Please Don’t Cry: Boohoo investors step away amid supply chain controversy

July 18, 2020

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3 min read

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What's going on here?

The asset management arm of Standard Life Aberdeen, known as Aberdeen Standard Investments, has sold its £27m shareholding in the online fashion retailer Boohoo. This follows Boohoo’s response to allegations of supply chain abuses, which the investment company deemed insufficient.

What does this mean?

In the week commencing 6 July 2020, allegations were made against Boohoo which suggested low pay and poor working conditions in its Leicester factory. This triggered a 47% fall in Boohoo’s share price, and rival fashion platforms Asos, Next and Zalando to drop Boohoo temporarily from their websites. Boohoo stated it was “shocked and appalled” by the allegations and subsequently authorised an independent review of its UK supply chain to address concerns from investors and customers about the treatment of its workers.

Perhaps unsurprisingly, Aberdeen Standard Investments labelled Boohoo’s comment regarding the allegations as “inadequate in scope, timeliness and gravity”. Boohoo’s chairman (and founder), Mahmud Kamani has not appointed an independent chair to help refute his accountability, nor has the company taken steps over the years to improve its supply chain transparency.  The latter is often a risk with the fast-fashion industry as lines become crossed between codes of conduct outlining working conditions, and the efficiency of production.

What's the big picture effect?

This story highlights both the fragility and importance of investor confidence. The damage that can be done to a company’s reputation through a prominent investor withdrawing their shares in light of public opinion can be extremely punishing.  Therefore, Boohoo may need to leverage its recent 45% surge in sales to reach out to new investors through equity finance. This would require the company to sell new shares to increase funds. However, a move in this direction would likely be viewed unenthusiastically by existing shareholders, since their profits would be reduced by dividends being spread across a larger group of investors, and their voting powers reduced if their control is put in jeopardy.

It is also worth noting that there could be an eventual need for greater legal intervention when it comes to ethical issues within companies. Of course, the impact of public opinion would likely be the principal concern for those businesses who prefer discussions to take place privately. Without strong consumer support, businesses find themselves battling against a reduction in cash flow and revenue in the short and long term. Yet, there is scope to change the requirements of negotiations between companies and their fund managers. This would bring poor adherence to UK employment law and business-specific codes of conduct into the spotlight, since workers are continually being undermined by poor corporate governance.

Although Boohoo has benefitted from a boost in sales during lockdown, the company should be wary. Having experienced a £500m drop in value already following the allegations of malpractice, analysts are concerned that growth could halve in light of the bad publicity, undermining investor confidence. Ultimately, whatever method Boohoo takes to gain “full transparency” of supplier operations must be thorough. Methods must be taken to mitigate the risk of losing present and future investors, such as increasing clothes prices to ensure employees’ minimum wage rights are safeguarded. Otherwise, the tears will be flowing if Boohoo finds itself redundant of investors and consumers alike when it reaches the other side of this unexpected conundrum.

Report written by Evangeline Taylor

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