Harvey Norman (HVN) chairman and co-founder Gerry Harvey has rejected claims that his company should consolidate its franchisee network, amid conflicting calls from proxy advisory firms as to whether shareholders should vote for or reject the company’s financial accounts at Harvey Norman’s annual general meeting on November 14. A report released last week by Ownership Matters and circulated to Harvey Norman’s shareholders has recommended that the company’s financial accounts should be re
ejected, based on concerns about the manner in which the company reports its dealings with its franchisee network.
The report claims that the “tactical support” HVN provides for franchisees in its network of 673 operators is “effectively loan forgiveness”, resulting in a lack of clarity around how well the company is actually doing in any given year.
According to Harvey Norman’s 2016 annual report, the company maintains $943 million in franchisee loans and wrote off $69 million in debt this year as “tactical support”.
“How do we know its is performing well? … The biggest swing factor in Harvey Norman’s profits is the extent to which it forgives its franchisees of their loans,” Ownership Matters’ co-founder, Dean Paatsch, told Inside Retail Weekly. “Consolidation removes that and it may well be that Harvey Norman is shooting the lights out and is the greatest retailer in the universe.
“In that case, consolidation would confirm that fact.”
However, Inside Retail Weekly has obtained a subsequent report circulated by proxy advisory firm ISS that contradicts Ownership Matters’ analysis, recommending that shareholders should vote for the financial accounts.
“The company’s auditors, Ernst & Young, have provided an unqualified independent audit report of the company’s financial statements, indicating they provide a true and fair view,” the report states. “A vote for this routine resolution is warranted, based on the unqualified audit report and the absence of any material corporate governance issues.”
For his part, Harvey has dismissed the Ownership Matters’ report, telling Inside Retail Weekly that the notion that Harvey Norman should consolidate its franchise network is “absolute rubbish”.
“I would have thought that every shareholder we’ve got would be delighted with us. We’ve just had a wonderful year ended June, making just short of $500 million before tax. This year, we’re telling them for Q1 we’re up 25.9 per cent on that,” he said. “If I was a shareholder out there I would be saying go man go.
“I don’t know who [Ownership Matters] is. The one that controls 60 per cent of the market [ISS] has a completely different view altogether,” Harvey continued.
Harvey didn’t think shareholders would give the claims any weight at the upcoming AGM, viewing the report as an attempt to kick up mud.
“We’ve got these people out there all the time, but we’re performing and at the end of the day, all I can do is cop the criticism and keep doing the job I’m doing,” he said. “We’re not prepared to discuss what we do internally with our franchisees.
“[If] someone from the outside wants to know how we do this or how we do that, we’ll tell them what we do to the extent that they need to know.”
One of the central concerns outlined in the report, according to Paatsch, is that there’s “prima facie evidence” that Harvey Norman maintains control over its franchisee network.
“There’s strong evidence of control in the sense that franchisees can be repaid only a nominal sum for their franchise and they can be removed at a day’s notice, but that the head office significantly affects the financial returns of the franchisee through loan forgiveness,” Paatsch said.
Paatsch argues that tactical support, as reported in Harvey Norman’s annual reports, amounts to a “surprise figure” and while he says Ownership Matters isn’t alleging that HVN is in breach of accounting standards, he does believe that the accounts aren’t consistent with the spirit of financial reporting.
“[It’s] often a surprise to see that in each balance sheet the loans to franchisees, so the receivables, are not impaired or past due.
“Yet that they are regularly written off, so that it’s very difficult for users of financial statements of Harvey Norman to predict what tactical support or loan forgiveness to franchisees will be in any one year.”