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IoD Gives "Cautious Welcome" to Tesco Board Appointments

09/10/2014 11:59 BST | Updated 09/12/2014 10:59 GMT

Last month's news that UK's biggest supermarket, Tesco, had overstated forecast profits by £250m, was understandably greeted with stunned incredulity by business analysts and commentators.

The question as to how it happened remains unanswered but in its wake has come a flurry of activity from the boardroom of the beleaguered supermarket.

There has been, dare I say it, the unmistakable sound of the stable door being shut after the occupant has kicked up his heels and bolted.

Of course hindsight is easy. But in its most recent actions the company has sought to address some serious flaws which are a lesson to anyone doubting the value of good corporate governance.

Tesco's Chairman Sir Richard Broadbent has strengthened the board with the appointment of two new non-executive directors (NEDs), Richard Cousins, chief executive of Compass Group, and Mikael Ohlsoon, former IKEA Group Chief Executive.

The appointment of NEDs is not usually the stuff of headlines. Indeed many members of the public (a large number of them, of course, shareholders through pension funds and other investments) may be blissfully unaware of the existence of NEDs and their role as 'critical friend' to their executive counterparts on the board. NEDs exist to ask the difficult questions and help the board be objective in its decision-making, understanding that they themselves are equally accountable for any outcome.

To understand the reason why the NEDs arrival has been so heralded in this instance you need to understand the context and rationale behind these two appointments. While diversity in the boardroom, particularly at premium listed companies, is welcome - it helps ward off the spectre of 'Group Think' which has beset so many boards not least in the banking sector - boards still need to be balanced. Common sense would surely say that a board directing a company must include individuals who have senior-level business experience as well as industry and sector-specific knowledge. In this case, retailing. Something Tesco's board had been singularly lacking.

Among the non-executive directors, not one (up to the point of the announcement) had worked directly for a large retailer. Most had been drawn from banking, telecommunications, government or manufacturing while Dave Lewis, the new CEO, had perhaps come closest, having worked in a consumer goods industry.

There are of course other issues which need addressing. Notably oversight. Why was the accounting anomaly not picked up by the internal audit department or the audit committee? The audit committee is the boardroom team - mainly or entirely composed of independent directors - put in place to appoint external auditors (PWC). Its role is to monitor the integrity of the financial statements and any formal announcements relating to financial performance as well as review internal financial controls. So what happened there?

Not having a succession plan in place for the Chief Financial Officer (CFO) was also clearly a mistake. Tesco had been without a finance chief since Laurie McIlwee left the business in April. His successor, Alan Stewart formerly of M&S, who was due to start at the beginning of December, had his arrival date brought rapidly forward.

This is undoubtedly an uncomfortable time for Tesco. At the time of writing, its share price has fallen 50-odd per cent this year.

Few doubt that the retailer will recover despite the battering to its reputation - although its growth profile in the future may be less glorious than under the14-year tenure of Sir Terry Leahy when Tesco conquered food retailing in the UK. But the key governance issue for Deloitte, who have been brought in to investigate the £250m overstatement, and Tesco's lawyers, Freshfields, is whether the issues of revenue recognition were one-off problems or, more worryingly, indicative of longer term issues about Tesco's corporate culture. It's something that Tesco shareholders should require the company to identify and address without delay.