"Things are always unnoticed, until they're noticed," Tesco chairman Richard Broadbent said when asked how Britain's biggest retailer had failed to spot a £250 million (€320 million) sized hole in its first-half profits.
It was an oversight that led to a £4 billion drop in Tesco’s market value and the suspension of four senior executives. The newly installed CEO called in forensic accountants and lawyers to find out what went wrong.
The scandal raises doubts over the management and financial oversight at Britain’s largest private sector employer, now in the midst of the gravest crisis in its 95-year history.
Tesco had once appeared unstoppable, boasting two decades of uninterrupted earnings growth as it bulldozed its way to dominance. Things began to go wrong in 2011.
It has now issued three profit warnings in two months with the latest causing the most alarm - the overstatement of its half-year profit forecast by£ 250 million due to the early recognition of payments by suppliers and the pushing back of costs.
Tesco has declined to comment on what may have happened until a review has been completed but chairman Broadbent has described it as “something completely out of the ordinary”.
The revelation has also sparked scrutiny of the upper echelons of the company. The senior executives who ran Tesco during its glory years of the 1990s and 2000s have all left and the board lacks retail experience.
“The chairman has been the leader of this organisation that seems to have failed at every turn,” said David Herro of large Tescon investor Harris Associates.
Four former senior Tesco executives have said that during the 2011-2014 CEO tenure of Phil Clarke, he repeatedly clashed with directors, who found him reluctant to take advice. During that time four of the company's most senior executives quit, taking a combined 109 years of experience with them.
Clarke has declined to comment on his management style but defenders of his record point out that he was battling the most difficult market conditions in decades.
The company’s head of digital told a conference this week Tesco was too big and complex to be run by “one general”.
People outside the company have many questions - not least who has been signing off on profit forecasts in the last three months which turned out, quickly, to be wrong.
By the time the group issued the second of its recent profit warnings on August 29, Clarke, a 40-year Tesco veteran, was technically still CEO but was working his notice while Laurie McIlwee, the firm’s chief financial officer since 2009, had quit on April 4.
“It seems unbelievable that a retailing colossus like Tesco should not have a full-time finance director,” said Adrian Bailey, head of parliament’s business committee.
Tesco's finance function had been further weakened in June when Mike Iddon quit as Tesco's group finance director, planning, treasury and tax.
Tesco says that after McIlwee’s resignation on April 4 it set up a group of senior finance personnel, reporting directly to Clarke. However the company has declined to say who was in that group and Clarke was himself working down his notice.
“What was the board’s scrutiny of the (second) profit warning (on Aug. 29) and numbers that they put out, because you would expect it to be extreme?” asked one retail audit committee chairman, in reference to the profit downgrade and 75 per cent cut to Tesco’s interim dividend.
“If you’re a non-executive director and you’re being asked to put out those kind of profound numbers and you’ve got no finance director and you’ve got no CEO to stand beside them, how do you know they’re right?”
Reuters
