Serious Questions Raised About Harvey Norman Franchisees + ‘Jobs For Life’.
Serious questions have been raised about the way in which retailer Harvey Norman run their business and whether their 673 franchisees are “independent” or are controlled by Harvey Norman.
One major issue that could lead to a shareholder revolt is how $943 in in loans to franchisees are managed with millions being written off with little if any explanation.
In 2016, franchisees booked $5.33 billion of headline sales that were not consolidated. Instead Harvey Norman booked $1 billion in fees, rent and interest from its 673 franchisees.
According, to the Financial Review, Proxy firm Ownership Matters has produced a report that shows that Harvey Norman provided $594.9 million in “financial accommodation” to franchisees which includes working capital, payments for stock and unpaid franchisee fees, rent, and interest.
The firm is recommending fund managers vote against accepting the group’s financial accounts at its November 14 annual meeting.
Another issue bubbling away is the lack of promotion opportunity at Harvey Norman with several managers telling ChannelNews that they see “little chance” of ever being promoted with management accused of giving executives “jobs for life”.
They claim that operational directors such as David Ackery and John Slacksmith are classic examples of executives who have been in the same job for “decades”.
One aspiring Harvey Norman executive said “You only have to look at the way that JB Hi Fi is run Vs Harvey Norman. With JB Hi Fi management comes through the ranks to become senior executives right up to CEO. This is never going to happen while Gerry Harvey and Katie Page are running the business or while Ackery and Slacksmith are in their high paid roles” they said.
The issue of how Harvey Norman pay executives have been a thorny issue for years, in 2014, 75 per cent vote against Harvey Norman’s remuneration report in 2014.
Chairman Gerry Harvey has also clashed previously with proxy advisers, whom he described last year as a “sore on corporate Australia”.
The issue for shareholders this year is that Harvey Norman management has provided no detail as to how or when the decision to forgive loans to franchisees is made.
The lack of transparency in the accounts, together with Harvey Norman’s willingness to carry franchisees who are unable to pay franchise fees and rent, raise questions whether losses are reported in the year in which they are incurred, Ownership Matters claims.
The proxy group are calling for Harvey Norman to voluntarily consolidate the franchisee network with the group accounts – a radical step because most of Harvey Norman’s earnings depend upon its franchisees being independent parties.
Consolidation would limit Harvey Norman’s ability to count revaluations of properties rented by franchisees as earnings, which it does now.
It would also force Harvey Norman to detail how it is able to report retail profit margins well above the 2-3 per cent range of rivals like JB Hi-Fi, and more generally force the retailer to be more transparent about its network’s performance.
The Ownership Matters report said that franchisees pay no material consideration for a franchise and at loss-making locations they may be entitled to “drawings akin to a salary and/or a vehicle allowance”.
Harvey Norman sweeps franchisees’ cash accounts daily, and wages to employees are paid by head office and billed back to the franchisee.
The franchisees can be moved or dumped at a day’s notice, but do not appear to be pursued for any debt owing, the report said. Instead it appears the debt is written off as tactical support.
The Financial The central issue is whether this amounts to control of the franchisees.