Was Tesco Corrupt? – II

Corrupt cultures in any organization or city or country don’t happen by chance. Tesco is a microcosm of the real world where activities are engineered by those in authority to create an atmosphere of pressure – maybe extreme pressure.

(earlier post on this: Was Tesco Corrupt?)

Listening to Melvyn Bragg’s “In Our Time” on Radio 4 today about the Haitian Revolution, it is easy to be complacent about how much we have changed. Slavery in Haiti was extreme – 90% of the population enslaved and under conditions that we in the West would rightly be scandalized about. Yet, we see similar conditions in many parts of the world today – countries like Equatorial Guinea where Transparency International is working to alert the world to tremendous poverty and lack of rights that are accorded to its people because the elite there takes virtually all the revenue from oil resources. Showing why “per capita GDP” data is, on its own so misguided in a world which is moving towards more income inequality, Equatorial Guinea has a per capita GDP on a par with Italy – yet most citizens lack access to clean drinking water.

 

The extraordinary problems that Equatorial Guinea has (caused by extreme corruption) may make any comparison with the UK seem a step too far. Surely the issues raised by the mis-accounting at Tesco is not even similar to what happens in Equatorial Guinea, Angola or other nations where vast resources are corruptly taken by a few.

 

However, that argument is much like someone arguing that, because of wars in Iraq and Syria, we should be content and not concern ourselves with knife-crime in the UK or poor waiting times in the NHS.

 

Corruption is corruption and what we are witnessing at Tesco has been the corrupt mis-accounting of £263 million and the humbling of a once-great business.

 

Deck Chairs on the Titanic?

 

Almost understandably, writers on Tesco and the company itself portray the problem as a few people that were under severe pressure and made bad decisions to bring forward hoped-for future profits into earlier periods. The Chairman is now leaving and various senior staff remain sidelined.

 

The auditors, Price Waterhouse Coopers (PwC) claim to have been “misled” by senior staff that were carrying out the mis-accounting. No-one seems surprised that they missed £263 million amongst the billions that are moved into and out of Tesco.

 

Accounting is but a reflection of a business. It is notoriously hard to find major errors which management are trying hard to hide. Most accounting crimes are found via whistle-blowers (as in this case and cases like Enron – which led to the demise of one of the big accounting firms – Arthur Andersen – who were complicit and went out of business as a result). This is not to say that PwC are in any way complicit. The issue is that audit firms are not that good at finding fault and (after 30 years as Tesco’s auditors, with ex-PwC members of the Tesco Board and being paid £10m a year) there are always suggestions that audit firms don’t try too hard.

 

The Board seems to have been in complete denial of the issues. Not only did they not know that the accounting problems existed until the whistle blower blowed, but they did not “see” the culture that led to the problems. Non-executive Directors on the audit committee, for example, are usually transfixed by numbers – and usually fail to ask the hard questions.

 

How many companies operating from the UK into nations where bribery and corruption is the norm ask the hard questions in Board and less formal meetings even now that the Bribery Act (and before it the Foreign Corrupt Practices Act in the USA) has been in place for 4 years. Glaxo (GSK) is feeling the pressure now about how it did business in China – a country where corruption is / was the norm and GSK went with the flow for many years. Here, staff were under pressure to perform but did so with the help of corruption.

 

The numbers could have indicated the problem but the culture certainly would have. Yet, how many Boards understand the culture of the organization for which they serve and can connect the culture with the potential for corruption or even associate the two?

 

Business Culture is key to success – and failure

 

When the banks entered into their maniacal dance of death resulting in the financial crash of 2007 and thereafter (which we are still paying for – literally), it was their common casino and bonus culture that was to blame. Senior management encouraged their investment banks and those outside the traditional banking rigours to take larger and larger risks but also to defraud customers. Ian Fraser’s excellent “Shredded” about RBS (Royal Bank of Scotland) is an example of how individuals create the culture of a bank or any organization and then reap the whirlwind that follows – whether good or bad.

 

The worst business cultures see staff swept along like leaves. As a character in my own book “Last Line of Defense” said”

 

“A business can take on an independent existence of its own. It begins to direct the individuals within it, rather than the other way. There is a dynamic to a business which can make you feel like a leaf in a river, unable to change the river’s course. Eventually unable to change its own course, the leaf is swept away downstream. The river carries on as before.”

 

So, it happened in Tesco. The CEO demanded results and got them – trouble was, they were not real. Instead of Tesco being a great company with great products and services that its customers wanted, it relied on mis-accounting to boost results.

 

That is a corrupting culture. It corrupted staff to engage in non-value added activities that prejudiced the company’s future and were a direct result of the pressures of a business that was failing to differentiate itself through its proper business activities.

 

Some argue that no-one benefitted from this. Maybe true if all the culprits are shown to be culpable and pay back any bonuses and pensions gleaned from the additional profits and maybe pay for the corruption with their jobs. Saving a job and its not unreasonable salary through corrupting the numbers has resulted (arguably) in a threat to Tesco’s future that a focus on how to make Tesco a better business would not have done. Just like the bureaucracy in Terry Gilliam’s “Brazil” that took up all a country’s resources and added no value, so a corrupt culture spends far too much time “corrupting” and not enough adding real value. So, a business collapses from the inside unless the corruption is arrested.

 

This is true of any corrupt organization – business or city or nation – where corruption exists and exacerbates the already bad conditions in which those who are party to the corruption or affected by it have to endure.

 

Fine, Tesco is not Equatorial Guinea but it is in the same game when, as a respected multinational business, it engages in bad business practices – corrupt practices.

 

Learning the Lessons?

 

Tesco seems not yet to have learned these lessons or at least not admitted to them. Accounting issues, changing board members, adding new processes and the like are all outputs of decisions to change culture. Why doesn’t Tesco actively state that this is what is has to do and then establish how best to do it. If it does not, then the changes will not result in real change but be like those deckchairs on the Titanic?

 

 

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Schools get fleeced – and we all watch

The Bureau of Investigative Journalism recently published an article (http://www.thebureauinvestigates.com/2012/09/25/schools-fleeced-by-it-scammers/comment-page-1/#comment-9117) following the exposure on Panorama (BBC 1) that schools in the UK had been “fleeced” by IT companies (“scammers”). The article and Panorama drew attention to schools which are burdened by the need to run themselves as businesses and are often ill-equipped to do so when set against the complicated requirements of funding, procurement, suppliers and the like.

 

The BIJ summed up the problem with the thought that the FMSiS (Financial Management Standard in Schools) had been wrongly abolished and that the Government should think again. It was abolished after it had become a paper ticking exercise as reported by the Government in 2010 in their White Paper – “The Importance of Teaching” – http://www.education.gov.uk/inthenews/inthenews/a0067711/government-announces-end-of-complex-school-financial-reporting-tool.

 

The BIJ article missed the fact that most of the schemes that Panorama reported on were entered into while the FMSiS was in place!

 

Why is Finance so hard for non-profits (public and private sector)?

 

This does not just happen in Schools – it happens wherever greater knowledge is brought to bear.

 

So, the banks have run out of control and, five years’ later, we remain stunned that the financial regulators did not see this coming – or even understand the huge range of sub-prime schemes, poor management controls, over-leveraging, bad morality, lack of risk aversion, inability for banks to fail, dislike of customers and similar.

 

In the same way, companies like Enron fooled their highly paid auditors (some of whom connived with them) – we never learned much from that or from the countless, other financial scams that have been served up on unsuspecting publics since at least the south Sea Bubble in 1720 and for thousands of years before.

 

But, we expect more from public sector and the third sector organisations that supposedly guard our taxes and donations. What makes it so hard for them to adequately ensure that the financial and support arms of those organisations are able to be a good as all those they work with?

 

Where the incentives are

 

Of course, much has been written about how the wealth potential of banks suck in those with the highest intelligence and motivation (and maybe those with the lowest ethics) and that the regulators are filled with those who cannot compete – maybe those who failed to make it in banking themselves.

 

Enron was full of highly motivated and driven people who bought into a scheme (or schemes) and worked like fury to implement their scam / scheme. The manipulation of an energy market was not understood by the regulators and auditors just as auditors and clients failed to understand how Bernie Madoff was making such returns on their “investments”.

 

In a money-driven economy, which has created tremendous wealth for society, there are, at the margins and even more in the centre, incentives provided to people that lure those who are massively motivated and driven to participate – to work 24 hours a day, to spend their time working up schemes to make money and their companies profitable. Business is a money-driven part of the economy in a way that the non-profit sectors (be they public or private sector) are not. The latter are full of people driven (and maybe just as motivated) by other things – a passion for human rights, for education, for people, for society – but not for the thing that drives those they may meet at the interface of private sector and the non-profits.

 

As Galbraith wrote in The Affluent Society, public goods are always at a disadvantage in a market-driven economy and the crucial problems always exist at the interface between the two.  I tackled this is a previous post – https://jeffkaye.wordpress.com/wp-admin/post.php?post=192&action=edit – and the inability of societies to establish how to provide the “social balance” to which Galbraith refers enables the problems to persist – such as the fleecing of schools in the UK.

 

Enabling the “social balance”?

 

The “social balance” (Galbraith ibid) is about how society reacts to private enterprise. The most obvious example is the automobile – private industry propels the development of cars but it is the public sector that provides the roads, traffic control and policing, emergency services and hospitals (usually), pollution control and similar. India is a great and recent example – http://uk.finance.yahoo.com/news/india-car-sales-soar-where-054302682.html. But, the ability of the private sector runs well ahead of the ability of the public sector to react.

 

Nowhere is this lack of social balance clearer than in the provision of expertise in “back office” areas in the public sector and in the third sector. While their front of office capabilities may be excellent, the non-profit sector cannot, in the main, recruit the best people (it cannot offer financial incentives to match anything like the private sector) and therefore its systems and processes fall well behind.

 

This is compounded by the continuous belief by government that they have to “do something” directly (like the FMSiS above) and in the third sector that anything spent outside of front end is a waste of money. Donors (whether governments, trusts and foundations, companies or individuals) suddenly have a different mindset as soon as they donate. How many would ask companies to stop spending on finance operations – yet, many donors insist that their donations can only be applied to front end work – the cause – and nothing to overheads. While it is good to keep overheads low, governance and financial management dictate that these “enabling” areas of any organization (like people management training) are as good as the front end operations so as not to stymie the work of the charity, NGO or pubic sector organization.

 

Having worked in all sectors (with most of my working life in the private sector) it is clear to me that the non-profit sectors are continuously starved of capability and expertise in the areas that could make them far more efficient and capable – not just to survive but also to enable far better work to be accomplished. If they work well it is in spite of the problems put in their way. Most don’t manage and the failures of the public sector to manage large IT projects, for example or the non-profit sector to survive continue.

 

So, how can the non-profits develop a response to the needed social balance so that they don’t get fleeced?

 

Pro-activity in the social balance

 

Governments and those who provide central governance to the non-profit sectors have undertaken so many actions and some have provided stability. But, each sector and those within it are challenged continuously.

 

What is needed is first, recognition that there is a problem. Each sector should assess where the main problems lie and government has to step up and signal that it will not do everything but begin to be the chief enabler for the non-profits. For example, restrictive funding for charities, whereby donors only provide money for front-end purposes, should not be allowed. The practice is akin to shareholders telling companies which part of the business their funding is allowed on. It is not a loan – it is a donation and restrictions mean more bureaucracy and less ability for the charity to manage itself.

 

If a donor believes that a charity spends too much on overheads, it can withhold donations just like a shareholder can invest elsewhere – but restricting funding in this way is counter-productive.

 

In the UK, this is something for the charities Commission and government to act on.

 

Second, there has to be a stepping up on ability – which will lead to improved processes and systems (although improvements in each need money as well and the proposal above is one way of directing more into this area).

 

This stepping up of ability should be driven by government who should require firms of accountants to do what the legal profession does – provide at least 2% pro-bono capability into non-profits. I have been highly impressed by law firms’ ability to do excellent pro-bono – less so by the finance industry.

 

CSR divisions of companies should also be driving their best finance people into non-profits – in a meaningful way to address the social imbalance.

 

Governments should look to reward those who go from the private sector into the public or third sector (even for a time) with tax incentives (much like students having to repay their student loans). It is not a great time to do this, but it would indicate a lot.

 

Third, the big accounting organisations should ensure that they focus more attention on public sector and third sector – understanding the problems and devising exams and maybe alternative paths to accreditation rather than the one-size-fits-all approach. Certainly, the CIPFA and IPSASB provide the basics for the public sector but the incentivisation for the best to go into that sector let alone education or charities / NGO’s is far less and the number of accountants that enter the charity sector (for example) with the same skill levels and drive as those in the private sector is small.

 

Fourth, trustees from private sector organisations have to become involved – not just from a governance standpoint but setting examples and putting the bar as high as it needs to go to make the enablers work. This is hands-on stuff not just remote governance.

 

Separate sectors, common interests

 

Except in a society where the three sectors don’t exist (e.g. communist states), the challenge is greatest at the intersections of society – where the sectors clash. Yet, as in the example of automobiles above (or any other transportation systems), different sectors live off each other – and the charity sector fills many of the gaps that society does not see fit to fill in private or public sectors.

 

The sectors need to be different, of course, but there does need to be a far better understanding of the problems that our economic structures throw up and how to deal with them or fleecing of our schools will recur but be seen to be a mere tip of the social iceberg.