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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Governance – From Osborne to Diamond – where is it?

If we wanted to see bad governance issues at their most raw – in all sectors of society – then maybe this was the week.

First – Corporate governance was shown to be completely awry at Barclays, where Bob Diamond’s testimony showed so clearly that non-execs that should have been applying governance strictures were so out of the picture.

Second – the public sector and education, where Michael Gove in a strange speech at FASNA (Freedom and Autonomy for Schools) said he knew what “good governance” looked like (fascinating to hear a politician talk about good governance!) and criticized many existing school boards as:

A sprawling committee and proliferating sub-committees. Local worthies who see being a governor as a badge of status not a job of work. Discussions that ramble on about peripheral issues, influenced by fads and anecdote, not facts and analysis. A failure to be rigorous about performance. A failure to challenge heads forensically and also, when heads are doing a good job, support them authoritatively.

Third – charities, where governance was held up at an ACEVO (Association of Chief Executives in Voluntary Organisations) conference to be a critical problem and the split between Chief Execs and Trustees very problematical (nearly 30 are seeking urgent advice from ACEVO on this issue).

Fourth – Government via the astonishing spat between Messrs. Osborne (our Chancellor of the Exchequer) and Ed Balls (his shadow) over banking and LIBOR – or worse, their obvious hatred for each other.

Across the nation – Governance in doubt

We clearly have a crisis of governance across the nation and in all sectors. Government, public sector, corporates and Third Sector all exhibit problems where real strains are showing and proper governance is often missing.

Gove’s comments (which show political mannerisms at their worst) can be spread across all areas if we want to.

The role of non-executive directors, trustees, governors or similar is crucial in organisations. Their importance is completely under-estimated in the same way that the importance of backbenchers in Parliament is. This showed so clearly in the Osborne / Balls playground fight this week and showed how dangerous it is when the Executive is a major part of the Legislature (as we have it in the UK) and back-benchers are unable to confront the over-weaning egos of the front-benchers.

The example shown here – of a senior government minister and his shadow in opposition – was appalling but, unfortunately, does shine a light on society. When recession strikes, the worst examples of society come to light.

What’s going wrong?

Much is actually right in sectors of society that organize themselves into such oganisations such as companies, public sector bodies and Third Sector organisations. But, there is a crucial link that is not sufficiently understood and where traditional rules don’t really work anymore – and, where they do work, are rubbished by politicians pursuing a political agenda.

The link is the one between senior operational staff and Boards. It is the crucial link in any organization.

Corporates

The danger here is the risk that Chief Executive Officers who have got where they are because they are good at what they do but also because they act like steamrollers, often force Boards to concede issues with too little scrutiny. Time is of the essence and information hard to take in when you are a Non-Executive Director (NED) maybe at many corporations and spend a few days a year on each.

The law now lays a heavy burden on NED’s but there remain many who want to bring their skills and knowledge and experience to companies. Most are acceptable to the CEO if they have good connections /networks. Beyond this, they are begrudgingly provided with data and fill remuneration and audit committees and the like, fulfilling a role but often not really involved with the central and driving forces behind the business. Government tinkering with the laws has prescribed the areas of involvement that the law requires and where NED’s have to focus. Areas that are fundamental, like strategy, culture, and ethics, are more likely to be left outside.

The danger becomes real in companies like Enron – which imploded under a Ponzi scheme that should have been obvious to all on the Board. It is endangering one of our best-known banks as it did with RBS and Lloyds-TSB.

Name the major scandals in corporates and then describe the efforts of NED’s to make things right – whether in newspapers and phone hacking, oil industry and health and safety, mining and corruption.

Public Sector

I use the example of schools / academies to show the reverse. Michael Gove, in seeking to set up an array of different schools so that the good ones can “emerge”, is in danger of wrecking education and the potential for good that exists in those schools / academies.

Of course, he was speaking at the FASNA – so, was amongst friends. But, his injudicious language threatens to throw out the good with the bad. I am a Chair of Directors / Governors at an excellent Academy and Gove runs the risk (as all “leaders” do) of demoralizing just the people he should be motivating.

In pursuing his political agenda, he shows he is full of ideas but not allied to the skills of a leader. Schools boards / or governing bodies are full of people who (unlike in corporates) are unpaid and fill positions out of a desire to help kids and the staff that run the schools. Gove is at least ten years out of date with his picture of local worthies – it is not just an insult but shows Gove to be stuck in the 1970’s at best.

At schools, the link between Head and Governors / directors can be bad (as it can in any situation) but is often very good. The role of the board as “critical friend” is enshrined in all that is done and the Head (and some of his / her staff) are on the Board as well. This creates a team that motivates each other to work together and develop a school for its students. Where it works (and it usually does to some extent), it provides enthusiasm as well as governance, skills as well as motivation – on both sides, operational and governance.

Of course, Gove has some insights as schools in difficult areas will have trouble finding the skills needed to fill a board. But, this is down to the location and the need to ensure that they are supported within a structure that works. This is a key area and where successful schools can certainly help.

But, Gove should not ridicule the governance structure in schools – it may be the one area that does work!

Third Sector

Now, I work in this sector as a CEO. I have a good Board but having been in the sector for five years or so (my previous 30 were in the corporate one), it is clear that there is a crisis and it is between CEO’s and the Board.

There is a divide that is unnecessary and needs to be fixed. My concern is that it won’t be because the mind-set of third sector participants is that the charity sector is precious and that there needs to be a separation between boards and operations.

The separation is, I am repeatedly told, because of conflicts of interest. These conflicts, if a CEO becomes a Trustee, means, for example, that the roles are somehow confused and that the Chief Exec can no longer properly comment on staff salary issues because of conflicts of interest (see NCVO website).

The Charities Commission is completely confused. Two requests for information on this yielded completely different responses in the last couple of weeks – both suggested a board would need to ensure no conflicts of interest but while one said they would need to approve the appointment and one did not, neither could attest to the specific conflicts that would be in evidence.

What this means is that the separation (which does not happen in Education – and a school is no less precious) is maintained for little reason and the huge benefits – teamwork, joint motivation, openness for example – are lost in the preciousness.

It needs to change and fast.

Governance and Government

Our government shows itself adrift in its response to good governance by the way it shows itself in parliament. Having the Executive commanding the legislature is bad enough but requires a more magisterial quality. Osborne and Balls would not know that if it hit them between the eyes.

It is important that organisations are properly run. They have an enormous impact on society and are a key part of it. It can be argued that civil society has lost its control over organisations as government (our supposed defenders) has clearly shown no tendency to take itself seriously. Osborne and Gove are poor exemplars.

There may be no excuse for the rioters of last summer in England, but the tendency of organisations to show lack of leadership is troublesome and leadership is needed.

The future of Governance

Sectors of society like the three (or maybe four) mentioned above work in silos and come up against each other from time to time. There is much in common and governance issues affect each and all of them.

Governance is the method of governing – it applies to us nationally, internally and within organisations to which most of us belong. Good governance is crucial to the way society works but it is under threat.

The future of society depends on good governance and we now need to unravel the workings of a hundred years of legal doctrine to develop improvements throughout all the sectors of our society.

We need structures that combine strategy and operations, directors / trustees / governors and business / organizational leaders, but where the non-executives are provided with the skills and time to address the concerns that society has.

At the same time, Chief Execs need to be able to explain the key drivers that make (in their view) the organization work and non-execs should be able to investigate for themselves.

Gove wants Ofsted to rigorously assess governors in the way they monitor Heads. Fine (if they had any understanding of what that means and the ability to do it) but who is doing this in corporates – maybe the auditors or some other independent body for any publicly listed company?

Finally, different sectors should not be isolated from each other. NEDs, trustees, governors have a lot in common but all operate to completely separate rules and guidelines. It is time for some common dialogue as civil society (which includes everyone) is getting pretty sick and tired of the mess that organisations are in.