Corporate Governance Failure at Tesco PLC: Case Study Analysis

This report examines the corporate governance failure at Tesco PLC, a major multinational corporation. The analysis focuses on an accounting scandal where Tesco misrepresented its profits, leading to significant financial penalties and legal issues. The report delves into the reasons behind the failure, including incompetent management, lack of risk assessment, and inadequate internal controls. It highlights the role of directors, the absence of a fair audit committee, and the impact of these failures on stakeholders. Furthermore, the report discusses corporate and governmental responses to the scandal, proposing solutions to prevent similar failures in the future. These solutions include strengthening corporate governance practices, improving financial auditing, and ensuring ethical conduct at all levels of the organization. This comprehensive analysis provides valuable insights into the importance of corporate governance and the consequences of its failure.

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Table of Contents
INTRODUCTION...........................................................................................................................................3
MAIN BODY.................................................................................................................................................3
Overview of the Case Scenario................................................................................................................3
Failure of Corporate Governance.............................................................................................................4
Reasons Behind Corporate Governance Failure in Tesco PLC................................................................5
The Corporate and Governmental Responses to this Scandal and Also the Legal Issues Involved..........7
Propose Certain Solutions to Avoid Such types of Failures in Corporate Governance in Future.............9
CONCLUSION.............................................................................................................................................12
REFERENCES..............................................................................................................................................13

INTRODUCTION
Corporate Governance can be defined as the rules and regulation which are needed to be
complied by any of the business entity. It is necessary for any of the entity to work according to
the corporate governance because it certainly provides the way through which entity can perform
effectively through which goals and target can be accomplished easily. Although, corporate
governance is helpful for entity in making any of the successful business decision but at the same
time it need to be understood that if any of the entity fails to follow the rules and regulation of
corporate governance then huge problem may arise for the entity. The problem can be seen in the
form of different types of penalty which can directly affect in the existence of the entity because
serval penalty which can be imposed are of serious nature as well. In any of the organisation, the
situation of corporate governance failure can occur only in the situation where members,
shareholder and different stakeholder do not perform as per the requirement of law. This
situation basically occurs because of the carelessness shown by internal management.
In context of the file, one of the corporate governance crime case is to be selected within
the premises of UK or US. The main purpose of selecting this particular section is just to identify
in the task that what where those area or situation due to circumstance of failure of corporate
governance occur. In the similar manner, it will be discussed in the file that what are the main
things within the case and what were the major decision which has been taken by government in
order to resolve this particular issue for future time period as well.
MAIN BODY
Overview of the Case Scenario
There was a case related to TESCO Plc which is one of the major multinational
organisations dealing in the market since 1919. The headquarter of the organisation is located in
Welwyn Garden City, United Kingdom. Although, company has been able to perform quite well
in different market but still it has been seen that they have struggled in number of occasion
where they didn’t perform their business activity as per the requirement of corporate
governance1. It needs to be understood that any of the organisation must not conduct any sort of
1 A.M.I. Lakshan and W.M.H.N. Wijekoon, 'Corporate Governance And Corporate Failure' (2015) 2 Procedia
Economics and Finance.

those activity due to which different problem may occur for the organisation. Here, one of the
famous scandals came to known in TESCO where company was showing wrong accounting
statement. It was found that directors of the company were showing wrong statement related to
profit and loss where they showed that the profit of the company is £1.1 billion but actual profit
amount was only £263 million which is far different then the result shown by the organization2.
The main purpose of showing higher percentage of profit then the actual profit earned was just
for the purpose of increasing customer base of the organisation. Also, to deliver higher
confidence in front of investor that company is doing well so they can easily invest within the
organisation.
It was among of the biggest scandal which was found by authorised department, where this
type of case falls under the category for corruption and fraud which any of the entity is not
allowed to do so. Looking at the scenario, the authorised department and Board of Director took
some of the important decision to deal with the matter but still it was found that £500 million
penalty was imposed upon the organization. In addition, investor in the company was not
satisfied so even they also decided to file the case against them which related with
misrepresentation and fraud. The clause of Fraud falls under the category of fraud within the
premises of UK. On the basis of case, there were different decision which were taken by the
government so that any sort of issues can be resolved in a very short time of duration.
Failure of Corporate Governance
It has been seen that most of the corporate governance failure cases are seen within the
multinational organization which likes to perform their business activity at a greater platform.
Similarly, TESCO Plc is also among one of those entity which has been capable of producing
something different in the market since long time period. But in this particular phase, it was seen
that entity failed meet out the requirement of corporate governance3. The image which has been
developed by TESCO Plc in the market is quite remarkable as they equally contribute in the
sector of Social Corporate Responsibility which means that organization is able to do all of those
tasks which they must be able to do. Working on all of this factor, rarely gives indication that
any sort of corporate governance failure will occur. But it was found that entity didn’t performed
2 Emerald Group Publishing., Corporate Governance (Emerald Group Publishing 2015).
3 Philip Stiles and Bernard Taylor, 'Maxwell ? The Failure Of Corporate Governance' (2016) 1 Corporate
Governance: An International Review.

their part of work as per the requirement due to which they had to face number of problems. It is
said that TESCO Plc is among the most top-rated organization but this failure reduces the trust
among customers towards the entity. Any of the scandal cannot be performed without the
involvement of team which means that proper team work was required in it and by considering
this particular factor, organization removed number of employees and suspended members who
were involved in the whole matter.
Any of the scandal do not occurs automatically as proper team work is required so that
authorized department took the decision to overview each of the decision and for that proper
audit committee was formed to overview each of the matter4. Also, financial statement were
reviewed in order to determine the performance of the company in past year and what are their
corporate governance failure in recent year.
Reasons Behind Corporate Governance Failure in Tesco PLC
Law and legal guidance are the most important thing where any of the organisation should be
able to focus because it is only the reason through which any of the entity can accomplish their
goals and target on specific time. Corporation failing to perform as per the requirement of law
and guidelines has to suffer in retaining their position in the market. It is essential to understand
for any of the organisation that their directors are the one who contribute the most for performing
any of the commercial activity. If any of the entity fails to perform their part of work, it means
that there is a collective support from different department due to which company fails to meet
out the terms and condition of corporate governance5. Similar, in TESCO Plc, it was found that
organisation was unable to perform as per the requirement of law and regulation and the main
reason behind the failure was directors of the company who has been given major responsibility
within the organisation. Below, there are some of the other reason as well which increases the
chances in failure of corporate governance.
 If an organization has incompetent management which is not able to perform their part of
work as per the requirement of Article of Association or Memorandum of Association.
 This are those particular situations in which company is not able to perform as per the
requirement of law and policies by the management.
4 Andrew Johnston, EC Regulation Of Corporate Governance (Cambridge University Press 2018).
5 John Zinkin, Challenges In Implementing Corporate Governance (Wiley 2017).

 In any of those situations where company is not able to consider any of the risk bearing
factor of the organization.
 The condition where entity is unable to distribute roles and responsibility among the
members and employees of company who plays huge role within the organization.
 If in case financial statements are not fully audited as per the requirement of law and
fraud accounting statements are presented for personal benefit.
Above mentioned points are always considered as the main point in any of the failure of
corporate governance. In the same manner, TESCO Plc was among one of those entity which
didn’t comply with any of the legislative guidelines. There are number of other reasons which
come across and proved as the main point due to which company has to suffer. It was found that
company was suffering as their very number of senior level post which were vacant. Such as
Chief Finance Officers, number of directors were also included6. All of this person holds strong
position within the entity and in their absence number of unauthorized people got opportunity to
take some of those decision due to company has to suffer.
If any of the entity fails to manage all their employees’ position within the entity, it
means that there is a high chance that organization will not be able to meet out the terms and
condition which must be met. Even there were Board of Directors of the company who were not
attentive towards their work which forced the company to face higher percentage of problem. As
they even didn’t try to overview the P&L and Balance sheet of the company and if they would
have been able to do so then there is huge possibility that company would not have to suffer in
any of the circumstances. In simple words, any of the organization requires strong management
team which is capable of performing their part of work as per the requirement of corporate
governance. Management team includes board of director, manager and shareholders of the
company. This director can work for the purpose of determining that whether all of the activities
are being performed by different department or not. Then, directors have the responsibility to
ensure that they are able to work according to the set objective, mission and goals where
management of TESCO failed. There was a huge negligence from the side of organization that
their director even didn’t tried to notice any of the activity which were performed by the entity.
Secondly, directors also didn’t perform their part of work according to Code of Ethics which
6 Analysis' (2015) 2 Corporate Governance: The international journal of business in society.

plays the crucial role for business entity because entire focus was upon generating revenue rather
than focusing upon the corporate governance. The problem was not limited up to here as it was
found that organization didn’t have fair audit committee who can conduct any of the audit related
work in a fair manner. In context of TESCO Plc, their accountant tried to earn person profit
rather than focusing upon the value of the organization. This were also some of the main reason
that further problem has been created within the organization.
In short, above mentioned different points were the main reason due to company like
TESCO Plc has to face different types of problem in maintaining the corporate governance. The
fraudulent activity could have been stopped if directors would have focused towards their
particular responsibility. Their responsibility includes that all of the activity is being performed
without any sort of negligence and delivering accurate information to each of the stakeholder
which is quite important in it. In addition, there were number of internal failures as well were
financial department didn’t perform their part of work due to which entity has to face serious
nature of problem. Overall, this was the main reason that organization like TESCO Plc has to pay
huge amount of penalty of sum of £500 million for the fraud which they had done. It simply
shows that company was unable to meet out the specific standard of corporate governance due to
which they had to face different kind of issues in the year 20147.
The Corporate and Governmental Responses to this Scandal and Also the Legal Issues Involved
It was one of those scandal which created huge issue for the business entity because it
certainly affected them in attaining their goals and target. As company like TESCO Plc was
unable to meet out the requirement of corporate governance, it can be easily said that there were
number of decisions which has been taken by corporate and authorized department.
Fraud Act 2006: It is one of the acts which was formed by the Parliament of UK which
came into force on 8th November 2006. Any of the person or entity found to be guilty as per this
act will be charged with criminal liability. The main purpose of formation of this act was just to
ensure that any of the person do not conducts any those activity due to which any of the innocent
part has to suffer. In context of TESCO Plc, their accounting statement did exactly against this
policy or law where they showed higher profit in their P&L which certainly affected number of
7 Philip Stiles and Bernard Taylor, 'Maxwell ? The Failure Of Corporate Governance' (2015) 1 Corporate
Governance: An International Review.

stakeholders of the company. Looking at the scenario, company dismissed its three-board
member who were involved in whole of the scandal. Along with this, it was also found that legal
action was taken against the CEO of the company who plays the important role within the
organization.
Corporate Governance Code: According to this particular code, its necessary for any of
the organization to follow the main principle of corporate governance which also include that
company should be able to present their data and facts. But at the same time, company like
TESCO Plc was unable to do so and in order to resolve whole of the case company took the help
of Deloitte and Freshfield which is one of the famous law firm in UK8. There were eight
directors as well who didn’t perform their part of duty to whom company suspended with
immediate effect.
In depth, talking about the government response towards the scandal of TESCO Plc, there
were three different executives of the company who plays major role in the organization were
charged with Serious Fraud offence. In addition to this there were different penalties which were
imposed upon the organization. It was clearly mentioned that company has also company ahead
with the agreement which clearly indicates that company will pay sum of £129 million to its
stakeholder who had to suffer because of the mistake performed by the entity.
Whenever any of this activity takes place due to which customers and different stakeholder
has to suffer, it means that company has tried to being negativity upon commercial sector. It is
necessary to understand that appropriate actions must be taken by authorized department so that
unnecessary problem can be resolved. So, by considering this particular situation, Financial
Conduct Authority has taken decision in which they had stated that TESCO Plc has definitely
tried to abuse the market condition. For this, different types of penalty were imposed upon the
organization so that other entity do not try to conduct any of the similar activity in future time
period. The three main executives were found guilty in this particular case, it means that
different charges related to white collar crime has been imposed upon business organization and
even proceeding of court has also started. But, due to the lack of evidences it becomes difficult to
prove any sort of mistake performed by executives.
8 Kingsley Opoku Appiah and Amon Chizema, 'Remuneration Committee And Corporate Failure' (2015) 15
Corporate Governance: The international journal of business in society.

In this particular scandal, it was found that the Board of Directors were not able to perform
their part of work as per the requirement of law and they simply ignored all of them terms which
are related to code of ethics including European Union Audit Directives. Not only this but it was
also found that organization failed to follow any of the corporate governance code which is quite
important in conducting any of the business activity at a greater platform. Even charged of Fraud
under the act will be charged against the company9. There was the issue in maintaining the
financial statement of the company but at the same time it is mandatory according to UK Code of
Corporate Governance then all of the presented data should be genuine and fair. Overall, all of
the problem was created just because of the mismanagement which has been done within the
TESCO Plc. Directors and Financial officer didn’t review any of the activity which must be
reviewed on a daily basis.
Propose Certain Solutions to Avoid Such types of Failures in Corporate Governance in Future
Corporate governance is that kind of process that is useful in operating of business and
maintaining of its culture within an organization. Corporate governance is very much required
within an organization in a manner that core principles that exists within it has been making the
organization work as per the principals like accountability, responsibility and transparency which
makes the manger and investor sustain within an organization. It is there to make
outperformance on an organization better and also attracts both customers and investors which
makes financial growth possible. Such principals are having an important role to play within an
organizations functioning. As it can be marked out that such governance involves investors and
managers. Both of them has various kinds of functions that has been existing within an
organization.
Future of corporate governance is dependent upon the situation and decisions taken by
these elements. Also the second set of forces is there to reflect changes with new development on
domestic corporate governance front. As companies continue their struggle to fully comply with
the Sarbanes-Oxley Act, new accounting rules and disclosure requirements, and new pressures
by institutional investors for greater shareholder democracy—principally focused on access and
accountability—virtually guarantee further rule changes. The number of changes that has been
changing place in the form of various kinds of resolution that has been passed regarding
9 Susan Parker, Gary F. Peters and Howard F. Turetsky, 'Corporate Governance And Corporate Failure: A Survival

shareholders and mangers. Also voting system has been changing within the companies that has
been impacting over process of selecting directors and choosing of area to be invested.
Corporate governance in future has to face lot of changes because of the forces that has been
driving it in future. In order to make it prepare for the changes mind set of mangers and investors
is required to be changed. That can be done through reshaping the purpose and functions of
board due to their role in decision making and operations of functions. There are various types of
issues that is going to affect corporate governance in future and are required to be taken care.
Such issues are been explained as follows:
CONFLICTS OF INTEREST
It is very much necessary for an organization to avoid conflict of interest and make rules
regarding it as per the corporate governance to deal with it. It means when the objectives of
corporation and its officers is based more on personal interest this results into developing of
conflict of interest10. Such interest if presented within an organization then it is going tom impact
the production capacity of an organization that is eventually going to lead towards loss.
OVERSIGHT ISSUES
Effective corporate governance requires the board of directors to have substantial oversight
of the company’s procedures and practices. Oversight is a broad term that encompasses the
executive staff reporting to the board and the board’s awareness of the daily operations of the
company and the way in which its objectives are being achieved. The board protects the interests
of the shareholders, acting as a check and balance against the executive staff. Without this
oversight, corporate staff might violate state or federal law, facing substantial fines from
regulatory agencies, and suffering reputational damage with the public
ACCOUNTABILITY ISSUES
Accountability is necessary for effective corporate governance. From the top-level
executives to lower-tier employees, each level and division of the corporation should report and
be accountable to another as a system of checks and balances. Above all else, the actions of each
level of the corporation is accountable to the shareholders and the public. . This is going to
impact the future of corporate governance in a manner that investment by the investors is going
to be less as lack of accountability is going to shake the confidence of worker while investing.
TRANSPARENCY
10 Luigi Zingales, Corporate Governance (2017).

This means that there should be a smooth flow in the process of production and all profit
with loss has to be disclosed in proper manner as this makes the organization to figure out and
analyse situation in proper way. If there is going to be lack of transparency then export is going
to be exposed and this is going to make the organization to lose its profit gaining techniques.
ETHICS VIOLATIONS
Members of the executive board is going to make the ethical duty to be followed in proper
manner and makes sure that they are not being violate. Also, it is responsible for making an
organization develop order and discipline. If this is not going to be there in an organization then
a healthy working environment is going to be disturbed11
All of these above-mentioned points can be effective through which any of the future
changes can be brought by the entity. This point will certainly allow the management and other
stakeholder of the company that what are the main issue where company is facing and whether
any of the information which has been presented are true and fair or not. In addition, this point
will allow the company to maintain their reputation in the market through which a greater
number of customers can be connected.
11 Indrajit Dube, 'Is Corporate Governance The Answer To Corporate Structural Failure?' [2018] SSRN Electronic
Journal.

CONCLUSION
After analysing the whole report, it can be analysed that following corporate governance
is quite important for business entity for performing business activity in a fair manner. It needs to
be understood that if any of the entity fails to perform as per the requirement of law and
regulation then there is different penalty which can be imposed and even reputation of business
can also be affected. In the same manner, the main reason behind the failure of corporate
governance of TESCO Plc was their management who didn’t their part of work as per the
required manner. Failure in maintaining corporate governance simply increases the problem
because reputation of the company gets affected. Different types of penalty can create issue for
the entity due to which survival in the market gets difficult. In order to manage different types of
corporate governance, government can make different types of law and regulation where
different types of mandatory rules can be formed. In this, it can be made mandatory that
company must follow the rules where financial reports must be audited on frequent basis and
current data must be presented after having cross verification because it can certainly allow the
organisation to maintain their reputation in the market.