First published in the Financial Times on 23rd September 2014.
General business skills are not nearly enough
I don’t know Tesco as a business that well, but I did sell them a business last year for £49m. I found them to be mostly straightforward dealers, albeit they tended to obsess over small financial and legal issues – sometimes missing the wood for the trees.
Hence I’m as shocked as many in the investment community at the announcement of a £250m accounting misstatement on Monday. This is a very large sum to get wrong – even for a company as big as Tesco.
Unfortunately, I think the problems at Tesco are not simply the single issue of this profit exaggeration. Possibly the root of the problem is that the business is hooked on unsustainable operating margins. It is undergoing a painful readjustment to its trading model as it tries to cope with ferocious competition – particularly from low-cost rivals.
I also believe the stewardship at Tesco has been woeful. The board of directors must accept responsibility for the way the organisation has been led and governed. This enormous error has occurred under their watch: they cannot pretend it is someone else’s fault.
I am not surprised the board missed the signs. Among the 10 main board directors, there is currently only one executive director, Dave Lewis, the new chief executive. He joined a few weeks ago from Unilever. Like every single other director on the main board, he has no executive experience as a retailer whatsoever. The nearest the board gets is experience from the consumer goods industry – from a former CEO of Unilever and a former CFO of Cadbury.
Elsewhere, the board boasts three non-executives who have worked at banks – Schroders, Standard Chartered and Barclays, to be precise. Another non-executive has worked in the telecommunications industry, another in glass manufacturing. And it has two non-executives who have worked in government – here and, bizarrely, the Netherlands (where Tesco has no operations at all). Tesco’s recruitment policy for directors clearly doesn’t include the requirement for them to have any hands-on background in their specific industry at all.
Tragically for Tesco’s 500,000 plus staff, its millions of customers, and thousands of suppliers, the main board is entirely lacking in what I call “domain knowledge”. This means they do not have practical experience of shopkeeping. They have a wide and impressive set of skills, but not especially relevant ones to the business of selling groceries. No doubt many of the board are regular customers at Tesco, but that is hardly the same as having to actually run stores.
Large companies like Tesco are complicated institutions. To succeed, such businesses require leadership with considerable technical understanding of the operations and finances of the business. General business skills are not nearly enough. Retailing involves property, logistics, buying, merchandising, staffing and myriad other activities. Unquestionably Tesco possesses retail management in depth below the main board. But with a main board lacking any real familiarity with the trade, how are they to interrogate and challenge the executive team – if they even meet them? Would they know if someone was cooking the books? The chairman, a grandee called Sir Richard Broadbent, made the fatuous remark that “Things are always unnoticed until they are noticed.” Except that very experienced, well-networked retail veterans might well have noticed something was amiss a little earlier. Unfortunately there was no one fitting that description serving on the main board.
Tesco is not just another supermarket retailer. It is a national asset. Like BP, its reputation has taken a battering in the last couple of years. Britain has far too few world-class, global companies. It makes me weep to witness the self-inflicted damage being suffered by the business. I know retired senior staff who are seething at recent events. One powerful lesson to emerge from this debacle is that public company boards should comprise a decent proportion of directors who possess in-depth domain knowledge of the business. And the other immediate action is for Tesco to start the search for a new chairman.