Corporate Governance Case Study Analysis: The TESCO Accounting Scandal

This case study provides an in-depth analysis of the TESCO accounting scandal, examining the company's corporate governance structure and the factors that led to the financial misreporting. It begins with a literature review of insider and outsider models of corporate governance, providing a framework for understanding the issues at TESCO. The analysis delves into the composition of TESCO's board of directors, highlighting a lack of retail experience and the subsequent restructuring efforts following the scandal. Key differences between UK and Singapore corporate governance practices are discussed, focusing on female board representation and stakeholder involvement. The study also critiques TESCO's remuneration practices and concludes with recommendations for improving corporate governance. The case study underscores the importance of robust corporate governance frameworks, experienced board members, and ethical financial reporting to maintain stakeholder trust and company stability.

Running head: CORPORATE GOVERNANCE CASE STUDY ANALYSIS
Corporate Governance Case Study Analysis
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1CORPORATE GOVERNANCE CASE STUDY ANALYSIS
Introduction
Corporate governance refers to the rules, regulations, processes as well as laws that are
used for controlling, regulating and for operating a business set up (Cai et al., 2015). The term
corporate governance is one that is known to encompass external and internal factors which are
seen to affect the interests of the stakeholders of a company such as the company’s shareholders,
the government regulators, the suppliers, the customers, as well as the management of the
company (Cuomo et al., 2016). It is the board of directors of a company who are technically
responsible for the creation of a corporate governance framework that is best aligned with the
conduct of the business as well as the goals and the objectives of the business enterprise
(Agrawal & Cooper, 2017). Corporate governance is comprised of certain and specific processes
such as performance measurement, action plans, dividend policies, compensation decisions,
procedures that are deployed for the resolution of conflict, as well as explicit and implicit
contracts that are drawn up between the stakeholders of the company and the board of the
company (Armstrong et al., 2015). Good corporate governance is usually characterized by a
well-enforced and well-defined structure which caters to the benefits of all people who are
working for a firm and which makes sure at the same given time that the enterprise is one which
adheres to ethical codes of conduct or ethical modes of governance (Bain & Band, 2016). One of
the most important corporate governance principles is that shareholders be treated with parity
(Berger et al., 2016). This essay engages in an in-depth case study analysis of the corporate
governance of TESCO by referring to the accounting scandal that tore the company apart
and made the restructuring of its board of directors an imminent affair. Prior to the case
study analysis, a literature review is undertaken, as a part of which existing research on the

2CORPORATE GOVERNANCE CASE STUDY ANALYSIS
insider and outsider models of corporate governance is discussed in detail. The essay concludes
with a number of important considerations that can be taken into consideration by TESCO in
order to improve its corporate governance in Singapore.
Before analyzing the accounting scandal at Tesco, it is first necessary to derive an
understanding of the insider and outsider models of corporate governance. It has been pointed
out by academics such as Bauer et al. (2018), that the outsider mechanism or form of corporate
governance is one where primary functions pertaining to corporate governance are those that are
undertaken by external rather than internal owners. The outsider mode of corporate governance
can be seen to prevail in countries such as the USA as well as the UK. As a part of such a
system, the ownership of the firm is something that is dominated by what may be termed as
institutional portfolio oriented investors and where the ownership stakes are known to amount to
three percent or less for each and every investor. Corporate governance activities are undertaken
by the owners outside of the firm and as such these are people who do not get involved in too
active a way in the proper and organized management of their respective companies. Instead of
voice, it is the concept of exit that is seen to exercise authority and control over the affairs of the
company with equity stakes being preferred to be sold off on the part of the owners rather than
any kind of hierarchical control being exercised to operate and manage such shares. A bias is
exhibited more often than not on the part of such business owners towards the publicly listed
firms rather than firms which are privately listed, and which are as a result hierarchically
controlled. This in turn is something that is promoted by stock markets that are well-developed,
being in existence, which make available the institutional mechanism that is needed in order to
go ahead and achieve the much desired diffused patterns of ownership.

3CORPORATE GOVERNANCE CASE STUDY ANALYSIS
Of course the fact as argued by scholars such as Aguilera and Crespi-Cladera (2016), diffuse
ownership is something that is capable of creating potential agency problems largely due to the
fact that the process of management is removed from any type of hierarchical control by block
holders is something that has been demonstrated well enough by Gardiner Means and Adolph
Berle in their seminal work, “The Modern Corporation and Private Property’ which was
published in 1932. In order to compensate for the various risks that are associated with the
outsider model of corporate governance, this is a system that comes with many different
complementary and institutional features that are seen to empower both information and
oversight and which are seen to also control activities of what may be termed as company
outsiders at the same given time. Examples of this include the non-executive boards that have
been appointed by shareholders, major roles that are performed by reputational intermediaries in
the provision of performance information that is externally visible, using stock price as the
primary indicator of the prospects of a firm, Incentive based and active markets for corporate
control that are further directed at aligning the interests of the firm’s agents or the management
of the firm with the principals of the firm or what may be termed as the shareholders of the firm.
On the other hand, it is argued on the part of scholars that the insider model or form of
corporate governance is a system where the owner of the firm is seen to monitor, to oversee as
well as to control a company or more than one company from within. Goals and objectives are
achieved on the part of the business owners by acquiring ownership stakes of a substantive size
in individual companies, while also cooperating in an active manner with the management of
such companies. As a consequence of such a system, investors are given the opportunity to retain
hierarchical control in a direct manner over the management of the firm, reducing agency costs
in the process. The insider model of corporate governance is something that is seen to be in place

4CORPORATE GOVERNANCE CASE STUDY ANALYSIS
in companies across the length and the breadth of continental Europe especially in the period
following the Second World War. When it comes to legalities in particular, it can be stated that
the legal protections which firms characterized by insider models of governance have are of quite
a poor standard. This is because block holders fulfill the role of monitoring and disciplining the
activities of the firm rather than the external stakeholders of the firm. The empowerment of
external and minority stakeholders is not something that is regarded to be a social necessity. The
absence of safeguards and rights is something that discourages minority stakeholders from
becoming or getting involved in the ownership structure of the firm as they are unwilling to face
all the risks that are posed by possible expropriation on the part of the block holders, something
that is entirely capable of being undertaken by the latter because of the high levels of direct
control which they have over the management of the company.
It is often said that snake charmers of corporations are more often than not responsible for
looting as well as placing such corporations on the edge of a knife thus jeopardizing in the
process the viability as well as the integrity of capital markets. This is something that is more
than evident from the accounting scandal of Tesco. In the year of 2014, the board of Tesco
comprised of as many as twelve directors which included two important executive directors,
namely, Chief Finance Officer of the Company who is Laurie McllWee and the Chief Executive
Officer, a man by the name of Philip Clarke. The 10 other members of the board of directors at
Tesco included Richard Broadbent who was the chairman of the company, who joined the
company in 2011 and who had no prior experience in retail, like the rest of the board members,
apart from Philip Clarke and Laurie McllWee who had worked for a long time in the retail
industry prior to joining TESCO (based on case study provided). Three of the board members
had a background in the domain of finance, two of them had a background in the area of

5CORPORATE GOVERNANCE CASE STUDY ANALYSIS
accounting and the other members of the board of direct4ors at Tesco included the non-executive
board directors. It was evident from looking at the composition of the board in the year of 2014,
that there was a lack of board members with sufficient knowledge and experience in the retail
industry, thus leading to a concern among directors regarding the lack of skills and knowledge on
the board with regard to the retail industry in general and the grocery industry in particular. As a
consequence of the accounting scandal however, the board of Tesco underwent a major
phase of restructuring following the immense amount of criticism that was levied at the
composition of the board. More people with retail experience were incorporated into the board
setup that included Mikael Ohlsson who is was formerly the CEO of IKEA as well as Richard
Cousins, who happened to formerly be the CEO of Compass Group, a well-known food services
firm. Two female and non-executive directors resigned from the board of Tesco following the
accounting scandal leading to a shortage in terms of female representation on the government
board of TESCO. It can thus be stated that while the accounting scandal compelled the
composition of the board of Tesco to undergo a change, there were several areas associated with
the board composition of Tesco that still invited criticism from others (based on case study
provided).
Some of the key differences between corporate board governance structure between the UK
and Singapore as is evident from this case study analysis can be detected in the areas of female
board representation and stakeholder involvement. When it comes to firms in the UK, female
board representation is something that is given a lot of credence and a lot of importance whereas
in Singapore it is not so significant (Larcker, D., & Tayan, B, 2015). Stakeholder value and
involvement also appears to be far more when it comes to corporate governance structure
in the UK. It is evident from reading the case study that has been provided that the outrage

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of the stakeholders, especially the shareholders in the company is something that compelled
the board composition of the company to undergo a severe change after the accounting
scandal took place, primarily because the board did not have sufficient number of
members with experience in the grocery or retail industry (De Haan & Vlahu, 2016). Even
after that, a fall in female board representation led the company to face a lot of criticism, as
adequate female representation is something that is required as part of adequate UK corporate
governance (Levit & Malenko, 2016).

7CORPORATE GOVERNANCE CASE STUDY ANALYSIS
It is clear from reading the case study that has been provided that the remuneration
plan that is followed by the Tesco is something that is quite excessive in nature and that it
accords too many benefits to people who ought not to be the same. What makes this quite
evident is the resignation of Laurie McllWee who did not agree with Philip Clarke, the CEO of
the company on many different matters, and who decided to part ways with the company. A
considerable amount of time and money was spent by Tesco in looking for a suitable successor
him, which in turn led to a huge drain on the resources of the company, as Laurie not only
received the huge salary that he had been drawing from the company for quite some time, at the
time of his send-off but he also received a bonus payment, leading many to term his send as a
golden one since he walked away with so much money at the time of doing so (based on case
study provided). The succession planning at Tesco is therefore of quite a poor standard. The
company had not identified potential skilled and committed candidates who took over the reign
of the company in the event that one of the senior directors of the company resigned. It took
Tesco a lot of time to look for a suitable person to replace Laurie McllWee and while the latter
was waiting for this to transpire, he performed his miniscule duties while drawing a huge salary
at the same given time, making it clear that both the remuneration system as well as succession
planning system of the company ought to be under the scanner (based on case study provided).
It can be said upon reading the case study which has been provided that regulators proved to
be quite effective in dealing with the accounting scandal that took place at Tesco. Lawsuits were
filed on behalf of the angry stakeholders, and it was seen that a huge amount of compensation
was demanded as a part of the lawsuits in order to ensure that the stakeholders especially the
shareholders of the company received adequate justice for the injustice that had been done to

8CORPORATE GOVERNANCE CASE STUDY ANALYSIS
them as a result of the accounting scandal in the first place. Over and above the fact that the
lawsuits which were filed against Tesco by regulators ensured that the shareholders got the
compensation or money that they were owed as a consequence of such a blow off, the regulators
also demanded that prominent members of the board of directors resign, with several of such
directors having been suspended from their posts in the aftermath of the scandal. The regulators
were effective in securing justice for the shareholders of the company, and played an important
role in looking into their interests, ensuring that they were paid sufficient sums of money in
terms of compensation and ensuring at the same given time that several of the board members of
the company who had triggered or been a cause of the scandal, were brought to justice and were
either suspended or made to leave the board of the company once and for all.

9CORPORATE GOVERNANCE CASE STUDY ANALYSIS
After taking the accounting scandal at Tesco into consideration, it may be said that the legal
system in the US is stronger than that of the UK especially as far as the protection of stakeholder
interests is concerned. For instance, there aren’t any legal provisions in the United Kingdom that
can allow for class-action lawsuits to be imposed on people who are seen to engage in unethical
corporate governance practices and using a legal instrument such as the Financial Services and
Markets Act is something that is quite rare in the United Kingdom. In this sense, it can be stated
that the legal system for the protection of stakeholder interest is better in the US than the UK
(McCahery et al., 2016). However, the event of the accounting scandal at TESCO was one which
marked a huge difference in the way that stakeholder and shareholder interests in particular are
handled in a country like the United Kingdom. Regulators came together to bring the
perpetrators of the scandal to justice. Lawsuits were filed, compensations were meted out to all
of the angry shareholders of the company and the regulators also made it a point to ensure that
guilty board members of Tesco were made to resign or be suspended from the company for a
very long period of time as a consequence of what it is that they had done (Oh et al., 2017).
Commercial income refers to the rebates, discounts and promotional fees from suppliers. It is
seen that a routine contribution is made on the part of suppliers of a percentage of their
promotional costs, paying retailers back a certain portion at least, if not a lot of the income that
they had lost (Zhu & Shen, 2016). The negotiations that pertain to commercial income are those
that are seen to take place between the retailers and the suppliers, at least a year or so ahead of
the time when the money is actually paid to the retailers by the suppliers (Tricker & Tricker,
2015). Cash is thus received more often than not by the retailers much before actually sales are
generated and profit is incurred. Cost accruals can be significantly delayed while profit accruals
are capable of being recognized far earlier than usual, with the profit being something that is

10CORPORATE GOVERNANCE CASE STUDY ANALYSIS
effectively overstated for the given period. A significant number of grey areas can therefore be
witnessed in the accounting activities of retailers in each and every part of the world, including
Tesco as is evident from reading the case study that has been provided (based on case study
provided). Upon reading and analysis it appears that while commercial income is profitable
for retailers, it is as such an unethical practice, as money is compensated for or paid off by
the suppliers to the retailers even before sales are generated and profits are incurred for
them to be able to do so. Suppliers are important stakeholders in the business process and their
interests need to be valued and looked into instead of looking into the interests of retailers alone.
Hence, companies in the United Kingdom or in any other part of the world should not comply
with accounting standards that allow for the receipt of commercial income (Yermack, 2017) as
this is one of the ways by which the snake charmers of corporations loot and plunder the
exchequer of the firm, leaving the firm bankrupt and in need of financial assistance.
Conclusion
Thus, the case study that has been provided provides a good account and analysis of the
corporate governance structure that prevails in the United Kingdom with special reference to the
company of Tesco and shows how snake charmers of corporations loot and plunder corporations
by demanding and drawing excessive salaries and taking no accountability, leaving the integrity
of the firms and the capital markets in general to be questioned. The case study provides clarity
on important concepts and ideas pertaining to corporate governance such as commercial income
and stakeholder interests while also pointing to legal provisions that are in place to deal with
unethical practices that may arise in the course of implementing corporate governance. The case
study reveals how effectively the accounting scandal at Tesco was dealt with by the regulators in

11CORPORATE GOVERNANCE CASE STUDY ANALYSIS
the UK, leading to huge compensations being doled out to the angry stakeholders especially
shareholders, and a complete restructuring taking place of the board of directors of the company.
The board of directors of Tesco underwent a complete overhauling and transformation, with
many erstwhile members being suspended or resigning and new members being appointed into
the board of the company, that is, board members who had sufficient knowledge and skill with
respect to the grocery retail industry which is the industry in which the company is seen to
operate.