Oral evidence: The Pension Protection Fund and Pensions Regulator, HC 55
Oral evidence, 29 June 2016.
Witnesses
Michael Sherwood, Vice Chairman, Goldman Sachs, Anthony Gutman, Co-Head, EMEA Investment Banking Services, Goldman Sachs, and Michael Casey, Managing Director, Goldman Sachs, gave evidence.
Chair
Mr Sherwood, your firm provided us, on 1 June, with a log of activity relating to the sale and acquisition of BHS, extending to 95 items. It was very thorough and we thought it was complete. On Monday we received a letter from Goldman Sachs in which it states, “For completeness, we should also note that shortly before the transaction closed Mr Sherwood also received a call from Sir Philip Green with the request that Goldman Sachs consider extending a £40 million loan to support the transaction to be guaranteed by Arcadia”. Why didn’t you tell us that before?
Michael Sherwood
Unfortunately I think when I was preparing for today I was looking at some material and talking to one of my colleagues and he reminded me of it. It only occurred for a brief moment in time because immediately after we were asked to look at it we were told to stand down, so we never really spent any time working on it. I apologise for providing it to you late.
Chair
What else haven’t you told us? Is there anything else for completeness?
Michael Sherwood
There was one other call that we included in the note to you, in which, as I was watching Sir Philip Green’s testimony, he remembered talking to me about who were Farallon. I said to him Farallon are a large asset manager and that was literally the end of that call.
Chair
How can clients trust you when for completeness you failed to remember a potential £40 million transaction?
Michael Sherwood
Again, it was around for an incredibly short period of time and we were told someone else had provided the loan. We never provided any terms on the loan. It was a request that went away almost as soon as it arrived.
Chair
But in terms of systems, of completeness of what goes on, what the firm is guaranteeing or otherwise, you are lacking here, aren’t you?
Michael Sherwood
I don’t think we are. It was logged in our systems. I missed it. I should have mentioned it to our lawyers when we were sitting down and talking about this.
Chair
It was logged in the system, so the system had it but it was not retrievable to be able to provide to us for a complete log when we requested it?
Michael Sherwood
Mr Chairman, I can only apologise and I offered it to you in the spirit of full transparency. I really don’t think it was a large point because it lasted for less than 24 hours.
Chair
I appreciate that Goldman Sachs is a large firm but is £40 million just considered immaterial to you; it can be forgotten?
Michael Sherwood
Again, we never put terms on the loan, ever.
Chair
How do you reconcile what Mr Gutman told us earlier on in our inquiry, that Goldman Sachs’s role in this was informal observations? How can that view be reconciled with providing potentially a £40 million transaction?
Michael Sherwood
I think at the point where the loan was asked for, the transaction was essentially finished. It was closed.
Richard Fuller
It is important, Mr Sherwood, because a big play was made last time by Mr Gutman about how no fees were here. In fact, it became a bit of a Committee joke that the only people who knew what was going on didn’t receive any fees and yet you forgot the one thing where you would get fees in your submission. Why was that?
Michael Sherwood
Again, we never quoted any fees, we never quoted any terms. We were told that someone else was providing the loan.
Richard Fuller
But it was another type of service. When you provide loans normally you would charge interest or fees on that, so it would have been remunerative to Goldman Sachs, wouldn’t it?
Michael Sherwood
It would have been if the proposal had continued but we were not asked to provide the loan. We were asked to stand down.
Richard Fuller
But you can understand our concern because there has been this impression created that Goldman Sachs were the gatekeepers. They are an informal adviser. They provided observations, I think was the word that Mr Gutman used, and yet you forgot in your submission the one thing that would have conveyed that there was a potential commercial transaction. I know it was only there fleetingly and I know it was not a lot of money in Goldman Sachs’s world—it was only for £40 million, which probably is not a lot of money for Goldman Sachs—but it was material to the understanding of the Committee about the different roles played by informal advisers and formal advisers and how informal advice is given credibility. I would like, if I may, to go through some of the other financially remunerative transactions and relationships that Goldman Sachs has with Sir Philip Green and with his businesses. How long has Goldman Sachs had a business relationship with Sir Philip Green?
Michael Sherwood
I think the business relationship first started in about 2004 when we were one of several advisers who advised him on his bid for Marks & Spencer.
Richard Fuller
Were you personally involved in that transaction at that time?
Michael Sherwood
I was personally involved at that time, yes.
Richard Fuller
So you have known Sir Philip Green for well over a decade?
Michael Sherwood
Yes. I got to know him, I would say, in the early 2000s, a couple of years prior to that.
Richard Fuller
Over that period of time, what types of services have Goldman Sachs provided to Sir Philip Green and his businesses?
Michael Sherwood
Obviously the Marks & Spencer transaction. Following that I don’t think we have done anything significant on the investment banking side. We have from time to time given him views on various markets, foreign exchange, interest rates, inflation and so on with respect to Arcadia and some of the pensions, and his family has had a private wealth management relationship with the firm since 2008.
Richard Fuller
So they are in your private client business?
Michael Sherwood
They are in our private client business managed by our private client people, yes.
Richard Fuller
As part of that, do you provide tax advice to your private clients?
Michael Sherwood
We don’t, no.
Richard Fuller
Goldman Sachs plays no role in making recommendations to private clients about how to manage their wealth tax efficiently?
Michael Sherwood
Maybe I should qualify that, because I don’t manage the account and I need to check with the person who manages it, but I am pretty certain we don’t offer tax advice. We don’t tend to offer tax advice, no. We are not a tax adviser.
Richard Fuller
Maybe it would be helpful if you take a couple of minutes to explain what that division of Goldman Sachs does for its clients.
Michael Sherwood
That division manages high net worth assets. It allocates them principally between fixed income, equity and alternative and cash markets. Goldman Sachs is slightly different from other firms. We don’t manage retail money. Our starting account size is larger and we are really in the high net worth business and that is all.
Richard Fuller
I am an MP. I earn £66,000 a year. Am I high net worth?
Michael Sherwood
Not to our private wealth management business, you would not be.
Richard Fuller
How much would I have to have in wealth?
Michael Sherwood
Several million dollars of liquid assets is where we start in that business.
Richard Fuller
I have some way to go then. You talked about investment banking relationships. Can you explain what type of investment banking work Goldman Sachs would have completed for Sir Philip Green’s companies? You mentioned British Home Stores. I think you said that that was probably the last time you did some investment banking.
Michael Sherwood
No, I said Marks & Spencer was the last time.
Richard Fuller
Marks & Spencer, my apologies.
Michael Sherwood
We have had various discussions from time to time but nothing substantive has ever come of those discussions. We really have not done any investment banking work for Sir Philip since the M&S transaction in 2004.
Richard Fuller
Does Goldman Sachs keep records about the fees that it earns from particular businesses or particular individuals?
Michael Sherwood
Yes.
Richard Fuller
Could you give the Committee any understanding of the amount of fees that Goldman Sachs has made from Sir Philip Green over the 12 years?
Michael Sherwood
They are very small. We can come back to you in writing but they are de minimis.
Richard Fuller
Why do you provide that advice? You are not making any money. You have been with him for 12 years. You are not giving any services; you don’t give him tax advice. He has involved you now in coming here, with tremendous reputational risks for Goldman Sachs. Why do you do it, Michael?
Michael Sherwood
We are in the business where we cover large corporations, high net worth individuals, Governments. They may not do things for a very long period of time but at particular times in their life cycle they might do significant transactions and we want to be in the goalmouth when those things happen. I was going to say hang around the hoops but I think in the goalmouth is more appropriate here. We want to be close to large transactions when they are going public, when they are selling assets, if they are doing large financings.
Richard Fuller
It is an awfully long time to hang around the hoop for 12 years, isn’t it, and only earn just a few peanuts?
Michael Sherwood
That is our business. That is the nature of our business. Unfortunately large companies do not do significant transactions that regularly.
Richard Fuller
Goldman Sachs is happy to make an early judgment on someone because he owns a business and then spend more than a decade hanging around the hoop, not earning much money, in the hope that some day he or she will do something big. That is your business model?
Michael Sherwood
I wouldn’t say we are happy but I would say we continue to assess the nature of those relationships and we put the appropriate amount of resources on them.
Richard Fuller
You have to make money, so wouldn’t it be in the nature of your relationship to want them to do something so you are always in the business of suggesting things that they should do?
Michael Sherwood
We would like them to do things that we think are in their best interest.
Jeremy Quin
Mr Sherwood, you will be acutely aware of the Goldmans brand and what it means, not only in this country but globally. What you lend your name to gives a tremendous amount of credibility to any process and I am curious as to why you are prepared to lend your brand name in these circumstances.
Michael Sherwood
Again, as I think Mr Gutman described previously to the Committee, we formally turned down the assignment to represent Arcadia on selling the British Home Stores company. From time to time we are willing to provide informal advice to our clients as and when they ask for it and, as Mr Gutman described last time he was here, we thought our role was very simply to provide some preliminary observations about this potential transaction. I would also add one more point. When we turned down the assignment we had absolutely no idea who the buyer might be or whether there were multiple buyers. We just had no idea. We didn’t think it was a piece of business for us so formally we decided to turn it down.
Jeremy Quin
I can understand that but you ended up being half in and half out. That was the reality and in doing so you were in the situation where you think you are providing informal guidance but I think your client said “one million percent” he would not have conducted the deal with Chappell unless he was comfortable that it had been signed off by Goldman Sachs.
Michael Sherwood
I think he said if we had turned it down, but on the same point we had not told him it was okay to proceed. I think Mr Gutman had done a good job of highlighting the risks with the transaction and with the counterparty.
Jeremy Quin
There is huge risk for all concerned if you are half in and half out of the deal, isn’t there?
Michael Sherwood
I don’t think there is enormous risk. The scope of work that we would have done if we were in would have been substantially more than the e-mail and call logs that we presented to you. We would have had lots of people, thousands of e-mails, dozens of meetings. We just were not that involved in this process.
Jeremy Quin
I understand that and I should say I was principally involved in your sector and I appreciate the work that you would have put in in those circumstances, but you were still prepared to be half in and half out. The fact is that your name was used as a gatekeeper but, as I understand it, you were only gatekeeper for one party. There was one party who had the Goldman Sachs brand there in front of him, “This is a serious process, this is something I have to take incredibly seriously. I have to put my best foot forward for meeting Goldman Sachs”.
Michael Sherwood
Gatekeeper was not our term. As I said, we were asked to provide preliminary observations. You will get a chance to ask Mr Budge again, but when I heard Mr Budge’s testimony he described our work as preliminary observations. That was entirely consistent with what Anthony performed.
Jeremy Quin
Do you think the disconnect is with Sir Philip, that he was thinking he was getting more than was fair?
Michael Sherwood
I think you have to ask Mr Budge. I wasn’t party to the conversations between Mr Budge and Sir Philip Green.
Chair
I am trying to understand your business model and the rationale behind the decision not to be transparently and publicly involved in the sale and acquisition of BHS. You are hanging around the goalmouth for 13 or 14 years and then a ball is crossed in and you move away into your defence. Where is the rationale behind that?
Michael Sherwood
We didn’t think the transaction was for us. We thought it was too small. We thought that the potential buyer base was probably a smaller turnaround, the kind of person who ended up buying, which really did not suit our clients. We were in a busy merger market at the time and we had to allocate our resources appropriately. We didn’t think this was for us on commercial reasons.
Richard Fuller
I am sorry about the mixed metaphors—I like NBA—but you have hung round the hoop for 10 years. It is not a whale. This is not the hugest transaction. He is not trying to buy John Lewis, heaven help us, but it is something. I mean, come on.
Michael Sherwood
It is obvious to everybody there is a very significant asset that Sir Philip Green owns and at some point he may decide to do something with it. That was the transaction that we would like to hang around the hoop for. This was a transaction that we did not think was for us, for the reasons that I mentioned.
Richard Fuller
Can you reassure us that you did not do the transaction because it was too small rather than the fact you did not do the transaction because you knew that it stunk?
Michael Sherwood
We absolutely had no idea at the time. As I said, we had no idea who a potential buyer could be for this transaction so at the time we turned it down—
Richard Fuller
Mr Gutman gave very compelling evidence that he had done his research on Mr Chappell. He did realise the person was a bankrupt.
Michael Sherwood
But that was all after we turned it down. As you will remember, Sir Philip Green called me and said, “Would you take this transaction on?” I had one brief conversation with Mr Gutman and we went straight back to him that day and said, “We’re going to turn it down” and we had no idea who the potential buyers would have been.
Richard Fuller
So it literally was just because of size?
Michael Sherwood
Size, commercial reasons, nature of the buyer base. Those are the reasons that I mentioned previously.
Craig Mackinlay
Mr Sherwood, thanks very much indeed. You have obviously had a long-term relationship with Sir Philip back to the M&S deal of the early 2000s, and I suppose quite understandably, given your very generous fee structure, he was probably on the phone to you from time to time. We have evidence that he called you in October 2014 with a potential sale of BHS. It has been quite difficult for us to get to when did this spark occur in Sir Philip’s mind of doing something with BHS. We know about its long-term losses and the difficulty in the retail market. I am understanding that you had an occasional relationship with Sir Philip Green. When were you first aware that this spark of a disposal was developing within him?
Michael Sherwood
Categorically or absolutely on that call. Had I been aware over previous years that if an appropriate buyer showed up he might sell it? I don’t think that was as surprise to anybody.
Craig Mackinlay
Do you recall that telephone conversation that you had in October 2014?
Michael Sherwood
I do recall that telephone conversation, yes.
Craig Mackinlay
What was the nature of it?
Michael Sherwood
It was as we described. He couched the conversation in, “This is probably not for you but would you like to advise on the sale of British Home Stores?” I said, “You’re probably right. Let me just think about it. I want to talk to Anthony”. I called Anthony. We have since compared notes. It was a very short conversation. We decided it wasn’t for us, for the reasons that I just suggested. I went straight back to Sir Philip and said we don’t want to advise on this transaction. It was not clear to me whether he would take another adviser or not at that point.
Craig Mackinlay
I would have thought this sort of brand name is the sort of work that Goldman would like to get involved with. You probably were aware—and you can explain whether you were or not—about the difficulties of the pension scheme. Were you aware of those? Did Sir Philip mention those in the telephone conversation?
Michael Sherwood
I was aware of the difficulties in the pension scheme. We had been following it for a few years, yes.
Craig Mackinlay
Were you aware of this Project Thor?
Michael Sherwood
I don’t think I ever knew it as Project Thor but I was aware generally about the de-risking of the pension plan and that was consistent with the ideas that our pension group had been showing him.
Craig Mackinlay
On that telephone conversation, was it just Swiss Rock being mentioned or did you get an inkling there were perhaps others in the field?
Michael Sherwood
Again, Mr Mackinlay, there was absolutely no client mentioned, none at all. We had no idea whether it was one buyer, multiple buyers. We had no idea. I have no idea whether Sir Philip knew at that point. I really don’t know.
Craig Mackinlay
I am finding this a little bit odd at the moment. You have had a telephone conversation about a potential sale with unknown purchasers. It seems an odd conversation. I think my business interactions would be, “Hello, Michael. I’m thinking about selling. You know that. We’ve got difficulties with the pension. I’ve got this person interested. What do you think?” I can’t see that conversation would take more than about 30 seconds.
Michael Sherwood
I can’t fabricate a conversation that didn’t happen. I described it accurately.
Craig Mackinlay
I am just trying to get the nature of that conversation. You had a call.
Michael Sherwood
He called me. He said, “You probably don’t want to act for us on this transaction. I’m thinking about selling British Home Stores”. I said, “I think you are probably right. Let me talk to Anthony and I’ll come back you”. That was the extent of the conversation as I remember it.
Craig Mackinlay
So it was very short?
Michael Sherwood
A very short conversation, yes.
Craig Mackinlay
From that conversation, you made the decision that it was not for you. It is odd that he has phoned you to tell you that it is not for you. It is an odd conversation.
Michael Sherwood
It happened.
Craig Mackinlay
I thought, busy man, to have a conversation with you. You are a busy man. You are a huge business. To say, “I want to do this deal but it is not for you”; why make the call?
Michael Sherwood
You will have to ask him.
Chair
Mr Gutman, welcome back. My understanding is that Sir Philip had rejected the proposal that was on the table about the middle of January on the basis of the money that had been put forward and the lack of a “creditable” retail front person and he decided to market BHS out into the wider market. Were you advising against a deal at that point?
Anthony Gutman
No. As I mentioned to the Committee last time, at no stage were we either giving advice or giving a recommendation, positive or negative, for the reasons we have explained, Chairman, which is that we did not have access to any information. We had one phone call with Dominic Chappell and one meeting in this whole process. All we did was provide the observations that I took the Committee through last time, which was that there were risks attached to the proposal in light of the lack of retail experience, the bankruptcy and the highly preliminary nature of the proposals and so on and so forth.
Chair
You were very hands off, very preliminary observations, and yet on 19 January you told Dominic Chappell that there was no deal and that BHS would be marketed. Again, how are those statements reconciled?
Anthony Gutman
Per the log, I didn’t tell him on 19 January. On 19 January Paul Budge, per the log, had a discussion with Sir Philip Green, according to the e-mail traffic, and then he went back to Dominic Chappell and said there was no interest in proceeding. We were not part of any of those interactions.
Chair
What happened and did your advice change between 15 January and 1 February?
Anthony Gutman
No.
Chair
You always thought, “This is a bit dodgy”?
Anthony Gutman
Well, no. We gave the observations that I explained. There was no reason for us to change our observations because nothing changed. In the period you are talking about, we had no engagement, no further interactions, so this process was going on as between the principals.
Chair
The proposal had been abandoned. It was going out to the market because Sir Philip Green wanted somebody with retail credibility but he changed his mind. Did he tell you why he changed his mind?
Anthony Gutman
No, he did not.
Chair
You didn’t ask?
Anthony Gutman
No. We were not privy to these conversations and so there was no reason to.
Chair
But my understanding is that on 26 and 27 January you spoke to Sir Philip Green.
Anthony Gutman
Yes.
Chair
What were the nature of those calls? What did you talk about?
Anthony Gutman
There were two calls. One call was where he referenced the fact that he was going to be progressing the transaction and he was not going to be using an adviser. In the second conversation, which was the day after as I recall, he said that they were likely to progress with Mr Chappell and that there would be a meeting on 28 January, which we then attended.
Chair
Is not using an adviser common in transactions of this nature?
Anthony Gutman
Yes, I would say it is quite common for big corporates with a sufficiently sizeable in-house team to execute a transaction in-house reliant on lawyers and accounting advisers alongside them. That is by the way of—
Chair
Given the preliminary observations that you provided, given that there had been a change of plan, a quite radical change of plan in terms of what Philip Green was doing, did you advise him against it? Did you say, “Given the preliminary observations that we have carried out, I would really urge caution against this”?
Anthony Gutman
He didn’t actually come back to us to ask us what he should or should not be doing. As I mentioned, Chairman, we were not capable of telling him what not to do and the reason was that, per the e-mail traffic, there was significant interaction as it related to financials, pensions, due diligence. We were not part of any of that. We provided our observations based on that one meeting with Dominic Chappell and that one phone call. The rest of the picture was formed through their other work and their other interactions. What we did do, as you know from our last discussion, was we identified the risks attached to the proposal and left it to them to make their judgments.
Richard Fuller
Thank you very much, Mr Gutman, for coming back.
Anthony Gutman
Thank you for having me.
Richard Fuller
Maybe we will have you again. On 3 February you had a conversation with Farallon who were Swiss Rock or Mr Chappell’s proposed lenders. Can you tell the Committee what your understanding was of Farallon’s proposals at the end of that call?
Anthony Gutman
It was probably a 15-minute conversation at the most. We had been forwarded an e-mail from Mr Budge that outlined indicative terms. In that conversation Farallon made clear that they had made an expression of interest but that it was subject to due diligence, documentation, investment committee approval, a number of conditions. The message that I conveyed to Mr Budge off the back of that call was that Farallon was a credible financing provider, given their history, that as it related to their position right now this was still a very preliminary financing proposal.
Richard Fuller
Did you see the term sheet?
Anthony Gutman
No.
Richard Fuller
Did you ask to see it?
Anthony Gutman
No. I had been provided, per the e-mail log, with high level terms and that was sufficient and then we had the discussion with Farallon.
Richard Fuller
What was the amount?
Anthony Gutman
£120 million drawn down in three tranches of £50 million each.
Richard Fuller
£40 million each, I think. Three times 40 gives 120.
Anthony Gutman
Sorry, you are right.
Richard Fuller
Maybe I can get a job at Goldman. Is three times 40, in terms of the provision of working capital, 40 or 120?
Anthony Gutman
I have no idea. Again, I am sorry to not be helpful to you but the data as provided were literally one line, three tranches of £40 million. We did not have access to working capital, projections of financials.
Richard Fuller
No, just the basics of understanding a term sheet, which you did not see but you had this e-mail and then you were asked to validate whether it was there or not. One of the things I would like to know from a term sheet is how much money it is. My question to you is: is three times 40, 40 or 120 in terms of the capital that is being provided to a business?
Anthony Gutman
I think it depends on the timing of the £40 million.
Richard Fuller
No, it doesn’t, does it, because in the term sheet it said every tranche has to be repaid? It is not a matter of timing at all, is it?
Anthony Gutman
Okay. Again, with respect, Mr Fuller, I didn’t see the term sheet at the time. I do not have any data to back it up but I can say to you—
Richard Fuller
In not seeing one of the critical conditions, that three times 40 when you have repaid 40 is not 120 in a company that is losing millions of pounds, where 11,000 employees’ jobs are on the line about this rescue plan, how can you not ask for the term sheet and then go on and provide informal observations that Mr Budge will take with a lot of credibility because it is from Goldman Sachs?
Anthony Gutman
Let me explain. If this financing had progressed and we had been involved in it that is exactly what we would have done. We would have looked at the financing terms, we would have compared them, if we had been provided with that, with the BHS projections and we would have given our advice as to whether the financing was fit for purpose to fund BHS, as you say. We did not do that. We had a very short phone call, consistent with the testimony from Farallon, and we gave these observations. We would have subsequently done exactly as you said but we were not asked to and nor intended to, and the observations we gave were that this would require further work and due diligence, as you said.
Richard Fuller
You must be feeling quite uncomfortable. In your log on 9 February Paul Budge suggested a call and asked you if you were happy with Farallon’s funding proposals as Arcadia were now progressing to a draft heads of terms. That sounds pretty serious to me with a £600 million business. Then you indicated on 10 February that you were happy with Farallon’s initial funding proposal, that you had not seen the document but they were subject to due diligence and documentation.
Anthony Gutman
Yes.
Richard Fuller
So you are providing advice to the owners of a £600 million revenue business on a funding proposal that within the terms clearly does not provide anything like the working capital needed for a turnaround and you feel it is in your position to say, “Yes, it’s okay”?
Anthony Gutman
What we said was that we were happy at this initial stage that the financing proposal looked like something that could be progressed but we were also clear, per the e-mail traffic, that it had a number of conditions. It was subject to due diligence, to documentation, and that that work would need to be done in order to establish whether that financing was, as you said, okay. Just to be clear, the reference to us saying this is okay was a reference to it being okay in the context of a preliminary proposal that would need significant further work.
Richard Fuller
If you are in a fast car driving headlong towards a brick wall and you are in the passenger seat, you don’t say to the driver, “We’re travelling north”. You say, “Hit the brakes”. Your advice carried enormous weight because Goldman Sachs has been hanging around the hoop for 10 years; they know Sir Philip Green who by all evidence is the person who drives everything in this business. You must have known that the advice that you were giving would have reinforced the momentum towards the draft heads of terms for a sale. You had not seen the term sheet, you didn’t know that it was not providing sufficient working capital, and as a consequence British Home Stores ended up in the hands of a three-time bankrupt. That seems to me to be a dereliction of duty whether you are paid for it or not.
Anthony Gutman
I would say that the approach from Farallon was consistent with any other financing approach at that stage in a transaction, highly preliminary and subject to a number of conditions. All we said at that point in time was that it was a consistent approach with market practice and that it would be up to Arcadia and their advisers to assess whether that financing proposal was fit for purpose, as you say. I don’t think it is fair to describe it as a dereliction of duty.
Richard Fuller
You may be right and I apologise if I am proven to be wrong on that, but let’s talk about the conversation with Mr Budge as the next stage. Did he ask you about the details of the term sheet?
Anthony Gutman
I didn’t have the term sheet. I understood that he had access to the term sheet.
Richard Fuller
Did he ask you about the details?
Anthony Gutman
He did ask about the details. As the e-mails show, the proposal was literally four lines: £120 million to be drawn down in three £40 million tranches to be secured on the properties and subject to standard due diligence and the disposal of properties. That e-mail had been forwarded by him to me, so he had seen that. What he asked was what my impressions were, based on my short conversation with Farallon. I explained to him that my impressions were that Farallon was a credible funding provider and, therefore, to be taken seriously but that it was a highly preliminary proposal and, as I put in the e-mail, it was subject to due diligence and documentation. He subsequently asked again, “Is it subject to documentation?”
Richard Fuller
Do you think that Mr Chappell sought to misrepresent the Farallon proposals as £120 million or do you not feel in a position to comment?
Anthony Gutman
As I said to the Committee, literally I had one phone call and one meeting with Mr Chappell so I am really not in a position to comment.
Michelle Thomson
Good morning, gentlemen. Thank you for coming along. Mr Sherwood, I have been keeping quiet to this point but I have been sitting watching everyone’s faces and, if you don’t mind my saying, you look somewhat uncomfortable. I wanted to explore with you, in the light of what has come out, from a reputational risk point of view and governance how do you manage the potential reputational risk to Goldman Sachs in the light of, as Richard puts it, hanging around the block when really in general terms we all acknowledge the wheels have fallen off?
Michael Sherwood
We are very careful about which clients we take on. We have various committees and checks that we go through and we try to avoid and have very publicly turned down certain pieces of business where we thought it was inappropriate.
Michelle Thomson
In the light of what we now know, how will you reflect that going forward in your relationship with Sir Philip Green?
Michael Sherwood
We will have to decide on whatever piece of business comes along whether it is appropriate for us and how reputationally sensitive it is.
Michelle Thomson
Will you change what you currently do in the light of what we are now coming to understand, based on the evidence?
Michael Sherwood
I think our procedures are strong and our reputation is good.
Chair
Do you think your reputation as a firm has been enhanced by your involvement in the sale and acquisition of BHS?
Michael Sherwood
No.
Chair
What are you going to do to change that?
Michael Sherwood
We do a lot to enhance our reputation. As I said, we work very closely with everybody at the firm, with our regulators. We set up processes, committees and so on to make sure that we take on appropriate pieces of business. I would remind you that after the time I met Philip Green he was knighted, he was asked by the Prime Minister to do a review for the Government. This was not a person whose reputation was going down. At that point it was going up.
Chair
But you must have processes in which high net worth individuals are subject to periodic review, “Do we want Goldman Sachs to be associated with this individual still in the light of subsequent acts?”
Michael Sherwood
We absolutely review all our clients all the time, yes.
Chair
When was the last time you reviewed the relationship with Sir Philip Green?
Michael Sherwood
We have been reviewing it at this point as all this has come to pass.
Chair
But you are happy to do more work with Sir Philip?
Michael Sherwood
As I said, it depends on the circumstances of the transactions.
Craig Mackinlay
If I could concentrate on the pension side of things, when we had Dr Margaret Downes, who was the previous quite long-term chairman of the trustees for the pension fund, there was an indication that, for obvious reasons, Sir Philip was interested in the performance of the pension fund and especially after the adverse valuation in 2012. It is given that Sir Philip had advice from yourselves or took you along to meetings of the pension fund. Were one of you involved in any of those meetings? Did you go along? Was that you, Mr Sherwood?
Michael Sherwood
No. It was our pensions group.
Craig Mackinlay
You have a pensions group?
Michael Sherwood
We have a pensions group, yes.
Craig Mackinlay
Do you understand any of the nature of what they were doing for Sir Philip Green in attending these independent trustees meetings?
Michael Sherwood
I don’t really have an understanding of which independent trustee meetings they were attending but I would say generally they were showing de-risking proposals to the pension plans.
Craig Mackinlay
Derisking proposals, okay. There was an indication at one time that Sir Philip was quite unhappy with the investment strategy, that he didn’t feel it was capable of making up the shortfall fast enough. Was there any formal advice given by Goldmans as to what would be a better investment strategy?
Michael Sherwood
I am not aware of it on the asset side, no.
Craig Mackinlay
Do you know if Goldmans were paid for that type of attendance?
Michael Sherwood
We are not paid for that kind of work. It is a principal group that provides potential transactions and then if the trustees decide to do them they normally appoint their own adviser and the adviser decides who to do the transactions with.
Craig Mackinlay
It seems quite a bizarre fund. We have come across so many advisers being involved. I think at one time the annual fees were £1.5 million per year across different advisers. Some of your team were going along but they were not being paid for this advice. I am trying to understand the nature of what they were doing there.
Michael Sherwood
As I said, from time to time they showed de-risking proposals to all sorts of pension plans all over the UK. The way they generate their business model is if the trustees decide to do transactions they tend to appoint their own adviser who then puts the trades out and normally the most competitive price wins. That is how the business tends to be executed.
Craig Mackinlay
Do you know if any of the proposals by your pensions team were actually taken up and carried forward?
Michael Sherwood
I couldn’t say for certain but, as I understand it, I don’t think these transactions ever occurred. I don’t know though.
Craig Mackinlay
You would be aware of Project Thor, another proposal for which there were an awful lot of external advisers. How much was Goldman Sachs’s role in that Project Thor? Were you aware of it? Were you just giving perhaps observations on it?
Michael Sherwood
I think Arcadia had their own pension adviser who was running the process. Our colleagues in the pension group would have given advice from time to time on that, I would say, yes.
Craig Mackinlay
I am trying to get to the bottom of there were lots of these independent groups around the whole enterprise, of which the pension scheme is a very important one. It had a lot of advisers but even while it had all those independent advisers, Sir Philip Green always referred to yourselves to come in and give some help. Do you know why that is? It seems slightly odd that there is a huge number of advisers but you are always involved with Sir Philip Green’s negotiations and interests.
Michael Sherwood
I don’t know why that was. I don’t know if that is true, actually.
Craig Mackinlay
Throughout Project Thor, throughout the 2000s, you always seemed to be helping Sir Philip understand the pension situation and it now seems you were doing all that for free.
Michael Sherwood
As I said before, I think it fell into our long-term overall relationship with Sir Philip and his companies.
Craig Mackinlay
When it was realised that Project Thor was being proposed, what input did Goldmans have into that?
Michael Sherwood
I believe at the time we commented on the proposal that directionally we felt that it was going in the right direction, but I don’t think our role was more significant than that.
Craig Mackinlay
I was wondering how much work you might have done to satisfy yourselves that it was going in the right direction.
Michael Sherwood
I don’t know. I can investigate further with our pension group and come back to you but I just don’t know the extent of that.
Craig Mackinlay
I would like to know how much input your pension group was having into the pension fund over the years. Indications are it seemed to be fairly significant. You were again being the gatekeeper—and that word comes up quite regularly—for Sir Philip Green. Is that a fair assessment?
Michael Sherwood
I don’t think we were a gatekeeper in either of these situations.
Chair
Mr Sherwood, we have minutes of the pension trustees scheme and it says for 15 July 2014, “Stuart Cash—and I understand Stuart Cash works for Goldmans—said he had been speaking with Sir Philip about managing some of the BHS scheme’s exposures from a markets perspective as whenever the trustees propose a change in approach Sir Philip will always ask ‘What do Goldman Sachs think about this?’” He comes to you constantly for advice, advice which you give him on pensions as well as a whole range of other things, don’t you?
Michael Sherwood
As I said at the very beginning, we have acted from time to time and given views on the pension fund, yes.
Jeremy Quin
Going beyond the immediacy of this transaction, could I ask for some informal, unpaid advice and guidance from Goldman? It would be much appreciated. We have a situation here where I appreciate that the transaction value was tiny in terms of equity but there are 11,000 jobs, pension fund and the like. In your experience globally, what could be done to ensure that for assets such as this work is done to ensure that you don’t suddenly sell to a buyer who three months later has a cash crisis? Is there any sort of positive recommendations?
Michael Sherwood
As Mr Gutman has explained before, if we had been the adviser and we had been involved in the ultimate sale—and there was a long period where we just were not involved at all—we would have done significant due diligence on the potential buyer as part of the process for culminating an M&A process, but we weren’t.
Jeremy Quin
I don’t want you to comment on this transaction. There are other circumstances where various opinions are required to talk about the value of the sale. From a regulatory point of view, are there recommendations that you would make that you think would make it harder for transactions to be made to buyers who are not capable of fulfilling their obligations?
Michael Sherwood
I think if we had been the adviser and a credible adviser had been there, they would have done the due diligence on the buyer.
Jeremy Quin
And if there is a credible adviser to the acquirer, to the other side?
Michael Sherwood
Both sides, yes.
Jeremy Quin
We are in the mind-set of recommendations on that kind of thing. Should one require advisers? Should you say boards have to consider certain things? Open field: what would you recommend to try to prevent this kind of incident happening again?
Anthony Gutman
We can give it some further consideration. From our vantage point—and I am not trying to be defensive—I think as Mr Sherwood said it is quite tough for us to give a view even generically because we don’t have all of the detail. As we witness what goes on with the Pensions Regulator and the PPF we can come back and have a conversation with you.
Jeremy Quin
We are aware that things have gone wrong in this particular circumstance and the way things exist they could continue to go wrong in other circumstances. There are suggestions that others have as to how these situations can be better avoided. It is nice to learn something out of it. Thank you.
Richard Graham
If we can go back to the pension scheme a little bit, what was your advice to Philip Green all along, Mr Sherwood, about his responsibilities to the pension scheme?
Michael Sherwood
I wasn’t giving Sir Philip Green advice on his responsibilities to the pension scheme.
Richard Graham
Who was? Anthony Gutman?
Michael Sherwood
No. I think our pension group was giving advice on how you could derisk the pension scheme and that was the extent of it.
Richard Graham
The pensions group is Goldman Sachs asset management or the investment bank?
Michael Sherwood
The pension group is within the financing group, which is within the investment banking piece of our bank.
Richard Graham
While you were giving Philip Green advice about the way forward on BHS the corporate, you were also introducing your pensions group in order to try to offer transactional help on the pension scheme. Would that be correct?
Michael Sherwood
Transactional help is a confusing term because transactions only happen once the trustees agree to do specific transactions. They then tend to put it to their own adviser who then tends to put it into the market. That is the way our group works and then it would move into our securities division who would offer quotes and if they were the best price they would win and if they were not they wouldn’t. In this particular situation, I don’t think we ever did any transactions with the BHS pension plan.
Richard Graham
Who from the pensions group was involved?
Michael Sherwood
For a long time it was Stuart Cash, who is no longer at the firm but he ran that group.
Richard Graham
Who was involved in the discussions with Sir Philip Green or other members of his team like Paul Budge?
Michael Sherwood
It was principally Stuart Cash.
Richard Graham
What exactly happened? What was his proposal, what was his recommendation?
Michael Sherwood
I think all the recommendations were centred on managing long-term interest rates. It is not an uncommon problem with these schemes and with all the schemes of UK corporates, as I am sure you are aware, that stealthily interest rates at the long end of the market have gone lower and lower and that was the biggest risk factor associated with the plan. I think this was a slippery slope. Rates went lower and lower and lower and along the way we had shown derisking proposals to manage, principally, long-term interest rates and, to a lesser extent, inflation.
Chair
Richard, forgive me for this. I am conscious of time and we touched upon this before you arrived. Mr Sherwood, it might be helpful if you could give us another log of all the work that Goldmans has carried out, both paid and unpaid, from different parts of the firm, the various teams. Would that be possible?
Michael Sherwood
Again, there is no paid work.
Richard Graham
Chairman, I think what would be very helpful is if in the written evidence from Goldman Sachs they could be very specific about what they were recommending as a solution to the pension scheme and to whom and whether those proposals were ever put directly or indirectly to the chairman and the trustees of the pension scheme or purely to Philip Green, for example, and Paul Budge. I think it would be interesting to know to what extent that perhaps formed the basis of Philip Green’s belief, as witnessed yesterday, that the solution to the pension fund was purely interest rates.
Chair
I think that is very helpful.
Michael Sherwood
If it would be helpful, I can read you one sentence that comes from our pension group where they say, “In April 2014 Arcadia was asked to comment on a proposal prepared by Deloittes as part of Project Thor in relation to the British Home Stores scheme investment strategy. Goldman Sachs supported the Deloitte proposal. In parallel, the trustees formulated their own proposal. If implemented, the trustees’ initial proposal would have seen less derisking of the scheme than the one that Deloitte proposed. As a consequence of subsequent discussions with Arcadia, Deloitte and us, the trustees enhanced their derisking proposal. GS supported that enhanced proposal.”
Richard Graham
That implies that Goldman Sachs was present at the trustees meeting.
Michael Sherwood
None of us were. Mr Cash might have been. I will have to check and we will prepare the log for you.
Chair
If you can find out, that would be very helpful. Mr Sherwood, I want to ask you a final few questions, if I may. When we had Sir Philip Green in front of us, my colleague Richard Fuller asked him this question: if Mr Chappell and RAL had not passed Goldman Sachs’s sniff test of their credibility, would you have done a deal with them? Sir Philip said, “We wouldn’t be sitting here, absolutely not”. Do you accept blame for this debacle?
Michael Sherwood
I absolutely do not accept blame. He never passed our sniff test. Anthony and I never told Sir Philip that he had passed the sniff test. All we highlighted was observations about the risks around Mr Chappell and the transaction.
Chair
Would you accept any degree of blame with regard to this episode at all?
Michael Sherwood
I think our role was extremely limited. If I had a regret, which I do, I wish that we had more clearly documented our role in writing so that we could not have the subsequent confusion that we are going through today, but it was crystal clear in our minds what our role was.
Chair
Given the concerns to your reputation, which is very important to you, what would you have done differently? You talk about written records. What are you changing to ensure that you can try to put this behind you and move forward with improvements?
Michael Sherwood
I think we will look again at the frequency with which we review clients, but we have a very robust programme that we talk to our regulator about all the time and are convinced that it works.
Chair
But essentially you think there are strong processes in place so nothing should change?
Michael Sherwood
We have strong processes, definitely.
Chair
So nothing should change?
Michael Sherwood
As I said to you, if I had a regret I wish we had clarified our role in writing.
Chair
Okay. Gentlemen, thank you very much for your time. Examination of Witness
Witness
Mark Sherwood, former Property Director, BHS, gave evidence.
Chair
Mr Sherwood, thank you for coming. We are very pleased that you are here to give evidence. May I begin by asking you when and how did you first come into contact with Dominic Chappell?
Mark Sherwood
About five, maybe six years ago I met him socially and then I got to know him slightly better through sailing. We both sailed together.
Chair
What did you know about his business experience?
Mark Sherwood
I basically viewed him as an entrepreneur. All his businesses were quite diverse in terms of what he had done. I understood he had done some work in north Africa. He had some good connections in the Middle East and he had an oil project somewhere in Europe.
Chair
What sort of impression did he give you? You said he was an entrepreneur. Did he look like a successful entrepreneur with all the trappings that that would provide?
Mark Sherwood
Yes. He wasn’t at Sir Philip’s level but he certainly seemed to have the appearance of someone who was successful in what they did.
Chair
Did you think he had the potential and the credibility to be at Sir Philip’s level?
Mark Sherwood
Goodness. Not many people do, do they? I think that he had the potential to go out and find deals and transact them.
Chair
Could you just speak up a little bit? That would be very helpful for the purposes of the Committee. He was a dealmaker. Is that where you thought his strengths were?
Mark Sherwood
Yes, that was my impression.
Chair
What did he tell you about the deal with BHS?
Mark Sherwood
He told me that he was seeking to agree terms to buy the company and he asked me to get involved in providing advice on the property side.
Chair
What would be the specific nature of that property advice?
Mark Sherwood
The focus was very much on the value of the prime assets that he had within that portfolio.
Chair
You moved from your job and went on secondment to RAL. Is that correct?
Mark Sherwood
No, I was employed by British Home Stores. Yes, I did move across.
Chair
That is a big step in terms of your career and putting food on the table.
Mark Sherwood
That was a huge step.
Chair
What were the reasons for you doing that?
Mark Sherwood
It was good job. From a property perspective, it was a national portfolio, nearly all prime or good secondary properties, and there were significant issues within that portfolio. Not from an occupational point of view at BHS but from a property director’s point of view that makes for an interesting and diverse role.
Chair
Who else were you asked to work with on this deal? Were you allowed to pick your own team or did Mr Chappell say, “I would like you to work with so and so”?
Mark Sherwood
No. Once I came in I worked for Darren Topp, so he was my line manager. We outsourced the additional resource that we needed. When we needed specialist advisers we went to specialist advisers.
Chair
Who would those be?
Mark Sherwood
There were quite a few. We used Savills, Knight Frank, Harper Dennis Hobbs, CPP, DTZ, Jackson Criss, Vail Williams, Eric Young, and then Allsop and GL Hearn carried on doing the rates and latterly we appointed Bellrock to help on the management side.
Chair
Forgive me, I am not a property expert by any stretch of the imagination but simply managing all those contracts seems to be a bit onerous. Is it common that you would have so many advisers doing that? Wouldn’t you streamline it down to maybe two or three? What was the purpose of having so many?
Mark Sherwood
They all had different jobs. We used CPP and Jackson Criss as our main contact with the market. If you asked someone in the market who did BHS use, those are the names that would have come up.
Chair
Thank you. That is very helpful.
Michelle Thomson
Good morning. It would also be helpful for me if you could speak up a little. Thank you. I was finding it a bit hard to hear. Just to finish off that section, what was the primary driver for you to move from your role in the LLP you were in and you had an equity also into BHS? Was it excitement or did you use it as a step up in the portfolio management side?
Mark Sherwood
It was a move into a role that I thought was very attractive. As I said, it was a good job. It was a really attractive real estate portfolio to go and work with. There are not many portfolios of that type that you get the chance to go and, as it was planned at that time, transform. It was very exciting.
Michelle Thomson
From a remunerative perspective, in addition to your salary, were you expecting to get a bigger fee cut in terms of rebalancing the portfolio?
Mark Sherwood
No. There was a bonus scheme that was agreed with the BHS remuneration committee and that was based primarily on savings achieved within the cost base of the portfolio.
Michelle Thomson
When you found out that Sir Philip Green wanted to sell back the BHS property portfolio that was sitting in Carmen that wasn’t part of the BHS business, what sort of view did you take about the impact on the covenant of it coming back? Did you think it was going to strengthen the covenant of BHS as a brand or weaken it, or did you just look at the property?
Mark Sherwood
I really just looked at the property, but if the company has greater assets within it then that should strengthen the covenant, shouldn’t it?
Michelle Thomson
Did you have any knowledge at that time that there would be some other deals done in terms of the whole portfolio or did you expect that absolutely everything was coming, prime and dogs, if you like?
Mark Sherwood
I expected all the occupational portfolio to come across and in that due diligence period my main focus was on the assets that had the most value.
Michelle Thomson
What access to property data were you provided with by Arcadia in advance? Were you given complete access?
Mark Sherwood
They were reasonably helpful. We got a schedule of all the properties, their tenure—whether they were freehold or leasehold—the length of leases, the rents and the square footage.
Michelle Thomson
Just the basics.
Mark Sherwood
All the headline stuff and then if you said, “Have you got any property reports?” most of the time the answer was no. They had a lot of information that people carried in their heads. If you found the right person you could get the information but you had to track it down.
Michelle Thomson
Mr Chappell told us that you went to work in Arcadia’s office for about a month prior to the acquisition to get a good grip of the property side. Is that something you would concur with?
Mark Sherwood
No. In the run-up to the acquisition Mr Chappell had spoken to Sir Philip about some of the ideas I had for the portfolio and I understand that Sir Philip had said, “We should look at doing that sort of thing anyway. Why doesn’t he come and start looking at it?” I went and met with Chris Harris. We sat down and we talked through the data that was there. I didn’t really need to be in their office. I needed the information, which he provided to me. I took that information and then when I needed more I went back and asked him.
Michelle Thomson
In terms of working up the business plan developed by BHS management, which then included looking for £26 million savings from the property, how much were you involved and how much was Dominic Chappell involved?
Mark Sherwood
I wasn’t involved. You are talking about the 3 March business plan, aren’t you?
Michelle Thomson
Yes. So you were not involved in that at all?
Mark Sherwood
No.
Michelle Thomson
Did you ever meet Paul Sutton?
Mark Sherwood
Yes.
Michelle Thomson
What was the purpose of those meetings?
Mark Sherwood
Paul Sutton came to my office with Dominic Chappell at, I think it was, the end of March 2014. He said that he was looking at acquiring a major corporate and asked if we could help. I talked to him about the sort of services we could provide, what we did and what our experience was. He said thank you and he went away. He came back about two weeks later and he had a spreadsheet with some properties on, which made it obvious at that point that it was BHS, and he asked if we could help. He didn’t engage us and he didn’t provide any more data. We couldn’t help. He just had a spreadsheet with a list of properties on and not very much data at all. I met him those two times and then there was a third time when he came to my office and said, “We are not going to do anything here. We are going to go to Arcadia and pick up all the information that you are telling me you need in order to take this forward”.
Michelle Thomson
When you say “we”, was that your previous company because you were involved through the—
Mark Sherwood
Yes. We were advisers, so it was a reasonably normal conversation at that stage. We, as in Paul Sutton, Dominic Chappell and myself, went to Arcadia’s offices and we didn’t get any further than reception. At that point, or very shortly afterwards I did say to Mr Chappell that, “There are a few warning bells here. I am not sure that I really want to work with them”.
Chair
While you are pausing there slightly, Michelle, let me just interrupt. The meeting that you had in March 2014, I think you said—you may have already said this and I didn’t pick it up and I apologise if you have—you knew Dominic Chappell already at this point, didn’t you, in a personal capacity?
Mark Sherwood
Yes.
Chair
Did he introduce you? Did he say, “I would like to bring along Mr Sutton”?
Mark Sherwood
Yes. He said, “There is someone that I think you should meet. You could do some business with him”.
Chair
What was your assessment of the relationship between the two? Was Paul Sutton very much in charge with Dominic Chappell as very much a junior partner or someone who was subordinate, or were these people of equal standing?
Mark Sherwood
No. At that point I got the impression that Paul Sutton was in the driving seat.
Chair
I think Dominic Chappell was in the driver’s seat from what we heard yesterday, but we will leave that.
Michelle Thomson
To clarify one other point, you said that at that meeting you did not get any further than the reception of the building in Arcadia. It is picking up on something else we have been exploring. Can you outline briefly what happened when you presented at the reception?
Mark Sherwood
As is normal, you are asked to take a seat. We had been there a few minutes and then Paul Sutton disappeared off somewhere into the building and he came back maybe 10, 15 minutes later saying that, “They can’t do the meeting. The Pensions Regulator is here. They are in the next room. They can’t talk to us. We need to leave.”
Michelle Thomson
Going back to the buildings turnaround plan, what gave you inherently the confidence that rents could be renegotiated successfully?
Mark Sherwood
I was never confident that rents could be renegotiated successfully.
Michelle Thomson
Perhaps then let’s go back a step, talk me through the steps you were taking for the turnaround plan? Where did that come from? What steps did you take?
Mark Sherwood
The basics of the plan, which I think you can probably accept was very high, were that on the property side there would be £2.2 million from head office savings, and that was sorted out on day one, and a further £5 million in impact from the Carmen rents, and that was sorted out on day one. Then there was £7.2 million of rental savings and I was very wary about how that would be achieved, certainly in terms of negotiation. If you have a lease, as nearly all the landlords did, and someone has contracted to pay you maybe £1 million a year in rent for the next 10, 15, sometimes 70 years, why would you say, “I’ll take a lesser sum”? It was something that was deeply concerning me. Mr Chappell had found a specialist firm who claimed that they did this for a living and that they regularly reduced rents by negotiation. I met with them and their fees were impressive, I thought. For us, as in BHS, it didn’t work because we were very much driven by cash flow and the way they structured their fees was such that they took a percentage of the total saving on the lease. If they got us out of a particular property, any of the leases where we had a long remaining term certain, we would end up paying them sometimes two, three years rent at that moment in time. The entire focus of the business was orientated around cash flow today. That was the absolute driver for the decision-making processes.
Jeremy Quin
That is very dangerous. Is it purely your summary that it was cash flow today that drove the thought process behind every transaction?