Tesco's Monopoly, Health, and Illegitimacy Issue - Case Study Example

Tescos Monopoly, Health, and Illegitimacy Issues: A Case Study Table of Contents Topic Page Introduction …………………………………………………………………………. 3 The legitimacy theory…….…………...……………………………………………… 3 The power of legitimacy………………….………………………………………….. 4 The aim of disclosure in legitimacy.............................................................................. 4 Legitimacy and Tesco UK.…………………………………………............………... 5 Effect on legitimacy..................................................................................................... 5 Repairing legitimacy……….………………………………………………………… 5 Regaining legitimacy in Tesco UK…………………………………………………… 6 Conclusion ……………….………………………………………………………….. 7 References ……………….…………………………………………………………… 8 Introduction The concept of positive accounting refers to the evolution of accounting from a mechanistic science of putting figures together to a social constructivist system of using accounting to seek social development and the fair distribution of wealth and resources. One of the major components of positive accounting is the legitimacy theory. This concept seeks the development of ethics, ideas, and conceptions to ensure that social change occurs and organisations behave in a responsible manner. Accounting plays a major role in this regard. This paper applies the legitimacy concept on the operations of Tesco PLC in the UK. It analyses some allegations raised against the company and how the company ultimately managed to address these issues. The legitimacy theory ‘Legitimacy is defined as the ability to exercise authority without resorting to open coercion’ (Breton & Cote, 2006). In other words, legitimacy refers to the ability to exert influence and to conduct ones affairs without having to use inappropriate and unacceptable means of making people accept ones actions. In the real world, a business will need to attain profitability in a legal manner. This means there should be a positive public perception about the business in the way it conducts itself in its operations. Davidson writes that political authority is based on the loyalty of the masses, and a firms legitimacy is judged on ‘the extent to which a firm or an industry conforms to the general expectations of the society in which it operates’ (1996). This argument indicates that a business will be judged on the basis of whether it engages in socially acceptable practices or not. When its actions are considered socially acceptable, the business is regarded as legitimate. Therefore, for a business like Tesco to continue to exist as a major supermarket in Britain, it will need to ensure that it operates in a manner that is in consonance with the social beliefs and expectations of the people of the UK. Cho and Patten state that ‘firms are a product of social creation’ (2007). In other words, firms take input from the society and processes and sells this back as an output to the society. This assertion indicates that the society has a say in deciding on the legitimacy of how a business operates. In relation to Tesco, it has the vested task to ensure that its operations are in line with the accepted views and opinions of the people of the UK in order to remain acceptable. Davidson goes on to draw a distinction between what is legitimate and what is legal. He states that something is legal if it conforms to the laws of the land. However, not all legal activities are necessarily legitimate. Legitimacy has more to do with the moral consequences of the actions of an entity (Davidson, 1996). The power of legitimacy ‘Organizational crises can be conceptualized as the interactions between organizations and stakeholders around the breach and re-establishment of common norms and social codes or the perceptions of legitimacy’ (Breitsohl, 2009). The above argument means that the relationship between an organisation and its stakeholders is based on popular norms, values, and social codes. Stakeholders refer to those who affect and are affected by the activities of an organisation. Therefore, the concept of legitimacy is based on the social view and perceptions of stakeholders on the activities of an organisations operations. It is also influenced by popular norms, ideas, and the requirements of the society. The main areas where businesses err and often lose legitimacy include scandals, accidents, and product safety/health (Shrivasata, 1988). These areas are major areas where businesses can encounter so many negative reactions from the public and therefore lose legitimacy. The aim of disclosure in legitimacy Legitimacy can affect the going concern status of a business. In other words, when a business loses legitimacy, its profitability and viability, as well as its right to exist into the future, are compromised. Therefore, businesses should come up with systems and structures that prevent loss of their legitimacy. One of the main tools to attain this end is the use of accounting disclosure systems and information methodologies. Legitimacy plays a role in business operations through its own values and norms, as well as its strategies that guide business operations. Therefore, the reporting and analysis of these two components have a strong effect on the legitimacy of a business. Legitimacy and Tesco UK In 2007, Tesco PLC was accused for being a major monopoly, controlling over 30% of the grocery industry (BBC News, 2007). Together with three other supermarkets (ASDA, Sainsbury and Morrisons), Tesco controls over 75% of trading in the grocery industry of the UK. In 2006, Tesco was accused of exploiting Bangladeshi workers (BBC News, 2006). It was reported to be paying some workers 5p per hour and as low as £8 per month. Then in 2007, Tesco was again cited as adopting extremely low hygiene standards after BBC undercover journalists identified that Tesco mixes batches of old and new food products, changes records, and uses various trade malpractices to ensure they sell at low prices (BBC Undercover News, 2007). Effect on company legitimacy Tesco is meant to operate in a manner that ensures all stakeholders are respected. Monopolising the markets means that small shops like corner shops in the UK will ultimately fold up. Further, some people can possibly lose their capital, and Tesco will end up controlling all the wealth in the UK. The exploitation of Bangladeshi workers also shows that Tesco might not be upholding elsewhere the high ethical standards it professes in the UK. The adoption of low hygiene standards and the conduct of trade malpractices make a customer wonder if it is still worthwhile to buy form Tesco. These issues have all affected the reputation of the company, reduced the worth of Tesco shares, and also caused so much media uproar against the supermarket. Repairing legitimacy In a situation like what occurred in Tesco in 2007, the company definitely needs to repair its image and to restore its legitimacy to the UK public. Suchman identifies four main steps on how a business can regain its lost legitimacy (1995). First, the business will need to normalise its accounts by denying or explaining the situation clearly to the public. Second, it will need to demonstrate the core company values and to set the parameters for its operations. Third, the company must reform its strategies, and finally, it must monitor and maintain the quality standards it has established. Regaining legitimacy in Tesco UK In reaction to the accusation of monopoly, Tesco immediately denied the allegation and stated that it remained sensitive to the smaller businesses in the UK (TescoPLC News Release, 2007). A press release mentioned partnerships to help support smaller businesses and to prevent their fold-up. It also stated that hygiene issues are taken up as major components of the business. However, they admitted that some staff could go overboard and do inappropriate things. In 2006, a similar press release stated that the minimum wage in Bangladesh is really low. However, the company promised that it will upgrade its pay structure in its overseas operations. After the incident, Tesco PLC has consistently emphasi sed its commitment to changing these trends and situations in each financial statement it presented. Between 2007 and 2010, its financial statements have reflected its commitment to customers, suppliers, partners, and the society in general. Certain pages in its financial statements are solely dedicated for this purpose. In its 2010 report presented on the Tesco Web site (2011), numerous disclosures were made on the way the company is growing its UK core. Pages 16 to 22 of the report show that Tesco UK is supporting the growth of smaller UK suppliers and brands and is also taking on some smaller competitors as suppliers and partners. They also show that hygiene standards and the training of employees are given priority. Further, social development standards in relation to employment are disclosed in the financial statements, which are also applicable overseas, particularly in developing countries. The risks in the reputation and operations of Tesco are all disclosed in its financial statements. The strategies it has adopted, including its disclosure of financial statements, show how much it is striving to remain ethical in relation to its competitors and international operations. All necessary corporate governance requirements are disclosed by the company, including its Board Committees operation reports. In note 1 of the financial statement, Tesco indicates that its financial statements are prepared in accordance with International Financial Reporting Standards. As these statements are audited, applicable standards have been reasonably used as the company discloses relevant elements of its operations. Conclusion The legitimacy theory ensures that businesses operate in accordance with the moral and ethical standards in a given society. Tesco has had a number of setbacks in terms of legitimacy and morality. However, the use of press releases and financial statements has allowed it to regain its legitimacy and improve its reputation three years after the scandals. References BBC News, 2006. UK Firms Exploiting Bangladesh. [online] Available at: [Accessed 30 December 2011]. BBC News, 2007. UK Grocers Face Competition Probe. [online] Available at: [Accessed 30 December 2011]. BBC Undercover News, 2007. Out-of-Date Food in UK Supermarkets. [online] Available at: [Accessed 30 December 2011]. Breitsohl, H., 2009. Organizational crises and reactions from a legitimacy perspective – results from two multiple-case studies. In: Schumpeter Discussion Paper. 2009 – 007 Wuppertal, Germany: Burgische Universitat Publication. Breton, G. and Coté, L., 2006. Profit and the legitimacy of the Canadian banking industry. Accounting, Auditing and Accountability Journal, 19(2), pp.512–539. Cho, H. and Patten, D., 2007. The role of environmental disclosures as tools of legitimacy: a research note. Accounting, Organizations & Society, 32, pp.639–647. Davidson, K., 1996. Sure it’s legal, but is it legitimate? Marketing News, 30(13), pp.13–15. Shrivastava, P., Mitroff, I. I., Miller, D., and Miglani, A., 1988. Understanding industrial crises. Journal of Management Studies, 25(4), pp.285–303. Suchman, M.C., 1995. Managing legitimacy: strategic and institutional approaches. Academy of Management Review, 20(3), pp.571–610. TescoPLC News Release, 2007. TescoPLC in Social Advancement. 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