during expansion.

Financial

Boohoo’s share price nosedived in the summer of 2020 after a Sunday Times investigation published on 5 July revealed that workers in factories supplying some Boohoo brands in Leicester were being underpaid and that working conditions at the sites were inadequate, sparking an intervention by the Home Secretary, Priti Patel, who told chief executive John Lyttle that the company must “step up and take responsibility” for its suppliers.

Reputational

Ever since, Boohoo has been seeking to repair its reputation, especially after a second probe in October 2020 by the BBC revealed a network of Leicester-based companies were involved in VAT fraud and money laundering.

Independent roadmap commits Boohoo to strong governance

Boohoo asked Alison Levitt, a leading QC, to investigate the supply chain issues, and her report – published in September 2020 – concluded that the company knew of the problems and did “too little, too late” to fix them. However, she also concluded that Boohoo had not intentionally profited from the failings and that its board had “already made a significant start on putting things right”.

In addition, Brian Leveson – best-known for chairing the UK press inquiry in the wake of a phone–hacking scandal – was called in to provide independent oversight.

The company has said his reports will be published, allowing greater “transparency and further independence to the process” and Boohoo gave its suppliers a deadline of 5 March to cease using outside labour as it acted on the recommendations of the report from Alison Levitt QC.

Boohoo chief executive John Lyttle said: “This is the not the end of a project for us at Boohoo but the beginning of a new way of working with our suppliers. We are driving positive change in the industry and want to play our part in rebuilding a vibrant manufacturing base in Leicester, one that offers good employment and great prospects for the workers and the industry in Leicester as a whole.”

Bridgehouse view: Growth with governance

Expanding at such a rapid rate, it is all too easy to underestimate the increased focus required to ensure that a business is being run in way that does not leave it open to scrutiny and reputational damage. Boohoo has grown its sales and brands extremely quickly and has now acted to bring in the good governance and strong practices required to provide it with proper oversight of its supplier practices. However, its experience serves as a warning that failure to prioritise such governance at the time can result in tangible and avoidable problems for any business.

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