TheChek News Flow

Hear no evil, see no evil.

On Saturday, FT Alphaville wrote a column on Boohoo, the controversial £3.5bn London-listed fast fashion company which has long been mired in allegations of using suppliers with working conditions that to us seem reminiscent of Oliver Twist.

Despite shrugging off the accusations over the six years since its 2014 IPO, the issue came to a head this year following a Sunday Times article published in July. The stock dropped by more than a third on the report, prompting Boohoo to commission QC Alison Levitt to investigate. Here’s what happened next (from our weekend piece):

Cut to September, and the publication of an independent report commissioned by Boohoo seemingly removed some pressure. Although lawyer Alison Levitt and her team found widespread evidence of unacceptable conditions at some of its suppliers, the document said the company did not intentionally profit from or cultivate them. A company pledge to clean up its act followed, helping the stock rise 20 per cent to £3.90, just below its all-time high.

Boohoo investors hoping for a period out of the media ring, however, would have been dismayed by news last weekend that its auditor, PwC, has resigned and the National Crime Agency is investigating one of its suppliers on suspicions of money laundering and VAT fraud. Gravity took hold of the stock and by Tuesday it had collapsed by almost a third, before bouncing a tad after management bought the dip the next morning.

At Tuesday’s close, the shares are at £2.76, having not recovered after last week’s plunge.

As part of our research we decided to read the 238-page Levitt report and ohhh boy, does it contain some pretty eye-opening details about Boohoo which we couldn’t squeeze into a succinct opinion piece. So now we’re in the unconstrained space of FT Alphaville, we thought it was worth sharing a few bits of the report. Boohoo’s response to the report’s findings and recommendations can be read here.

Without further ado then, here are our five most jaw-dropping moments from the report with a little bit of commentary. Although we do think a lot of it speaks for itself.

The time Boohoo couldn’t produce a list of suppliers . . . 

First, let’s get some jargon out of the way. A Tier 1 supplier is a supplier that Boohoo has a direct business relationship with — ie a company that it orders garments from and makes payments to. While a Tier 2 supplier is, in effect, a subcontractor — ie they do some work on behalf of Tier 1 suppliers.

Got it? Good. Here’s a few paragraphs from page 54:

At the outset of our Review we made what we thought was a straightforward request, namely to be provided with a list of Boohoo’s Tier 1 and Tier 2 Leicester suppliers. Such a list has never materialised and it is now clear to us that it doesn’t exist.

Instead, over time we were provided with a number of spreadsheets including one listing 141 Tier 1 Leicester suppliers. We were never provided with anything which purported to be a comprehensive list of Tier 2 companies.

The picture remains unclear but, doing the best we can, we estimate that in Leicester there are currently roughly 200 Tier 1 suppliers, and something in the region of 300 Tier 2 subcontractors.

. . probably because it’s on-the-ground compliance team wasn’t much of a team

Boohoo has an in-house compliance team that is meant to check whether a new supplier abides by both international standards and the company’s own code of conduct. After a supplier is signed up, the team then is meant to perform various spot checks on suppliers from time-to-time, to make sure they’re still following the rules.

And here lies the problem: Boohoo’s Leicester-based team was rather thin on the ground. From page 55:

The number of members of the Leicester compliance team fluctuated over time. From January 2017 until April 2020, the team consisted of Witness 152, a Compliance Manager based in Manchester and a ‘Regional Compliance Technician’ in Leicester, Witness 16, plus two administrative assistants. A further Leicester-based ‘compliance technician’ joined the team in January 2018 before leaving in August 2019. She was not replaced.

From this it will be seen that, save for the eighteen months when there were two of them, Witness 16 was the only member of the team actually on the ground in Leicester. In other words, the Leicester audit compliance “team”, in the sense that the lay person would understand it, actually consisted of one person, save for the eighteen months when they were a team of two.

It doesn’t exactly scream “we’re keen to get on top of things” does it?

The time co-founder Mahmud Kamani was interviewed over orange juice . . . 

If you co-founded and grew a business into a multi-billion pound entity, you’d think that you might want to get on top of any issues that are plaguing the company’s reputation and damaging the share price.

For Boohoo co-founder and executive chairman Mahmud Kamani, however, this doesn’t seem to have been the case. When Ms Levitt scheduled an interview with him as part of her investigation into the business, she was rather surprised by the setting he picked.

From page 112:

We conducted a video interview with Mr. Kamani. He spoke to me from an hotel (he told me that he was in Istanbul on business). The setting in which he chose to be interviewed about these serious matters (having breakfast on a terrace with people coming and going) left me doubtful of the seriousness of his approach to my Review, given his senior position in the company. However, I am prepared to accept that this was a misjudgement of the circumstances on his part rather than a lack of interest.

Very generous of her, we think you’d agree.

. . and was rather forgetful

Edward Toogood is Boohoo’s Head of Internal Audit, and is therefore one of the key individuals when it comes to the question of Boohoo’s supply chain. In late 2019, he presented to the Audit Committee the findings of a report into “supplier compliance” between April and September 2019.

According to Ms Levitt (page 172):

Edward Toogood paper [sic] had set out a number of serious concerns — for example that 84% of the Leicester and Manchester suppliers had out-of-date audits — and the discussion was Minuted with the Audit Committee.

Yet when Ms Levitt asked Mr Kamani about Mr Toogood’s findings, this was their exchange (for context, Mr Kamani was chief executive during the period of Mr Toogood’s report):

ALQC: “Did there come a time when you became concerned that you didn’t have visibility on what was happening in Leicester?

Mahmud Kamani: “No not really, I never had that concern”

ALQC: “Do you remember [Edward Toogood] raising it?”

Mahmud Kamani: “…….who is this guy? [Edward Toogood] who??”

ALQC: “He’s your internal auditor”

Mahmud Kaman: “ He had some concerns did he?”

ALQC: “Yes”

Mahmud Kamani: “And did he make it better?”

ALQC: “It’s fair to say it’s taken a while”

Ms Levitt also adds the following a few paragraphs down:

Mr Kamani appeared to exhibit a similar lack of knowledge of (or possibly interest in) the Verisio spot checks on the Leicester companies which took place during July and August 2020

Verisio is one of Boohoo’s supply chain auditors. Talk about tone from top eh?

Missing documents

Cleanliness is godliness, or so the saying goes, but at Boohoo, keeping a clean trail of paperwork even from its board meetings, let alone its risk registers, seems to have been pretty difficult.

From page 181:

Many of the Board Minutes are undated and at least one has the wrong date on it. In at least two instances a document is described as ‘Minutes” when it appears to be the Agenda, just with the names of those present added at the top, but no record of what was discussed or decided. A meeting plainly took place on those dates but I have been provided with no other document.

The first tranche of Minutes arrived from the company in random order. It took me a full day to sort them out; having done so I realised that there were a large number missing. After many requests and some pressure from me, I received a further 24 sets of Board Minutes on 9th September 2020 (nine days after I delivered my interim report and six days before my final report was due). One or two sets of Board Minutes which I believe must exist (because they are referred to in other Minutes as having been approved) have never materialised.

I was sent eight documents which purport to be the company risk registers from the date of the floatation to the present day. The documents are largely undated and most of them are word-for-word identical. I have never received a ‘RAG-rated’ risk register.

I have seen no records which document the company’s risk appetite, nor how risks for which the mitigation is in conflict are evaluated and resolved. If there are documents which I have not been sent that is in itself unacceptable, given the number of requests I have made for governance documents and particular those which relate to risk management.

These were just a few highlights of a report that really does cover all the bases. For some late night reading which may give you a fright ahead of Halloween, we particularly recommend Chapter 6J: Leicester Visit (page 182). We would have used the whole thing, but a 2,000 word long quote felt like a bit much. Even for us.

It’s just a shame that, due to the limited nature of the investigation, the company’s accounts weren’t covered in the same detail as its supply chain. Reading the above, we’re sure they’re squeaky clean.