Tesco redux

In yesterday's FT, Hugh Willmott offered his view of the Tesco situation.  He comments on the apparent dereliction of the NEDs but his analysis misses two points that I have written about before.

Firstly, the Tesco board structure.  The company has a board made up of NEDs, the group CEO and the CFO. It also has an executive committee, which comprises all the senior executive directors plus the CEO and the CFO. The diagram showing the committee structure does not show the executive committee so we must infer that the Board and the Executive committee function together in some way but it is not at all clear how this happens. The 2014 report tells us:

"The Board itself has evolved substantially over the past two years
from its historical structure of broadly balanced Executive and
Non-executive representation to its current shape of the Chief
Executive and Chief Financial Officer being the only Executive
members of the Board. It is important to view these changes in the
context of management development generally and in particular
the development of a strong Executive Committee under Philip
Clarke, the individual members of which generally attend Board
discussions of matters reflecting their responsibilities. This allows
the Board to operate as a smaller group, supporting real, robust
and penetrating debate while ensuring continued contact with a
range of senior business executives."

Let's think about this in the historical context. Among the concerns that prompted Cadbury was the negative influence of dominant chief executives and many of the measures that have followed have been designed to deal with this apparent problem. (I say apparent because there may be some circumstances in which a dominant CEO may be just what is needed but let's ignore that.) But in Tesco's structure the link between the two committees rests in the hands of the CEO and the CFO who sit on both (the company secretary does, too, perhaps we shouldn't forget him.) Doesn't this potentially hand power back to the CEO?

Tesco is not alone in adopting this "evolved" board structure. When the Cadbury Committee sought to strengthen the role of NEDs, particularly through establishing audit committees, critics argued that this undermined the principle of the unitary board. But the trend to smaller boards with an emphasis on the role of independent NEDs seems to have led to a de facto two tier structure. I've never understood why this shouldn't work just as well but it's worth noting that the countries where this is the norm have different legislative and regulatory arrangements to the UK.

Secondly, Professor Willmott's criticism of Tesco's NEDs is rather unfair. With the best will in the world and even with relevant industrial and commercial experience, a bunch of part time directors is unlikely to be able to offer the rigorous oversight and constructive challenge which is now demanded of them. I'm surprised that anyone wants to take on the role these days.

Prescribing board composition to raise the level of board independence has had unintended consequences and there is little evidence that it has been effective in any regard.  I very much doubt whether similar prescriptions to increase diversity will work, either. As the Tesco report also says:

"Board structure is not set in stone. At any point in time it must
reflect the requirements and state of development of the business
in order to be effective. The Tesco Board will continue to evolve to
best match the needs of the business."

Let's move away from prescription and return to the intention of the Cadbury Committee which was to enable the important conversation between boards and investors within the flexibility of the comply or explain framework. And let's also remember that boards, however independent and diverse, will still make mistakes. Not every "scandal" has its roots in corporate governance: some are just bad business decisions.