Corporate Governance - Executive Remuneration Practice at Tesco - Case Study Example

Corporate Governance Issues: A Case of Executive Remuneration Practice at Tesco Name Institution Course Date Corporate Governance Issues: A Case of Executive Remuneration Practice at Tesco Goodley, S 2011, Tesco soothes shareholders but angers pig farmers. The Guardian 14 Jan. 2015, viewed 8 March 2016 http://www.theguardian.com/business/2011/jul/01/tesco-annual-meeting-bonuses Introduction The concept of corporate governance has been receiving increased attention in the current times than in the past. The increased focus on corporate governance has been sparked by increased stakeholder awareness and demand from the executives (Bourne 2012, p. 16). Additionally, the increased attention on this area has also been triggered by the many cases of corporate scandals that rock businesses. Conflict of interest in particular is one of the major corporate governance issues that have become common in companies today. According to Walton, (2005, p. 2) a conflict of interest results when the managers or executives of a company decide to pursue self interest for personal gains instead of the interest of the company and its stakeholders. Tesco is one of the companies that have been riddled with corporate governance issues particularly those related to executive remuneration practices that conflicted with those of the stakeholders of the company. This essay will begin by summarizing the article reporting the conflict of interest as regards the remuneration practices adopted by Tesco executives. It will proceed to discuss the corporate governance issues raised and explain why the issue has been raised in the media. Finally the paper will conclude by providing a brief summary of the issues raised and recommend the measures that need to be taken going forward. Tesco: Company Background Tesco is a leading British food retailer founded in 1929 in London. Since then, the company has never looked back and has experienced a huge growth over the years to become the third largest food retailer in the world (Reuters 2015). Although the UK is Tesco’s main market, the company has expanded its market reach over the years by entering into different emerging markets in South East Asia, the U.S. and Eastern Europe. Despite the stiff competition that Tesco faces from other giant food retailers, the company has maintained good profits over the year. However, the company’s profits have been dwindling in the last few years a trend that has been a course of concern to the management (Reuters 2015). Executive Remuneration Practice at Tesco Tesco is a typical example of a retailer that is synonymous with corporate governance issues the most recent being the executive remuneration policy that has raised eyebrows from the stakeholders. Goodley (2011) report that the executives of Tesco and its suppliers of products were engaged in a war of words after it emerged that the executives of the firm were enriching themselves by awarding themselves hefty bonuses at the expense of the farmers who supply the company with products. The huge salaries and bonuses that the executives awarded themselves were triggered by the shareholders move to approve the new incentive scheme. According to Goodley (2011), 97% of the shareholders approved a new bonus and remuneration scheme that allowed Tesco executives and directors to pocket huge sums of money. The new remuneration policy approved by the majority shareholders meant that the former CEO of Tesco Philip Clerk was to take home £7 million in the form of salary and benefits provided that Tesco met its year target. The same applied to the other directors that the new remuneration scheme allowed to pocket huge salaries and bonuses as long as the retailer met its sales targets. However, of particular concern is that, whereas the executives of the company were allowed to pocket huge sums of money, farmers who supply the retailer with products were being paid very poorly with some being forced to wait for too long before they could get paid for their supplies. Corporate Governance Issue Being Raised: Conflict of Interest Conflict of interest is the principal corporate governance issue being raised in this article. As aforementioned, conflict of interest arises where an individual or organization pursues self interest at the expense of the other stakeholders(Moore et al. 2005, p. 31). Although conflicts of interest are bound to surface in an organization at one time of the other, Peters and Handschin, (2012, p. 46) and Gunay (2008, p. 63) suggests that measures must be taken to ensure that this is prevented before they occur. This is because whenever a conflict of interest surfaces, this affects the impartiality of an individual because of the clash of interests. The corporate governance principle prohibits management from pursuing interests that clash with those of the company and its stakeholders (Claessens 2004, p. 22). Because the executives of a company are expected to pursue the company and its stakeholders interests instead of self interests. This include ensuring that investors receive high returns n their investments; that customers get quality goods and services; suppliers get paid on time; government receives taxes, employees paid competitively and that the environment is protected from pollution among others (Freeman, Harrison, and Wicks 2007, p. 11). In this case, however, the move by the shareholders to award the executives of Tesco high salaries and bonuses while paying suppliers poorly violated the principle of corporate governance. Suppliers are a key stakeholder for Tesco and without them, the retailer would not be in operation since there would be no products to sell to customers. According to Goodley (2011), the shareholders passed the resolution that gave executives hefty pay as a way of motivating them to work hard to ensure that the company meets its financial targets. On the other hand, the pig farmers that supply the retailer with the products were receiving meager prices. The pig farmers repeatedly complained that the retailer was paying them poorly and that there was a need for their prices to be increased. However, Tesco ignored such calls, but instead focused on reviewing the salaries and bonuses of its directors and executives upwards at the expense of the poor suppliers. Among the concerns raised by the farmers was the fact that, whereas Tesco made a weekly profit of up to of £16 million from the sale of their products, farmers were losing more than of £3 million every week something, which farmers described as unfair and unethical as it amounted to exploitation (Goodley, 2011). Besides the suppliers, the move to review the executive remuneration upwards impacted negatively on Tesco’s performance, as well. Goodley (2011) reveal that few months after the company began implanting the reviewed remuneration package, the company’s performance began declining. At the end of 2011, for instance, Tesco’s shares had declined by about 1.85% in the stock exchange market. Additionally, rewarding executives hefty salaries and bonuses while exploiting suppliers is against the corporate governance principle in the sense that it might prompt the collapse of the company. The executives of the company are expected to ensure accountability by safeguarding stakeholder interests. However, in this situation, they ended up accepting huge salaries and benefits while knowing very well that the suppliers were languishing in poverty because of poor pay, which sometimes get delayed. Ethically speaking, the executives should have rejected to new remuneration package if they had the suppliers interest at heart. Reasons this Corporate Governance Issue Was Discussed in the Media The media plays a very important role in the society. Firstly, the media is important to the society because it informs the public of what is happening around them. Without the media, certainly there could be so many things that people could not have not of to today. However, currently, with the availability of the digital media, information can be relayed quickly and easily. The media also plays a role of educating people (Dash 2012, p. 18). Through the media, people are able to learn new things. Therefore, the corporate governance issue highlighted above was discussed in the media so as to help keep the people informed. Tesco has many stakeholders that have an interest of what is happening in the company at any given moment. The stakeholders include employees, customers, suppliers, the government, investors and the community as a whole (Gunay 2008, p. 28). However, because not all the stakeholders will be closer to the company at any given point to learn about the happening, the media usually comes in to act as the provider of information. Therefore, the issues were discussed in the media so that stakeholders learn about what is happening at Tesco so as to be able to make an informed decision about how to go about associating with the company (Dyck and Zingales 2002, p. 16). For instance, after the media reported the executive remuneration practices that had been going on at the company, this gave other suppliers that wanted to engage with the company had to rethink of their relationship with the company. Secondly, the issues were discussed in the media as a way of shaming Tesco for exploiting suppliers. It was only by exposing the company in the media that Tesco noticed that it needed to respond accordingly to safe its image as the public started criticizing the company after the information was made public (Dash 2012, p. 18). This also played a role in putting pressure on Tesco management to ensure that the executives of the company abide by the corporate governance principles. Additionally, the conflict of interest at Tesco was discussed in the media to enable the society learn of the consequences of engaging in such acts. For instance, the media exposed that Tesco experienced a decline in its performance after the exposure of the corporate governance issue. Accordingly, this teaches other companies that may engage in conflicts of interest that such behaviors exposes the companies they are managing to the risk of registering poor performance due to reputation damage. Conclusion Corporate governance has become an area of increased focus in the recent times. However, as illustrated in this paper, conflict of interest remains a common corporate governance issue that needs much attention. Conflict of interest is detrimental to a company as it results in a situation where executives, managers or employees pursue self interest instead of the interest of the organization. Because an organization has many stakeholders with an interest in its performance, executives of a company should ensure that the interests of a company and its stakeholders are put first before self as this would ensure impartial decision making and good performance. In the case of Tesco, the company adopted a policy that allows shareholders to raise the remuneration package of its executives at the detriment of the suppliers. It would be important for the shareholders of the company to understand that the farmers that are being exploited by the company are the reasons for the existence of the company. Without the farmers, the company will not have enough supplies to sell to its customers, thus leading to the collapse of the company. As such, as much as the shareholders intend to enhance the morale of its executives by increasing their salaries and bonuses, this should not be done at the detriment of the suppliers. Instead, the company should ensure that the suppliers are promptly and fairly compensated for their contribution to the retailer. In this respect, the suppliers of pig products ought to be paid competitively to encourage them to maintain constant and quality suppliers for the benefit of the retailer. Above all, Tesco should correct all loopholes that trigger conflicts of interest in the executive remuneration policy. As such, instead of giving the shareholders the exclusive powers of determining the remuneration package of executives, the policy ought to be amended in such a way that ensure that all the major stakeholders of the company, such as suppliers, managers, sponsors and staff are consulted to ensure that the remuneration package that is arrived at is that which is acceptable to all the stakeholders. This would go a long way in insuring that the company adopting an executive remuneration policy that conflicts with the desires and the expectations of other stakeholders of the firm. References Bourne, L 2012, Stakeholder relationship management: A maturity model for organisational implementation. Gower Publishing, Ltd, London. Claessens, S 2004, Corporate governance and enforcement. World Bank Publications, New York, NY. Dash, A. K 2012, "Media impact on corporate governance in India: a research agenda", Corporate Governance. The international journal of business in society, Vol. 12 Iss: 1, pp.89 – 100. Dyck, A., Zingales, L 2002, The corporate governance role of the media, viewed 8 March 2015 http://sticerd.lse.ac.uk/dps/extra/zingales.pdf Freeman, R. E., Harrison, J. S., & Wicks, A. C 2007, Managing for stakeholders: Survival, reputation, and success. Yale University Press, New York. Goodley, S 2011, Tesco soothes shareholders but angers pig farmers. The Guardian 14 Jan. 2015, viewed 8 March 2016 http://www.theguardian.com/business/2011/jul/01/tesco-annual-meeting-bonuses Gunay, S. G 2008, Corporate governance theory: A comparative analysis of stockholder and stakeholder governance models. iUniverse. Cambridge, MA. Moore, D. A., Cain, D. M., Loewenstein, G., & Bazerman, M. H 2005, Conflicts of interest: challenges and solutions in business, law, medicine, and public policy. Cambridge University Press, Cambridge, MA. Peters, A., & Handschin, L 2012, Conflict of interest in global, public and corporate governance. Cambridge University Press, Cambridge, MA. Reuters. (2015). Tesco PLC (TSCO.L). Retrieved from http://www.reuters.com/finance/stocks/companyProfile?symbol=TSCO.L Walton, J 2005, How to identify & to manage conflicts of interest. AICD, London. Read More