Neil Collins’ Notebook – It’s not the mistake, it’s the response

Every organisation makes mistakes. The test is not whether it does so, but the reaction when the extent of the mistake becomes apparent to those at the top. On this scorecard, failures are being chalked up faster than with A-level algorithms.

The directors of Boohoo Group were shocked – shocked – to be told that dresses they were selling for £25 were being made in little better than slave conditions. The board of Rio Tinto had no idea that some irritating pieces of rock in the way of their iron ore mine extension marked an ancient Aborigine site. By the time the Financial Conduct Authority noticed that a private firm selling mini-bonds ought to be stopped, investors had been gulled into parting with £267m, much of which is now lost.

Let us assume that those in charge in each case thought they were doing their best. Even so, at Boohoo the non-executive directors would have been justified in asking how the alchemy of transforming cloth into fashion was accomplished for that price. After the Sunday Times exposé, and some dithering, the company appointed QC Alison Levitt to run an independent enquiry.

It has not started well. The home secretary has written to Boohoo’s CEO to raise the pressure to come clean. The Ethical Trading Initiative, a body which looks at just such issues, points out the obvious problem of the company marking its own homework. Rather than a narrow focus on conditions in Boohoo’s suppliers, the ETI wants an examination of the whole industry.

The brokers at Shore Capital point out that associating semi-slave labour with glamorous fashion is not a good look, and have shifted their recommendation to sell. Bohoo’s founders, Mahmud Kamani and Carol Kane, responded to the slump in price that followed the Sunday Times story by investing £15m more in the shares, which have since risen by a half.

By contrast, at Rio Tinto the blunder looks more like cock-up than conspiracy. The CEO has taken a (temporary) pay cut, and everyone is making the right noises of contrition. Unlike that to the Aboriginal site, the damage is likely to be temporary.

The same thing cannot be said at the FCA. London Capital & Finance’s “mini-bonds”, which offered wildly inflated returns, would not have stood up to any competent analyst’s examination. Had the authority closed it down when outsiders first told it so, £200m of investors’ money would have been saved. As it is, at least three-quarters of the £237m they put in has been lost.

Prosecutions will surely follow, while the other focus will be on whether there are grounds for compensation. The FCA tried to wash its hands of the affair, arguing that the bonds were not authorised. It was pushed into appointing QC Elizabeth Gloster to investigate, but this week the authority’s incompetence forced her into a second delay, after it admitted to finding a further 3,500 documents, a year and a half after her appointment. She has every reason to be hopping mad.

Conspiracy theorists have plenty to tuck into here. The chairman of the FCA at the time was Andrew Bailey, since promoted to governor of the Bank of England. Should the Gloster report find sufficient evidence of early warnings, or worse still, evidence that Mr Bailey knew, his position might be fatally undermined.

So, three institutional failings, three different responses. Mining is by definition a rough and dirty industry, but there is no excuse for rough and dirty responses elsewhere. Others might note both cases and think how better to respond if they make egregious mistakes.

Shopkeepers 1, Landlords 0

Commercial buy-to-let is not a uniquely British activity, but it reflects our unique obsession with property. After all, you are buying physical assets, leases frequently contain upward-only rent reviews, the landlord is a preferential creditor, and the shopkeeper remains liable even if he passes the lease to someone else. What’s not to like?

An increasing amount, it seems. The earthquake in the high street has revealed that commercial leases are too one-sided to be sustainable, and the balance of power is being redrawn. The owners of shops occupied by New Look are finding out the hard way where the market is taking them – a turnover-based rent as low as 2 per cent on most stores, and zero for three years on the rest of the 470 in the portfolio.

There will be real hardship here for some individual landlords, and while the owners of the business are playing the usual private equity/hedge fund role as cardboard villains, more struggling chains will not survive without some similar scheme. The British Property Federation, the commercial landlords’ trade body, is doing its best to hold back the tide, but with too many shops in the UK – even before Covid and internet commerce – they had better get used to the new look, however badly it suits them.

A very expensive Hut

Good news for holders of UK tracker funds: The Hut, a rag-bag of frightfully modern and e-savvy bits and pieces (“We build brands. We drive ingenuity. We create experiences”) will not qualify for inclusion in the FTSE 100 index. This is because too few shares are being offered in the forthcoming flotation, and because founder Matthew Moulding is retaining a sort of golden share. Still, he expects to raise £920m for a market value of £4.5bn, or 25 times earnings before nasties, which is presumably why he needs seven bookrunners plus NM Rothschild to handle the issue. Best of luck to the buyers.