Analysis of Tescos Corporate Governance and Responsibility

Analysis of Tescos Corporate Governance and Responsibility 1.0 INRODUCTION 1.1 Overview of the project Corporate governance and Corporate Responsibility have gained an increasing amount of importance over the last decade due to some of the worlds greatest corporate scandals that have been taking place. These scandals have not been happening to the under developed or developing economies, which have a high rate of corruption, but instead have been taking place in the developed countries, which supposedly have had various safeguards to protect the interests of all the stakeholders. Following the collapse of major multi-nationals such as the Maxwell Empire in the UK, Enron in the United States and Parmalat in Italy to name just a few, findings of fraud, dishonesty, irregular accounting and too much power held by one individual soon came to light. As a result, people and investors have lost the trust they placed in the financial markets and the big corporations to safeguard their assets and interests. The loss in confidence has seen big drops in the stock markets around the world and should the trend continues, the whole world economy would collapse which would lead to devastating consequences. As a result of those alarming situations, governments around the globe have devised frameworks of good corporate governance and passed on various laws, rules and regulations to hold companies responsible for their own actions, known as Corporate Governance and Responsibility in order to ensure that such scandals are not repeated in the future. The main corporate governance frameworks include the Organisation for Economic Co-operation and Developments (OECD) principles, the UK revised Combined Code (2003) and the Sarbanes-Oxley Act in the United States. Some of these are legally binding, such as the one in the United States while others operate on a comply or explain basis. This project will place more emphasis on the governance framework in the UK, namely the revised Combined Code, though I will make brief analyses of other reports and frameworks. Why I chose this particular topic area is for many reasons. Firstly, I believe that there is still scope to improve corporate governance worldwide and hence, wished to learn more about it. Secondly, despite the fact that corporate governance and corporate responsibility have become increasingly important in todays world and that companies have to adhere to the rules or principles, reports of fraud and bad management are still emerging in the developed economies, which lead to the collapse or nationalisation of various organisations. Well known examples in the UK include the nationalisation of Northern Rock bank and the government pumping in money into its various other banks, including Lloyds and Royal Bank of Scotland among others. It therefore begs the question about the credibility of the corporate governa nce framework. In addition, as a business student, it is now imperative to have a good understanding of the subject and as a taxpayer and citizen, I am both directly and indirectly affected by corporate behaviour. 1.2 The Organisation in question This thesis revolves around Tesco plc, one of the worlds leading retailers. Opened in 1919 by founder Jack Cohen, his first days sales were  £4 with a profit of  £1. By 1947, the company floated on the stock exchange with a share price of 25p and by 1979, its annual sales has reached  £1 billion. In 1983, Tesco Stores (Holdings) Ltd becomes Tesco PLC. Nowadays, the company has entered various other markets including the USA, China, Korea and many other European countries. It has also diversified into other industries, including financial services and is currently making profits in excess of  £2 billion. It is the UKs biggest supermarket in terms of turnover with 2,115 UK stores and employing 280, 373 staff in the UK alone (Tesco annual report 2008) .Such an organisation has been chosen for various reasons, namely because: It is a listed company, and hence according to the London Stock Exchange rules, it needs to adhere to the principles of the UK Combined Code on Corporate Governance on a Comply or Explain basis. Therefore, I will be able to determine whether such a big company is really being a good corporate citizen. Most of the data that I will need to conduct my research is readily accessible through its website, including its financial statements and annual reports. Data on similar organisations, such as Sainsburys plc is also readily accessible, which would prove to be very useful for comparison purposes. This would help me to make an analysis on how those two similar organisations are complying with the UK combined code on corporate Governance and whether the departure from for example a specific code is usual for these companies or ot. Tesco plc has a very large number of stakeholders and hence it is interesting to find out how the company is working towards fulfilling its responsibility towards them. In other words, how it is being corporately responsible, especially how it is dealing with the principal-agent problem. In addition, according to the companys annual report, Tesco follows a diversification strategy, laid down over 10 years ago and which has been the foundation of its enormous success in recent years. Due to the companys size, Tesco has segmented itself into 5 main areas: CORE UK COMMUNITY NON FOOD RETAILING SERVICES INTERNATIONAL The UK is its biggest market and the core of the business. The main aim here is to provide its customers with excellent value and choice. As well as deriving high shareholder value, the company also tries to be a corporate citizen. In addition to its annual report, the company also publishes a Corporate Responsibility report to show that it is a responsible business. Over the past decade, the company diversified into the non-food market whereby it offers a range of products, from laptops to mobile phones, etcThe aim here is to be as strong in food as in non-food, competing on price and value. Following its success into the non-food market, the company went into retailing services, offering financial services to its customers. Again here, this sector has proven to be profitable for the company. Nowadays, Tesco is not only operating in the UK but also in most European countries as well as in the US and Asia. The company has been expanding very quickly and is the number 1 retailer in Thailand today! As can be seen, Tesco has followed through a diversification strategy throughout the last decade, expanding not only into other markets but into other industries as well. Considering that diversification is quite a risky strategy, the company has been performing exceptionally well, defying the current credit crunch to record profits of over 2 billion pounds! Such a big and successful company provides us with ample opportunities to assess whether there are any irregularities in its reports, ie, whether there is good governance or not! 1.3 Research Questions The dissertation is mainly an analytical one, in that an analysis on the companys corporate governance and its corporate responsibility report will be performed. The main objective is to determine whether the company is behaving responsibly, by complying with all the provisions of the code and how is it discharging its duties towards its stakeholders. The main questions that will therefore be investigated are the following: Has Tesco complied in all respect with the principles of Corporate Governance and if not, why has it departed from a particular provision? Is there a link between its Corporate Governance and Corporate Social Responsibility and its financial position? Is the company projecting an image of a good corporate citizen? The above will form the main research questions though I will also be looking at various other aspects briefly such as: Variety of directors at the organisation. The difficulty in finding the right people with the right skills for the company. The role of Tescos audit committee, including independence issues. Public relations regarding the effect on the company if seems to flout regulations. The companys budget towards fulfilling its corporate responsibility How the company is working towards being eco-friendly Whether the company provides proper adequate training, pension provisions, etc 1.4 Overall Research Approach The starting point for the thesis indulges firstly into a broad explanation of both corporate governance and corporate responsibility. We will look at various definitions from a few sources in order to provide the reader with an understanding of the subject. Good corporate governance is incorporated into many reports. The main ones that will be the focus of the dissertation are notably the Cadbury report, Hambel report, Greenbury report, Higgs report, Smith report and the Turnbull Committee. The main points of the UK Combined Code (revised July 2003) will be discussed in a bit more detail, since it will form the basis of our first topic of interest of the project. In addition, the London Stock Exchange now requires all its listed companies to comply with the above code, which includes Tesco. As such, the first project objective will be achieved, whereby we can make an analysis whether Tesco has complied fully with the code or not. Whether there is a link between Tescos governance system and its financial performance will be the second part of the project. An analysis of the companys financial statements will be performed to assess its financial performance using various accounting techniques, such as ratio analysis, industry, competitor and international comparisons. Other items, such as share price movements, off balance sheet finance, creative accounting and conflicts of interests between management and shareholders will also be looked at to ensure that the figures provided in the financial statements are not misleading, especially to both current and potential investors. The impact of Tescos corporate governance system on its various stakeholders will form the next point. The main stakeholders that will be investigated here will be: Shareholders Employees Suppliers Customers Loan provider Government Public Each of the above points will be explored in details and an assessment on stakeholders conflicts of interests will be discussed briefly if there are any. Next on the agenda will be the topic of Corporate Responsibility. I will be making an analysis to determine how well Tesco is taking the responsibility to consider the interests of customers, employees, shareholders, society and the environment in its operational activities. Lastly, the thesis will focus on any criticisms and possible recommendations on the organisations corporate governance system and on its corporate social responsibility. 2.0 Information gathering Gathering information and data effectively is key to achieving a good project. A great deal of research is needed and very often there might be data overload. When too much data is collected, it sometimes becomes very difficult to analyse and interpret them properly which may be problematic in doing well in the thesis. On the other hand, not collecting enough data may lead to the wrong conclusion, thus rendering the thesis useless or even misleading. Therefore, it is of utmost importance that one must collect information properly and effectively in order to avoid wasting time and sometimes even money. We should always bear in mind that the data that needs to be collected should be sufficient so as to achieve the research objectives. 2.1 Sources of information There are two types of data, mainly primary and secondary data. Primary data is data that is unique to the researcher, and that is unavailable anywhere else. There are different methods of collecting such types of data. The main ones though are: Survey Questionnaires Observation and Interviews Primary data is often very valuable since it is unavailable anywhere else. However, collecting it is very time consuming and costly. In addition to that, one must always ensure that a proper margin of error is selected and that a good sample size is chosen. Otherwise, all the benefits of primary data will be lost. As can be seen, though valuable, it is often very time consuming and costly. Secondary data, as the name suggests, is data that is not unique. It is data that already exists somewhere else. Secondary data is data that has already been collected and collated by somebody for some reason other than the current study. It can be used to get a new perspective on the current study, to supplement or compare the work or to use parts of it, as another study may prove costly and time consuming e.g. the census. Secondary data can further be divided into two parts, namely qualitative and quantitative. Qualitative data includes biographies, personal letters, diaries, records, documents, published material, computer database, policy statements, etc. Quantitative data would have market research, census, and Economic documents, planning documents or specimens. The list is endless and once the type of secondary data is identified, it becomes easy to locate the source. The following is a list of where data has been collected and scrutinised for the purpose of the thesis: 2.1.1 Textbooks Textbooks have always been a major source of information. In fact, due to the increased importance of corporate governance, corporate responsibility and responsibility accounting, many textbooks have attempted to explain the concept of those topics and their relevance of in todays financial world. In todays accounting profession, it is now recommended that all accountants be familiar with corporate governance and especially ethics. This is mainly due to those scandals such as Enron which shook the whole financial world. It has been one of the most talked topics in the recent decade regarding the top CFOs and CEOs integrity! I found the texts regarding corporate governance and corporate responsibility to be well documented, which has been quite useful in analysing the topics in question. I made use of several textbooks, including many accounting ones. The main one I have used for my research is the BPP textbook for the Association of Certified Chartered Accountants P1, Professional Accountant. The textbook has provided me with a great insight about ethics and corporate governance and has helped a lot in preparing for this analysis. In addition, I also found the Heriot-Watt University MBA textbook regarding corporate governance to be extremely useful. This has helped me to understand from scratch why corporate governance is so important! The MBA textbook goes into much more details on the subject which really broadened my knowledge and provided me an insight from the barriers to improvement on governance systems to the various policy responses. The benefits of using textbooks are that they contained a great deal of literature on the issue of corporate governance, which not only helped me in achieving some of my aims for my project but also opened my eyes on the effects it has on each and every one of us. Unfortunately, textbooks have some drawbacks as well. Firstly, one needs to get the right texts for a particular research topic, which can take a lot of time. Next, there is a lot of reading to do, and if time is a constraint, this can pose a serious problem. In addition, although one may get the right books, one also has to make sure that they are the latest editions, since they tend to contain updated data and information. 2.1.2 Professional magazines Professional magazines are another great source of information. As a regular subscriber to the economist, needless to say that they have been of tremendous help to my thesis. From an economic point of view, I understood how corporate governance impacts on everyones life, no matter where you are or whichever country you are working in. The Enron scandal for example did not only affect its employees and the United States citizens but everyone else in the world. Now one may asks oneself how do i get affected if i live in Nepal for example. The answer to that I understood it by reading the economist! When Enron collapsed, first of all, the employees and shareholders and whoever were directly connected were the first to suffer. But Enron was a major global player in the financial markets, which sent shockwaves across the whole world, meaning we were all impacted by their actions! It is therefore no wonder that legislations such as the Sarbanes-Oxley were quickly brought into force in the United States. A lot of other countries also brought in their own codes of best practice on corporate governance and responsibility accounting. All this knowledge, I gained from those professional magazines, which are a great way of keeping up to date. Other magazines that have been useful in my research include the various accountancy magazines, such as Student Accountant which i receive regularly, since I am also an accountancy student from the association of chartered certified accountants. 2.1.3 Library I visited various libraries in order to be able to collect as much information as possible for my research. There is a local library where I live and this helped a lot. I needed to find journal articles and specific books for corporate governance and corporate responsibility. However, the problem I encountered at the library is that there were far too many books for me to choose from and that was very time consuming. I had no other option but to seek help from the librarians, who were most eager to help. I spent a really long-time reading and summarising all the information that I believe would be useful to me. A big drawback was that there were a lot of outdated information which was very frustrating. However libraries are a great source to get information from and they have been most useful to me. 2.1.4 The internet The internet nowadays is one of the most indispensable tools for information gathering. It is an integral part on everyones life and without it, mankind would be kind of lost! The big advantage of using the internet is the speed at which a large amount of data can be accessed. For that reason, it had been one of my principal sources of information. The information is mostly free and it is easily accessible. Though some websites require a payment to get the information provided, most were free of charge. Most of the information regarding this thesis has been accessed from the internet. As with every good thing, the internet has its drawbacks as well. First, one needs to make sure that by accessing information for our own use, we should make sure that we are not infringing anyones copyright. We also have to be very careful due to the spread of viruses which can damage ones computer and stealing our private information. In any case, the internet remains one of the most powerful tool to gather information. 2.1.5 Tesco plc annual report (2008) The companys annual reports were easily accessible from the website and provided me with a wealth of information in regards to corporate governance and corporate responsibility. I managed to even get a 5 year summary of the companys financial statements which has helped me to draw out a lot of conclusions regarding performance. However, as one would expect, the report portrayed Tesco as a good citizen which does everything ethically. I could not therefore rely a hundred percent on everything the report said about. 3.0 Ethical Issues As in any thesis, ethics play a very important role. Therefore, one needs to make sure to being completely ethical whenever gathering information and using them for ones purpose. 3.1.1 Information gathering Bias and Balance: Recognizing biased information, looking for balanced views, exploring opposing views, recognizing commercial interests in published information. Fact or Opinion: Recognizing factual information, looking for evidence of factual truth, recognizing and valuing opinion. Knowledge Gaps: Identifying missing information, locating missing information, stating research methodologies so that others can search further. 3.1.2 Information Evaluation Accuracy: Is the information accurate when checked against other sources? How reliable and error-free is the information? Authority: Does the information source qualify as an expert? Is the source rightly expected to know the facts and specifics? Are the qualifications of the author/speaker clearly stated? Is the author/speaker affiliated with an institution or organization? Is there contact information available for the author of a written document? Content: What is the purpose of the information, i.e. to inform, convince, or sell? What does it contribute to your understanding of the issues? Who is the intended audience based on content, tone, and style? What is the overall value of the content compared to other resources on the topic? Coverage: Does the information cover the subject adequately? Are there inexplicable omissions? Currency: Is the publication date clearly stated? When was the information last revised? Is it maintained and updated regularly? Are the links on a web page up-to-date and useable? Documentation: Are you certain the information is based on more than hearsay? Does the author explain where the information was obtained? Does the web page or article contain a bibliography or list of sources used? 3.1.3 Information Use Fair Use of Information: Copyright law allows limited copying for educational and archival purposes, but does limit even that to no more than 10% of a work, among other restrictions. Proper Citation: Complete citations of sources used is the most important issue, attributing information to its true author, and including enough information for another to locate the source. The ethical issues above (3.1.1 3.1.3) were compiled by H. Heller-Ross, Plattsburgh State University. They have been included in this thesis to help readers take a grasp on the various ethical issues which may impact upon ones research. 4.0 Results and Analysis Corporate Governance 4.1 Corporate Governance Corporate governance is the system by which organisations are directed and controlled. (Cadbury A. 1992) Corporate governance is a set of relationships between a companys directors, its shareholders and other stakeholders. It also provides the structure through which the objectives of the company are set, and the means of achieving those objectives and monitoring performance are determined. (Johnston D. J OECD Secretary General) Corporate governance, the system by which organisations are directed and controlled, is based on a number of concepts including transparency, independence, accountability and integrity. (BPP, P1 2007) Corporate governance is the system by which companies are directed and controlled. It deals largely with the relationship between the constituent parts of a company the directors, the board (and its sub-committees) and the shareholders. Transparency and accountability are the most important elements of good corporate governance. This includes: the timely provision by companies of good quality information; a clear and credible company decision-making process; Shareholders giving proper consideration to the information provided and making considered judgements. The corporate governance framework in the UK operates at a number of levels: through legislation particularly the Companies Act; Through regulation and in particular for listed companies through the listing rules, which are the responsibilities of theFinancial Services Authority. Through the Combined Code which is the responsibility of the Financial Reporting Council. It contains general principles and more detailed provisions relating to the corporate governance of listed companies. It is appended to the FSAs Listing Rules, which require these companies, in their annual report and accounts to, (i) report on how they apply the principles, and (ii) confirm that they comply with the Codes provisions or, where they do not, provide an explanation: hence the comply or explain principle which, if applied effectively, underpins informed dialogue between directors and shareholders. contains general principles. (http://www.berr.gov.uk/whatwedo/businesslaw/corp-governance/page15267.html) What the above definitions are about is that organisations should be managed in the best interest of everyone connected. In other words, directors should not forget that they are the agents of the companies they manage and they have a responsibility towards the various stakeholders. Therefore, they should act with integrity and honesty and should not just be concerned with filling their own pockets. The principal agent problem consists of trust and risk. (Lee, A.T. 2006). This trust may be breached by the agents by pursuing their own interest or through negligence and fraud. History is witness to this abuse, which has resulted in shareholders losing their investments and employees losing their jobs with no fault of theirs. As a consequence, stakeholders now want reassurance that such scandals are not repeated, resulting in corporate governance frameworks around the world. The success of a company based on the principal-agent relationship is dependent on the effectiveness of its corporate governance particularly the competence and independence of its board of directors and various subcommittees. (Lee, A.T. 2006) 4.2 Various Corporate Governance Reports The various scandals around the financial world prompted governments to review corporate governance, especially about those companies that are listed in the stock markets. This lead to a wide range of corporate governance reports being written by scholars around the world. The main ones in the UK are listed below, with a brief explanation about it. 4.2.1 The Cadbury report The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report of a committee chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures. The report was published in 1992. The reports recommendations have been adopted in varying degree by the European Union, the United States, the World Bank, and others. 4.2.2 The Greenbury Report The Greenbury report was issued in 1995 by a committee under the chairmanship of Sir Richard Greenbury that developed a number of recommendations of the Cadbury Report on directors remuneration. It stressed the importance of a remuneration committee of non executive directors , the provision of information on remuneration policy in the annual report and accounts, and the restriction of notice and contract periods to less than one year. 4.2.3 The Hambel Report This was a committee set up under the chairmanship of Sir Ronald Hampel to review the implementation of the Cadbury Code and the recommendations of the Greenbury report. A report was issued in 1998 emphasizing that the primary duty of directors is to shareholders and that the recommendations of the two earlier reports should be treated as guidelines rather than prescriptive rules. 4.2.4 The Turnbull Report The latest link in the UK corporate governance chain is the September 1999 publication Internal Control: Guidance for Directors on the Combined Code otherwise called, after its chairman (Nigel Turnbull, Executive Director of Reed Plc), the Turnbull Report (Turnbull). Turnbulls guidance is based upon the adoption by a companys board of a risk-based approach to establishing a sound system of internal control, and on Accountability, transparency, corporate social responsibility: a new mantra for a new millennium. reviewing its effectiveness. This should be incorporated by a company within its normal management and governance processes. The span of internal control contemplated by Turnbull stretches wider than financial controls, to encompass social and environmental issues matters that have recently come to be grouped together under the generic heading of reputational risk. 4.2.5 The Higgs Report The Higgs Report, named after its author Derek Higgs focused on the role and effectiveness of the non-executive director so as to consolidate the UKs combined code on corporate governance. The report was published in January 2003 and it was expected that the revised combined code will come into effect in July 2003. 4.2.6 The Smith Report Following the major financial scandals around the world, the Financial Reporting Council invited Sir Robert Smith to chair a report on the role and responsibilities of the audit committees. The aim was to develop the existing Combined Code guidance and to clarify the duties of the non executive directors meant to form the audit committee. 4.2.7 UK Combined Code The Combined Code on Corporate Governance sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit and relations with shareholders. All companies incorporated in the UK and listed on the Main Market of the London Stock Exchange are required under the Listing Rules to report on how they have applied the Combined Code in their annual report and accounts. Overseas companies listed on the Main Market are required to disclose the significant ways in which their corporate governance practices differ from those set out in the Code. The Combined Code contains broad principles and more specific provisions. Listed companies are required to report on how they have applied the main principles of the Code, and either to confirm that they have complied with the Codes provisions or where they have not to provide an explanation. (http://www.frc.org.uk/corporate/combinedcode.cfm) The combined code on corporate governance will be the benchmark against which an analysis of corporate governance at Tesco will be made. Any areas of the code which have not been followed or where the company has tried to manipulate it will be looked at in detail and conclusions drawn out. 5.0 Analysis of Tescos Governance system 5.1 Directors 5.1.1 The board As at 28 February 2009, the Board of Tesco PLC comprised eight Executive Directors, seven independent Non-executive Directors and David Reid, Non-executive Chairman. The Companys Articles of Association require all new Directors to be submitted for election by shareholders in their first year following appointment. The Board has appointed one Non-executive Director, Rodney Chase, to act as Senior Independent Director. The Senior Independent Director is available to shareholders to assist in resolving concerns, should the alternative channels be inappropriate. The Senior Independent Director is also required to lead the discussion in relation to assessing the effectiveness of the Chairmans performance. The Non-executive Directors bring a wide range of skills and experience, as well as independent judgement on strategy, risk and performance to the Compa Analysis of Tescos Corporate Governance and Responsibility Analysis of Tescos Corporate Governance and Responsibility 1.0 INRODUCTION 1.1 Overview of the project Corporate governance and Corporate Responsibility have gained an increasing amount of importance over the last decade due to some of the worlds greatest corporate scandals that have been taking place. These scandals have not been happening to the under developed or developing economies, which have a high rate of corruption, but instead have been taking place in the developed countries, which supposedly have had various safeguards to protect the interests of all the stakeholders. Following the collapse of major multi-nationals such as the Maxwell Empire in the UK, Enron in the United States and Parmalat in Italy to name just a few, findings of fraud, dishonesty, irregular accounting and too much power held by one individual soon came to light. As a result, people and investors have lost the trust they placed in the financial markets and the big corporations to safeguard their assets and interests. The loss in confidence has seen big drops in the stock markets around the world and should the trend continues, the whole world economy would collapse which would lead to devastating consequences. As a result of those alarming situations, governments around the globe have devised frameworks of good corporate governance and passed on various laws, rules and regulations to hold companies responsible for their own actions, known as Corporate Governance and Responsibility in order to ensure that such scandals are not repeated in the future. The main corporate governance frameworks include the Organisation for Economic Co-operation and Developments (OECD) principles, the UK revised Combined Code (2003) and the Sarbanes-Oxley Act in the United States. Some of these are legally binding, such as the one in the United States while others operate on a comply or explain basis. This project will place more emphasis on the governance framework in the UK, namely the revised Combined Code, though I will make brief analyses of other reports and frameworks. Why I chose this particular topic area is for many reasons. Firstly, I believe that there is still scope to improve corporate governance worldwide and hence, wished to learn more about it. Secondly, despite the fact that corporate governance and corporate responsibility have become increasingly important in todays world and that companies have to adhere to the rules or principles, reports of fraud and bad management are still emerging in the developed economies, which lead to the collapse or nationalisation of various organisations. Well known examples in the UK include the nationalisation of Northern Rock bank and the government pumping in money into its various other banks, including Lloyds and Royal Bank of Scotland among others. It therefore begs the question about the credibility of the corporate governa nce framework. In addition, as a business student, it is now imperative to have a good understanding of the subject and as a taxpayer and citizen, I am both directly and indirectly affected by corporate behaviour. 1.2 The Organisation in question This thesis revolves around Tesco plc, one of the worlds leading retailers. Opened in 1919 by founder Jack Cohen, his first days sales were  £4 with a profit of  £1. By 1947, the company floated on the stock exchange with a share price of 25p and by 1979, its annual sales has reached  £1 billion. In 1983, Tesco Stores (Holdings) Ltd becomes Tesco PLC. Nowadays, the company has entered various other markets including the USA, China, Korea and many other European countries. It has also diversified into other industries, including financial services and is currently making profits in excess of  £2 billion. It is the UKs biggest supermarket in terms of turnover with 2,115 UK stores and employing 280, 373 staff in the UK alone (Tesco annual report 2008) .Such an organisation has been chosen for various reasons, namely because: It is a listed company, and hence according to the London Stock Exchange rules, it needs to adhere to the principles of the UK Combined Code on Corporate Governance on a Comply or Explain basis. Therefore, I will be able to determine whether such a big company is really being a good corporate citizen. Most of the data that I will need to conduct my research is readily accessible through its website, including its financial statements and annual reports. Data on similar organisations, such as Sainsburys plc is also readily accessible, which would prove to be very useful for comparison purposes. This would help me to make an analysis on how those two similar organisations are complying with the UK combined code on corporate Governance and whether the departure from for example a specific code is usual for these companies or ot. Tesco plc has a very large number of stakeholders and hence it is interesting to find out how the company is working towards fulfilling its responsibility towards them. In other words, how it is being corporately responsible, especially how it is dealing with the principal-agent problem. In addition, according to the companys annual report, Tesco follows a diversification strategy, laid down over 10 years ago and which has been the foundation of its enormous success in recent years. Due to the companys size, Tesco has segmented itself into 5 main areas: CORE UK COMMUNITY NON FOOD RETAILING SERVICES INTERNATIONAL The UK is its biggest market and the core of the business. The main aim here is to provide its customers with excellent value and choice. As well as deriving high shareholder value, the company also tries to be a corporate citizen. In addition to its annual report, the company also publishes a Corporate Responsibility report to show that it is a responsible business. Over the past decade, the company diversified into the non-food market whereby it offers a range of products, from laptops to mobile phones, etcThe aim here is to be as strong in food as in non-food, competing on price and value. Following its success into the non-food market, the company went into retailing services, offering financial services to its customers. Again here, this sector has proven to be profitable for the company. Nowadays, Tesco is not only operating in the UK but also in most European countries as well as in the US and Asia. The company has been expanding very quickly and is the number 1 retailer in Thailand today! As can be seen, Tesco has followed through a diversification strategy throughout the last decade, expanding not only into other markets but into other industries as well. Considering that diversification is quite a risky strategy, the company has been performing exceptionally well, defying the current credit crunch to record profits of over 2 billion pounds! Such a big and successful company provides us with ample opportunities to assess whether there are any irregularities in its reports, ie, whether there is good governance or not! 1.3 Research Questions The dissertation is mainly an analytical one, in that an analysis on the companys corporate governance and its corporate responsibility report will be performed. The main objective is to determine whether the company is behaving responsibly, by complying with all the provisions of the code and how is it discharging its duties towards its stakeholders. The main questions that will therefore be investigated are the following: Has Tesco complied in all respect with the principles of Corporate Governance and if not, why has it departed from a particular provision? Is there a link between its Corporate Governance and Corporate Social Responsibility and its financial position? Is the company projecting an image of a good corporate citizen? The above will form the main research questions though I will also be looking at various other aspects briefly such as: Variety of directors at the organisation. The difficulty in finding the right people with the right skills for the company. The role of Tescos audit committee, including independence issues. Public relations regarding the effect on the company if seems to flout regulations. The companys budget towards fulfilling its corporate responsibility How the company is working towards being eco-friendly Whether the company provides proper adequate training, pension provisions, etc 1.4 Overall Research Approach The starting point for the thesis indulges firstly into a broad explanation of both corporate governance and corporate responsibility. We will look at various definitions from a few sources in order to provide the reader with an understanding of the subject. Good corporate governance is incorporated into many reports. The main ones that will be the focus of the dissertation are notably the Cadbury report, Hambel report, Greenbury report, Higgs report, Smith report and the Turnbull Committee. The main points of the UK Combined Code (revised July 2003) will be discussed in a bit more detail, since it will form the basis of our first topic of interest of the project. In addition, the London Stock Exchange now requires all its listed companies to comply with the above code, which includes Tesco. As such, the first project objective will be achieved, whereby we can make an analysis whether Tesco has complied fully with the code or not. Whether there is a link between Tescos governance system and its financial performance will be the second part of the project. An analysis of the companys financial statements will be performed to assess its financial performance using various accounting techniques, such as ratio analysis, industry, competitor and international comparisons. Other items, such as share price movements, off balance sheet finance, creative accounting and conflicts of interests between management and shareholders will also be looked at to ensure that the figures provided in the financial statements are not misleading, especially to both current and potential investors. The impact of Tescos corporate governance system on its various stakeholders will form the next point. The main stakeholders that will be investigated here will be: Shareholders Employees Suppliers Customers Loan provider Government Public Each of the above points will be explored in details and an assessment on stakeholders conflicts of interests will be discussed briefly if there are any. Next on the agenda will be the topic of Corporate Responsibility. I will be making an analysis to determine how well Tesco is taking the responsibility to consider the interests of customers, employees, shareholders, society and the environment in its operational activities. Lastly, the thesis will focus on any criticisms and possible recommendations on the organisations corporate governance system and on its corporate social responsibility. 2.0 Information gathering Gathering information and data effectively is key to achieving a good project. A great deal of research is needed and very often there might be data overload. When too much data is collected, it sometimes becomes very difficult to analyse and interpret them properly which may be problematic in doing well in the thesis. On the other hand, not collecting enough data may lead to the wrong conclusion, thus rendering the thesis useless or even misleading. Therefore, it is of utmost importance that one must collect information properly and effectively in order to avoid wasting time and sometimes even money. We should always bear in mind that the data that needs to be collected should be sufficient so as to achieve the research objectives. 2.1 Sources of information There are two types of data, mainly primary and secondary data. Primary data is data that is unique to the researcher, and that is unavailable anywhere else. There are different methods of collecting such types of data. The main ones though are: Survey Questionnaires Observation and Interviews Primary data is often very valuable since it is unavailable anywhere else. However, collecting it is very time consuming and costly. In addition to that, one must always ensure that a proper margin of error is selected and that a good sample size is chosen. Otherwise, all the benefits of primary data will be lost. As can be seen, though valuable, it is often very time consuming and costly. Secondary data, as the name suggests, is data that is not unique. It is data that already exists somewhere else. Secondary data is data that has already been collected and collated by somebody for some reason other than the current study. It can be used to get a new perspective on the current study, to supplement or compare the work or to use parts of it, as another study may prove costly and time consuming e.g. the census. Secondary data can further be divided into two parts, namely qualitative and quantitative. Qualitative data includes biographies, personal letters, diaries, records, documents, published material, computer database, policy statements, etc. Quantitative data would have market research, census, and Economic documents, planning documents or specimens. The list is endless and once the type of secondary data is identified, it becomes easy to locate the source. The following is a list of where data has been collected and scrutinised for the purpose of the thesis: 2.1.1 Textbooks Textbooks have always been a major source of information. In fact, due to the increased importance of corporate governance, corporate responsibility and responsibility accounting, many textbooks have attempted to explain the concept of those topics and their relevance of in todays financial world. In todays accounting profession, it is now recommended that all accountants be familiar with corporate governance and especially ethics. This is mainly due to those scandals such as Enron which shook the whole financial world. It has been one of the most talked topics in the recent decade regarding the top CFOs and CEOs integrity! I found the texts regarding corporate governance and corporate responsibility to be well documented, which has been quite useful in analysing the topics in question. I made use of several textbooks, including many accounting ones. The main one I have used for my research is the BPP textbook for the Association of Certified Chartered Accountants P1, Professional Accountant. The textbook has provided me with a great insight about ethics and corporate governance and has helped a lot in preparing for this analysis. In addition, I also found the Heriot-Watt University MBA textbook regarding corporate governance to be extremely useful. This has helped me to understand from scratch why corporate governance is so important! The MBA textbook goes into much more details on the subject which really broadened my knowledge and provided me an insight from the barriers to improvement on governance systems to the various policy responses. The benefits of using textbooks are that they contained a great deal of literature on the issue of corporate governance, which not only helped me in achieving some of my aims for my project but also opened my eyes on the effects it has on each and every one of us. Unfortunately, textbooks have some drawbacks as well. Firstly, one needs to get the right texts for a particular research topic, which can take a lot of time. Next, there is a lot of reading to do, and if time is a constraint, this can pose a serious problem. In addition, although one may get the right books, one also has to make sure that they are the latest editions, since they tend to contain updated data and information. 2.1.2 Professional magazines Professional magazines are another great source of information. As a regular subscriber to the economist, needless to say that they have been of tremendous help to my thesis. From an economic point of view, I understood how corporate governance impacts on everyones life, no matter where you are or whichever country you are working in. The Enron scandal for example did not only affect its employees and the United States citizens but everyone else in the world. Now one may asks oneself how do i get affected if i live in Nepal for example. The answer to that I understood it by reading the economist! When Enron collapsed, first of all, the employees and shareholders and whoever were directly connected were the first to suffer. But Enron was a major global player in the financial markets, which sent shockwaves across the whole world, meaning we were all impacted by their actions! It is therefore no wonder that legislations such as the Sarbanes-Oxley were quickly brought into force in the United States. A lot of other countries also brought in their own codes of best practice on corporate governance and responsibility accounting. All this knowledge, I gained from those professional magazines, which are a great way of keeping up to date. Other magazines that have been useful in my research include the various accountancy magazines, such as Student Accountant which i receive regularly, since I am also an accountancy student from the association of chartered certified accountants. 2.1.3 Library I visited various libraries in order to be able to collect as much information as possible for my research. There is a local library where I live and this helped a lot. I needed to find journal articles and specific books for corporate governance and corporate responsibility. However, the problem I encountered at the library is that there were far too many books for me to choose from and that was very time consuming. I had no other option but to seek help from the librarians, who were most eager to help. I spent a really long-time reading and summarising all the information that I believe would be useful to me. A big drawback was that there were a lot of outdated information which was very frustrating. However libraries are a great source to get information from and they have been most useful to me. 2.1.4 The internet The internet nowadays is one of the most indispensable tools for information gathering. It is an integral part on everyones life and without it, mankind would be kind of lost! The big advantage of using the internet is the speed at which a large amount of data can be accessed. For that reason, it had been one of my principal sources of information. The information is mostly free and it is easily accessible. Though some websites require a payment to get the information provided, most were free of charge. Most of the information regarding this thesis has been accessed from the internet. As with every good thing, the internet has its drawbacks as well. First, one needs to make sure that by accessing information for our own use, we should make sure that we are not infringing anyones copyright. We also have to be very careful due to the spread of viruses which can damage ones computer and stealing our private information. In any case, the internet remains one of the most powerful tool to gather information. 2.1.5 Tesco plc annual report (2008) The companys annual reports were easily accessible from the website and provided me with a wealth of information in regards to corporate governance and corporate responsibility. I managed to even get a 5 year summary of the companys financial statements which has helped me to draw out a lot of conclusions regarding performance. However, as one would expect, the report portrayed Tesco as a good citizen which does everything ethically. I could not therefore rely a hundred percent on everything the report said about. 3.0 Ethical Issues As in any thesis, ethics play a very important role. Therefore, one needs to make sure to being completely ethical whenever gathering information and using them for ones purpose. 3.1.1 Information gathering Bias and Balance: Recognizing biased information, looking for balanced views, exploring opposing views, recognizing commercial interests in published information. Fact or Opinion: Recognizing factual information, looking for evidence of factual truth, recognizing and valuing opinion. Knowledge Gaps: Identifying missing information, locating missing information, stating research methodologies so that others can search further. 3.1.2 Information Evaluation Accuracy: Is the information accurate when checked against other sources? How reliable and error-free is the information? Authority: Does the information source qualify as an expert? Is the source rightly expected to know the facts and specifics? Are the qualifications of the author/speaker clearly stated? Is the author/speaker affiliated with an institution or organization? Is there contact information available for the author of a written document? Content: What is the purpose of the information, i.e. to inform, convince, or sell? What does it contribute to your understanding of the issues? Who is the intended audience based on content, tone, and style? What is the overall value of the content compared to other resources on the topic? Coverage: Does the information cover the subject adequately? Are there inexplicable omissions? Currency: Is the publication date clearly stated? When was the information last revised? Is it maintained and updated regularly? Are the links on a web page up-to-date and useable? Documentation: Are you certain the information is based on more than hearsay? Does the author explain where the information was obtained? Does the web page or article contain a bibliography or list of sources used? 3.1.3 Information Use Fair Use of Information: Copyright law allows limited copying for educational and archival purposes, but does limit even that to no more than 10% of a work, among other restrictions. Proper Citation: Complete citations of sources used is the most important issue, attributing information to its true author, and including enough information for another to locate the source. The ethical issues above (3.1.1 3.1.3) were compiled by H. Heller-Ross, Plattsburgh State University. They have been included in this thesis to help readers take a grasp on the various ethical issues which may impact upon ones research. 4.0 Results and Analysis Corporate Governance 4.1 Corporate Governance Corporate governance is the system by which organisations are directed and controlled. (Cadbury A. 1992) Corporate governance is a set of relationships between a companys directors, its shareholders and other stakeholders. It also provides the structure through which the objectives of the company are set, and the means of achieving those objectives and monitoring performance are determined. (Johnston D. J OECD Secretary General) Corporate governance, the system by which organisations are directed and controlled, is based on a number of concepts including transparency, independence, accountability and integrity. (BPP, P1 2007) Corporate governance is the system by which companies are directed and controlled. It deals largely with the relationship between the constituent parts of a company the directors, the board (and its sub-committees) and the shareholders. Transparency and accountability are the most important elements of good corporate governance. This includes: the timely provision by companies of good quality information; a clear and credible company decision-making process; Shareholders giving proper consideration to the information provided and making considered judgements. The corporate governance framework in the UK operates at a number of levels: through legislation particularly the Companies Act; Through regulation and in particular for listed companies through the listing rules, which are the responsibilities of theFinancial Services Authority. Through the Combined Code which is the responsibility of the Financial Reporting Council. It contains general principles and more detailed provisions relating to the corporate governance of listed companies. It is appended to the FSAs Listing Rules, which require these companies, in their annual report and accounts to, (i) report on how they apply the principles, and (ii) confirm that they comply with the Codes provisions or, where they do not, provide an explanation: hence the comply or explain principle which, if applied effectively, underpins informed dialogue between directors and shareholders. contains general principles. (http://www.berr.gov.uk/whatwedo/businesslaw/corp-governance/page15267.html) What the above definitions are about is that organisations should be managed in the best interest of everyone connected. In other words, directors should not forget that they are the agents of the companies they manage and they have a responsibility towards the various stakeholders. Therefore, they should act with integrity and honesty and should not just be concerned with filling their own pockets. The principal agent problem consists of trust and risk. (Lee, A.T. 2006). This trust may be breached by the agents by pursuing their own interest or through negligence and fraud. History is witness to this abuse, which has resulted in shareholders losing their investments and employees losing their jobs with no fault of theirs. As a consequence, stakeholders now want reassurance that such scandals are not repeated, resulting in corporate governance frameworks around the world. The success of a company based on the principal-agent relationship is dependent on the effectiveness of its corporate governance particularly the competence and independence of its board of directors and various subcommittees. (Lee, A.T. 2006) 4.2 Various Corporate Governance Reports The various scandals around the financial world prompted governments to review corporate governance, especially about those companies that are listed in the stock markets. This lead to a wide range of corporate governance reports being written by scholars around the world. The main ones in the UK are listed below, with a brief explanation about it. 4.2.1 The Cadbury report The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report of a committee chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures. The report was published in 1992. The reports recommendations have been adopted in varying degree by the European Union, the United States, the World Bank, and others. 4.2.2 The Greenbury Report The Greenbury report was issued in 1995 by a committee under the chairmanship of Sir Richard Greenbury that developed a number of recommendations of the Cadbury Report on directors remuneration. It stressed the importance of a remuneration committee of non executive directors , the provision of information on remuneration policy in the annual report and accounts, and the restriction of notice and contract periods to less than one year. 4.2.3 The Hambel Report This was a committee set up under the chairmanship of Sir Ronald Hampel to review the implementation of the Cadbury Code and the recommendations of the Greenbury report. A report was issued in 1998 emphasizing that the primary duty of directors is to shareholders and that the recommendations of the two earlier reports should be treated as guidelines rather than prescriptive rules. 4.2.4 The Turnbull Report The latest link in the UK corporate governance chain is the September 1999 publication Internal Control: Guidance for Directors on the Combined Code otherwise called, after its chairman (Nigel Turnbull, Executive Director of Reed Plc), the Turnbull Report (Turnbull). Turnbulls guidance is based upon the adoption by a companys board of a risk-based approach to establishing a sound system of internal control, and on Accountability, transparency, corporate social responsibility: a new mantra for a new millennium. reviewing its effectiveness. This should be incorporated by a company within its normal management and governance processes. The span of internal control contemplated by Turnbull stretches wider than financial controls, to encompass social and environmental issues matters that have recently come to be grouped together under the generic heading of reputational risk. 4.2.5 The Higgs Report The Higgs Report, named after its author Derek Higgs focused on the role and effectiveness of the non-executive director so as to consolidate the UKs combined code on corporate governance. The report was published in January 2003 and it was expected that the revised combined code will come into effect in July 2003. 4.2.6 The Smith Report Following the major financial scandals around the world, the Financial Reporting Council invited Sir Robert Smith to chair a report on the role and responsibilities of the audit committees. The aim was to develop the existing Combined Code guidance and to clarify the duties of the non executive directors meant to form the audit committee. 4.2.7 UK Combined Code The Combined Code on Corporate Governance sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit and relations with shareholders. All companies incorporated in the UK and listed on the Main Market of the London Stock Exchange are required under the Listing Rules to report on how they have applied the Combined Code in their annual report and accounts. Overseas companies listed on the Main Market are required to disclose the significant ways in which their corporate governance practices differ from those set out in the Code. The Combined Code contains broad principles and more specific provisions. Listed companies are required to report on how they have applied the main principles of the Code, and either to confirm that they have complied with the Codes provisions or where they have not to provide an explanation. (http://www.frc.org.uk/corporate/combinedcode.cfm) The combined code on corporate governance will be the benchmark against which an analysis of corporate governance at Tesco will be made. Any areas of the code which have not been followed or where the company has tried to manipulate it will be looked at in detail and conclusions drawn out. 5.0 Analysis of Tescos Governance system 5.1 Directors 5.1.1 The board As at 28 February 2009, the Board of Tesco PLC comprised eight Executive Directors, seven independent Non-executive Directors and David Reid, Non-executive Chairman. The Companys Articles of Association require all new Directors to be submitted for election by shareholders in their first year following appointment. The Board has appointed one Non-executive Director, Rodney Chase, to act as Senior Independent Director. The Senior Independent Director is available to shareholders to assist in resolving concerns, should the alternative channels be inappropriate. The Senior Independent Director is also required to lead the discussion in relation to assessing the effectiveness of the Chairmans performance. The Non-executive Directors bring a wide range of skills and experience, as well as independent judgement on strategy, risk and performance to the Compa