On October 18, last, the headlines of the British newspaper The Sunday Times read that according to accountancy firm Deloitte, there has been “a pattern of inappropriate behavior” with the major British supermarket chain Tesco. The profit forecast for the first six months of 2014 appeared to be 250 million pounds (approximately ANG 750 million) too high on account hereof. As a result of this scandal, almost immediately many billions of British pounds of market value of the internationally active grocery store evaporated.
From a corporate governance perspective, this news item is interesting for several reasons. First, it is significant. After all these years of close attention paid to integrity and good governance, all of us apparently are not able to prevent such gigantic scandals from reoccurring.
Secondly, it is interesting because this time it was not the management of the company that had committed fraud or that acted incorrectly or unethically (as in most cases of major corporate scandals), but the staff themselves. Because the Tesco turnover continued to drop, the managing directors and notably the commercial team of Tesco were under extreme pressure to turn the tide. This made the staff manipulate the figures.
Thirdly, it is interesting because the motive for the manipulation was not financial gain. In most corporate fraud cases, there is question of unauthorized appropriation of funds, bonuses, profits, etc. In this case, the point was merely to save the company and the jobs along with it.
Of course, this does not make a fundamental difference. Fraud is fraud. Yet, some lessons can be learned from it. The first lesson is that the top management of the company, the managing directors and supervisory directors, anyhow are and remain legally and morally responsible for the figure manipulations by the staff. It does not matter whether or not they were aware of it. For they should have been aware (the supervisory directors too!). They should have intervened in time. They are notably to blame because they should have noticed (earlier) that the sales were strongly declining, while the income of the company remained approximately the same. Moreover, and this is a far more serious omission, they should have prevented the staff from being placed under so much pressure that they proceeded to such acts of despair. The point is not the disappearance of “just” some money. On account of this lack of supervision, a major supermarket chain with a turnover and market value of many billions of pounds is at risk of going bankrupt. As a consequence, tens of thousands of people will lose their jobs.
And this is the fourth reason why this news item is interesting and also the second lesson we can learn from it. It is necessary to appoint one or more supervisory directors with thorough knowledge of the relevant branch of industry in the group of supervisors in a company. The board of supervisory directors has to be able to judge quickly whether the turnover-expense-profit ratio is normal for the branch of industry in question.
We have not heard the last of this scandal yet. The British newspapers are bulging with the “£ 250 m Black Hole”. This amount is expected to quickly increase as yet and the market value is expected to drop even further. The staff members in question (executives at sub-management level) have meanwhile been suspended. That is what happens. Who holds the top management responsible? The most important lesson is that also the managing directors and supervisory directors are to be held responsible.
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