Analyzing Ethical Issues in Corporate Governance: TESCO

This report delves into the ethical issues within corporate governance, focusing on a case study of TESCO. It begins with an introduction defining corporate governance and its significance in the business environment, highlighting the importance of ethical practices. The report then explores the background of TESCO, a major multinational retailer, and identifies insider trading as a primary ethical concern. The objectives include analyzing insider trading, its impact on TESCO's growth, and the role of corporate governance in addressing it. The literature review covers corporate governance concepts, insider trading definitions, and its drawbacks. It examines the misappropriation theory, the role of corporate governance in preventing insider trading, and the relationship between insider trading and business growth. The report emphasizes the importance of transparency, accountability, and ethical behavior in corporate strategy, concluding with recommendations to mitigate risks associated with insider trading and promote sustainable business practices.

Corporate Strategy and
Governance

Table of Contents
Title..................................................................................................................................................1
Introduction......................................................................................................................................1
Literature Review.............................................................................................................................5
Research Methodology....................................................................................................................8
METHODOLOGY..........................................................................................................................1
CRITICAL REVIEW ......................................................................................................................8
RECOMMENDATION AND ACTION PLAN ...........................................................................18
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................21

Title
“To analyse ethical issues in corporate governance and strategy. A case study on
TESCO”
Introduction
Overview
In the words of Abor, Corporate governance is defined as the system by which companies
are directed and controlled. It is also considered as the way in which corporations are handled by
the boards and officers. It helps in defining the relation between the company and its
environment, the social and legal systems in which it is working. This research project is based
on analysis of ethical issues that arise in corporate governance of the company (Amran and et.
al., 2014). As in the case of companies they have the directors that are working for development
of the policies that will help them to achieve the organisational goals. It has now become a buzz
in the global business environment to check over the ethics which are followed or not by the
organisation. Business of all sizes are nowadays employing the concept of corporate governance
so that they are able to enhance their work culture and an ethical working will be ensure within
firm. If the company is following all the legal requirements and corporate ethics than it will be
easy for them to work efficiently and smoothly. Management should work in a way that it would
create an ethical working condition for both the employees at the lower level as well as
employees at the higher level.
Background
Organisations in 21st century are facing exciting and dynamic challenges. For the
company to be globally successful they have to make strategic policies so that they can become
strategically competitive. In the present scenario, it is very important for the business
organisations to build and create a policy to sustain in the market and to gain the competitive
advantage in the global business (Bender, 2013). Management while involved in operating
activities of the company, they should also create a level of ethics that should be bind all the
employees to follow rules and regulations and work in ethical manner.
TESCO is British Multinational Groceries and retail store. This is third largest
organisation in world in terms of their revenues. This organisation is established in 1919 and
have head quarter in London, England UK. This association served in different parts of world
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such as Czech Republic, Malaysia, Thailand, Ireland, etc. The aim of the corporate strategic
governance is to enhance the ethical structure so that the company is able to operate its business
smoothly.
Review of problem faced
Insider trading has become one of the main ethical issue for the management. Trading on
the basis of insider information is one of the main problem as it impacts the main duty of
management to protect the interest of shareholders. Various strategies should be formed by the
companies to protect that unethical issue of insider trading and restrict it. For analysing the
effectiveness of ethical issues in corporate governance, TESCO has been taken into
consideration which is a UK based company that operates its business in retail industry. It was
founded in the year 1919.
Significance
In this research module the learner of the research would be able to identify the level of
understanding that will help them to know the ethical issues that arise in corporate governance
and impact of it if not followed by employees. Insider trading is selling and buying of stocks,
bonds and securities from a company with the implication of non public confidential information
which would impact on its price (Castañer and Kavadis, 2013). It is unethical action done by the
insider because its is unfair for stockholders and investors as a whole. As ethic in corporate
governance is one the main issue for every organisation in today's world and without this the
organisation cannot survive. It is the system of rules and practices that helps the organisation to
direct the operations of the employees and control them.
Aims
To analyse ethical issue of Insider trading that arise in corporate governance and
various ways to deal with this issue – A case study on TESCO.
Objectives
The objectives of this research proposal are:
 To study the concept of insider trading and its drawbacks.
 To determine the impact of insider trading on growth and sustainability of TESCO.
 To assess how corporate governance helps in dealing with insider trading. To determine the relationship between the issue of insider trading and growth of TESCO
Questions
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The question that the reader of the researcher would be able to answer are:
 What is insider trading and what are its drawbacks?
 How does insider trading impact on the growth and sustainability of TESCO?
 How corporate governance helps in dealing with insider trading?
 What is the relationship between insider trading and growth of TESCO?
Literature Review
Corporate governance is a set of customs, policies, laws and processes affecting the way
a corporation is directed and controlled (Donaldson, 2012.). It is a system of rules and practices
by which a company directs and control the employees and different department of the
organisation. It involves making the balance between the interest of companies shareholders and
its stakeholders. It provides the company framework to attain the overall objectives of the
organisation. It encourages the trustworthy model in the ethical environment of the organisation.
In this context there are some factors that unfavourable in identifying sources of a relation
between corporate governance and insider trading. However some challenges in analysing the
effects of corporate governance on insider trading enables organisation to short out potential
insider transactions from trades which were not based on personal information. But in practical
terms corporate governance it is hard to find potential insider transactions and trading in
corporate stock by corporate insiders is unavoidable, particularly at organisation that employ
equity as major source.
Insider trading and its drawbacks:
As per the point of view of Filatotchev and Nakajima, (2014), Insider trading is the word
which can be defined in various ways and has illegal implications. It is defined as the buying and
selling of a security by someone who has access to material non public information about the
contracts that are to be made in future which would impact the performance of the company as a
whole. This action of the insider is considered to be ethically immoral since they affects other
unfairly. Its drawback is, by having the information which other people don't have will impact
negatively on company and its brand loyalty as well. It is analysed that ownership structure is a
significant determinant in firms objectives, increasing the wealth of shareholders and
opportunistic behaviour. The board of directors is the first and foremost body responsible for
governing the affairs of a corporation as directors has a running duty to look after the interest of
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the shareholders. The culture of all the companies should consist the reflection of the objectives
which should be a part of the mission statement.
Although some theories have argued that company's existing control structure including
corporate governance, is not effect for preventing managers from enjoying self- interest at a cost
to stockholders. A single case of insider trading causes negative and dangerous situations for
concerned activities. In insider trading process at a certain point when the prices reach at
satisfactory level then insiders along with his small group of people sells the stocks and make
profits, such act resulting in huge losses for the public investors and company. Illegal insider
trading is considered unfavourable for both investors and market. Illegal insider trading shows
that there is no positive factors and there is no positive demand and supply of stocks, all other
factors have negative effects on a healthy capital market.
Impact of insider trading on growth and sustainability:
According to the Formentini and Taticchi, (2016) insider trading is considered as the
main issue and the person who have information about the decisions that are made for the future
sustainability of the business can impact its growth in destructive way.
Misappropriation theory of Insider trading:
According to the Goel et. al., (2012) misappropriation theory mainly concerned with
factors that arise due to fraud done by using insider information or vital sensitive information in
trading to gain undue advantages. In countries all across the world, person who is guilty
according to the misappropriation theory will likely be convicted of insider trading.
Misappropriation theory is different from the classical theory of insider trading as In case of
classical theory, a person who is not involved in insider trading but knowledge of material non-
public information and used this information in trading, is not deemed to be guilty of insider
trading. The classical theory emphasises on the person accused of insider trading be an actual
insider, such as an officer or employee of the company whose securities is traded. However in
misappropriation theory, the outsider or insider who is directly or indirectly engaged in activities
of insider trading or providing access to non public price sensitive information is deemed to be
guilty of offence under insider trading. Misappropriation theory is proposed with intends to
safeguard securities markets from outsiders who have access to non public and price sensitive
information but who do not owe a financial duty to the organisation or stakeholders. This theory
states that individual who misappropriates information from employer and use this information
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in trading of shares would be guilty of insider trading. In particle life, in the context of this
theory most of the convicted persons of insider trading are lawyers and accountants (Iatridis,
2013). Misappropriation theory applies to certain no business relationships because as per this
theory an individual collects confidential information in duty of trusts or confidence would be
liable. Insider trading under this theory creates negative growth and affects is sustainability in
share market but it also increased scope of insider trading to capture people engaged in insider
trading.
Role of corporate governance in dealing with insider trading:
According to the Jacoby, (2018) corporate governance has major impacts to listed
companies because it is basically related with improving transparency and accountability in
existing system. Now days Corporate governance is benchmark for corporate, used to describe
governance and accountability of company. For instance, in the work of Elder and Kim it was
analysed that corporate governance improves financial and operational transparency that
decreases insider trading associated with informational asymmetries. It also concluded that firms
with better governance structure helps to reduce leaking of information to the outsider. Corporate
governance has major impacts to listed companies because it is basically related with improving
transparency and accountability in existing system. The shareholders’ role in corporate
governance is to appoint directors and auditors, and to ensure that proper steps taken by them for
preventing insider trading. Under corporate governance responsibilities of the board in relation to
insider trading combines determining the company’s strategic goals, providing directions to
secure price sensitive information, supervising the management of the business and reporting to
shareholders to ensure that proper strategy is followed to prevent activities of insider
trading .Corporate governance is therefore plays a major role in preventing insider trading and
enhancing the confidence of investors. The importance of corporate governance can be analysed
as it helps the organisation to
 Keep the working in the ethical manner so that material information is not leaked to
outsider.
 It helps in knowing the relationship between the boards and the executive management. Keeping in control the insider trading practises.
Relationship between issue of insider trading and growth of business:
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Insider trading and growth of the company has vice-versa relationship, as if there is no
insider trading there would be increase in growth potential and management would look into
other matters relating to the production and achieving its target growth. Under insider trading,
individual related or interested in company purchase the stock, shares price-sensitive information
along with small investors who purchase the securities of company and promote others to
purchase shares of company to create huge artificial demand for the particular stock resulting in
higher prices. Which shows favourable growth of company and other people who are not aware
of these facts buys these share (Kathy Rao et. al., 2012). All such thing creates high demand for
shares for a short period but when share price increased to a peak level with high unexpected
price then such insider along with small group of investors sell all the shares acquired to create
fake demand which results in heavy losses for other investors and company.
An insider organised a process to sell stock but hold back from doing on the basis of
internal information thereby slightly stops a potential investor from entering in great deal.
Insider’s self controlled transfers opportunities from the potential investors to himself, however
such type of act does not happen frequently. Some time it seems that insider trading helps
securities markets to become more profitable and productive by moving the current market price
closer to potential future price. Insider trading is beneficial for an organisation in achieving
individual profit motives only, does not directly creates long term growth for company. There is
positive as well as negative relationship between insider trading and business growth. This can
be understood as when internal parties of TESCO has knowledge about different aspects such as
information related to CSR activities, percentage of contribution towards CSR, etc. helps to
perform operations in positive way through which revenues can be enhanced and income can be
exempt from tax. While there are chances that employees may reveal confidential information
which affects business growth in negative manner because of more competition in retail sector.
Primary and secondary research undertaken:
Research methodology defined as the method that is required for development of the
research project (Khan et. al., 2013). The data is based on 25 employees which are working in
TESCO and the assessment is done on the corporate governance strategies which they are aware
of. For collection of data, different types of data analysis, various research designs have been
used which includes the descriptive, explanatory and experimental design types. This research
has been done with descriptive design as by using descriptive design in depth study of the issue
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would be possible. In this research qualitative method has been applied so as to collect the data
and prove the results so obtained. In making the report relevant the investigator has to follow
certain issues such as they have to invest a good amount of money while conducting the
research. Lastly the researcher has to make the research look valid and reliable so that they are
able to produce a good result. In this project, it is necessary and crucial to do brief understanding
of both primary and secondary research to know the exact and relevant sources for gathering the
most suitable and reliable information for arriving at the valid and common conclusion.
Marketing research generally involves two basic types of research namely primary and
secondary research. The brief discussion of both the research methods is as follow:
Primary research: Primary research is generally undertaken when one person conduct
any project with self-reliable efforts and potential or someone other to do so. It basically involves
going directly to the source usually the customers and prospective customers in the target market
with the purpose to ask the question and gather the relevant and suitable information. This type
of research method involves interview(telephonic or face to face), surveys(online or using mail),
questionnaires, focus groups or visits to competitors location. When conducting the primary
research, there are basic tow kind of information to be gather namely specific and explanatory.
Along with this, primary research is considered as most costly and takes more period than
secondary research. In this project work, Questionnaire will be used to collect the suitable and
relevant information for the further analysis and conclusion purpose.
Questionnaire:
Q1) Are you aware about the concept of insider trading?
a) Yes
b) No
Q2) What are the drawbacks of insider trading?
a) Enhance the risk for stock market crash
b) Leads to a reduces in the overall trust in the market.
c) Spread out rumour about a insider transaction.
Q3) Is insider trading impact on the growth and sustainability of TESCO?
a) Yes
b) No
Q4) Does Corporate governance play vital role in dealing with insider trading?
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a) Yes
b) No
Q5) Which kind of relationship is exist between insider trading and growth of TESCO?
a) Positive
b) Negative
Q6) Which is the main step used by TESCO to stop insider trading issue?
a) Keep a close eye on external parties
b) Corporate code prohibiting insider trading
c) Phone tapping and surveillance
Q7) Which is the major step that need to be consider by business managers in order to deal
with issue of insider trading ?
a) Proper communication
b) Education and Training
Q8) Which is the most effective or useful strategy that can be implement to overcome insider
trading?
a) Restrict risky trading
b) Act quickly to investigate insider trading
c) Other
Q9) Provide recommendation to TESCO in order to achieve sustainability and growth.
Secondary research: This is the type of research that already compiled and published by
others. It also includes the reports and studies by the different government agencies, trade
association or other businesses. Doing the secondary research involves information collecting
through Internet, magazines, journals etc. to arrange the suitable and relevant informations. This
research methods is considered as most cheap and less time consuming technique for gathering
the data/information. In this project work, data collection through newspaper, Journals, Internet
etc., will be used to arrive at the actual and valid conclusion. The main source of data collection
used for this project is internet and journal articles.
Research methodology is the specific procedures or techniques used to identify, select,
process and analyse information over the topic. In any research project, the methodology section
allows the reader to critically evaluate a study's overall validity and reliability. Apart from this, it
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also cover historical and actual data both to arrive at the valid conclusion. In addition to this, it is
considered as detailed and theoretical analysis of various methods which is useful to the different
fields of the research (Klettner, Clarke and Boersma, 2014). In this project work, methodology
will be taken into consideration for quality over the quantity.
Research Onion: It is referred to as most appropriate model that is based on different
philosophies such as axiology, epistemology and ontology. It basically illustrates the stages that
must be covered in order to develop the proper research (Litov et. al., 2012). When viewed from
he outside, each layer of the onion describes the more detailed stages of the research process.
Also, the research onion has provided an effective progression through which the research
methodology can be designed. In this project work, framework of an entire research is based on
different layers such as data collection, cross-sectional, mixed methods and surveys including the
deductive approach.
Illustration 1: Research Onion Digram
(Source: Research Onion Digram, 2018)
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Research Philosophies: Research philosophies is the outermost layer of the research
onion model which is taken for this investigation and necessary to arrive at the valid & common
conclusion. Research philosophies are of two different types such as Interpretivisim and on the
other hand positivism (Marquis and Lee, 2013). For an effective relationship establishment,
Interpretivisim philosophies will be adopted here, because it has been initiated to evaluate an
information correctly and effectively. In other side, positivism philosophies will not be suitable
here for executing research, because it will not be suitable to arrive at the valid conclusion and
results.
Research approach: This step comes under the next layer of research onion cycle which
has been divided into two parts: inductive and deductive. In this project, deductive approach is
suitable and relevant, this is why because it will give the comprehensive of different
understanding of the relationship between staff turnover and leadership. Inductive approach will
not be used here because it is limited in scope and consist of limited information. Deductive is
comparatively necessary and useful that inductive approach.
Research Strategy: It refers to as the different strategies which is used to get appropriate
method for collecting the relevant information through survey and interview, which has more
quantity so as to arrive at the common results and conclusion (Mason and Simmons, 2014). In
this case study, questionnaire is the best suitable technique to get the right information at right
time with an accurate purpose. This type of strategy is suitable to identifying the issues regarding
to the dissertation topic.
Research Method: It is the another layer just after the research philosophies. It is the
foremost layer of the research onion which is applied with an application for quantitative and
qualitative. In case of qualitative research, it is considered as exploratory research which is
applied to achieve to gain better purpose of reasons, opinions and motivations. This approach
will be used here, because it will give insight to complete issues and problems and also helpful in
creating the idea or solution of this dissertation problems (McCahery, Sautner and Starks, 2016).
Whereas, Quantitative research is referred to as complete systematic empirical study of the
phenomena through the statistical or technical tools. This methods will not be used here for this
research topic, because, it requires the bulk sample size.
Research instruments and techniques: It is the last layer which is completely related to
procedures and tools & techniques. In the research project, both primary and secondary method
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