BackgroundTesco PLC is a British multinational grocery and generalmerchandise retailer with headquarters situated in Hertfordshire, England. Thecompany was founded in 1919 by Jack Cohen who began buying surplus stock fromthe British Army and selling it from his market stall in Hackney. In 1924,Cohen purchased a shipment of tea from supplier T.
E Stockwell and sold it ashis own-brand product. When choosing a name for his brand, Cohen decided totake the initials of his supplier and combine them with the first two lettersof his surname to produce the name Tesco. The first Tesco store was opened in1929 and by 1939 there were over 100 Tesco stores across the UK. Since then,Tesco has experienced rapid growth and is now the 9th largestretailer in the world in terms of revenue (Deloitte, 2017). The company operatesin a number of different countries all over the world, employing over 460’000people across 6809 stores – 3739 of which are in the U.
K. Tesco has a number ofsubsidiaries including its online service Tesco.com and also Tesco Bank whichoffers financial services to customers in the U.K. Many of Tesco’s stores arenow equipped with petrol stations which has led to Tesco establishing itself asthe U.K’s largest independent fuel retailer with the company reporting £6.
05billion in revenue from fuel sales in 2016/17 (Tesco Annual Report, 2017). Themajority of Tesco’s revenue, however, comes from its retail operations whichgenerated £48.8 billion in revenue in 2016/17.Retail IndustryThe retail industry is the largest industry in the U.K andis vital to the success of the country’s economy.
In 2016 alone the retailindustry generated £358 billion in sales, accounting for 5% of the U.K’s totalGDP (Gross Domestic Product). The largest part of the retail industry is thefood and drink sector, which accounted for £171.1 billion of the total retailsales in 2016. The industry employs over 3.9 million people in the U.
K which is14% of the entire U.K workforce. The food and drink sector is dominated bysupermarket chains with Tesco occupying 28.
0% of the market share. Its maincompetitors are Sainsbury’s (16.2%) and Asda (15.3%), however, German valuechains Aldi and Lidl have saw rapid growth in recent years, occupying 6.7% and5.1%, respectively (Kantar Worldpanel, 2017). There are a number of externalforces which can affect the performance of companies within the retail sectorincluding economic factors such as unemployment levels; social factors such asfamily size and political factors such as the political and legislativeconditions of the countries in which they operate.
These factors can present anumber of risks to companies so it is important that they are addressed in boththe strategy setting and risk management processes. Failure to manage theserisks effectively can have devastating effects on a company’s financial health.Tesco Accounting ScandalIn September 2014, Tesco released a statement admitting thatit had overstated its profits for the first-half of 2014 by £326 million. As aresult, Tesco’s share price dropped by over 50% in one year – wiping £2 billionoff its market value. The company set the record for the biggest ever lossrecorded by a retailer, recognising a £6.3 billion loss for the year. Thescandal resulted in Tesco being investigated by the Financial Conduct Authority(FCA) and the Serious Fraud Office (SFO).
The investigations came to an end inMarch 2017 with Tesco agreeing to pay £235 million in a settlement deal. Tescowere not the only organisation subject to investigation; after the scandal cameto light, the Financial Reporting Council launched an investigation into theconduct of Tesco’s auditors – PricewaterhouseCooopers (PwC). However, theinvestigation was later closed with the FRC’s executive council stating thatthere was “not a realistic prospect that a tribunal would make an adversefinding against PwC” (FRC, 2017). Deloitte later replaced PwC as Tesco’sauditor in 2015.Tesco has been on a long road to recovery since theaccounting scandal came to light and have been working tirelessly to regaincompetitiveness, improve its balance sheet and rebuild trust in its brand(Tesco Annual Report, 2017). The scandal was ultimately a risk managementfailure as there should have been appropriate controls in place to prevent itfrom happening. Accordingly, there have been extensive changes in the way riskis managed throughout the organisation (Tesco Annual Report, 2015).OversightThe Tesco board has overall responsibility for ensuring thatthere is an effective risk management structure throughout the organisation.
The board is responsible for setting the organisations risk appetite and isdirectly involved in the risk assessment process. The board is also responsiblefor conducting a yearly review to ensure the effectiveness of theorganisation’s risk management process and internal controls. There is cleardivision of responsibility between the running of the board and the running ofthe business. The chairman is responsible for the leadership of the board andensuring that it is operating effectively, whilst the responsibility of theday-to-day management of the business has been delegated to the group chiefexecutive. The group chief executive is responsible for developing andimplementing the organisation’s strategy and has overall accountability for thecontrol and management of risk. The Group Chief Executive is supported by theExecutive Committee, which is responsible for making and implementingoperational decisions while running Tesco’s day-to-day business, and for makingrecommendations to the Board.
The board is supported by a number of committees, includingthe audit committee which is responsible for overseeing and reviewing theeffectiveness of the organisation’s risk management process and systems of internalcontrol (Tesco Annual Report, 2017). They report the results of the review tothe board and provide them with recommendations for areas where action isrequired.The group compliance committee is responsible for monitoringlegal and compliance risks, ensuring that the organisation is adhering to allregulation requirements.
RegulationIn the UK, all companies with a premium listing of equityshares are required under the listing rules to report in their annual reportand accounts on how they have applied the UK Corporate Governance Code which ispublished by the Financial Reporting Council (FRC, 2016).In the context of risk management, the code states that theboard has ultimate responsibility for risk management and internal control,including for the determination of the nature and extent of the principal risksit is willing to take to achieve its strategic objectives and for ensuring thatan appropriate culture has been embedded throughout the organisation (FRC,2016).The corporate governance section of Tesco’s annual reportcontains a statement from the board confirming that the company has applied themain principles and complied with the relevant provisions set out in the UKCorporate Governance Code. Organisational CultureThe corporate governance section of Tesco’s annual reportcontains a statement from the chairman of the board acknowledgingresponsibility for ensuring that employees do the right things in the right wayby setting a tone from the top and leading by example (Tesco Annual Report,2017).Tesco have three main values:- No one tries harder for customers- We treat people how they want to be treated- Every little help makes a big differenceThese values are recognised across the organisation and havebecome a vital part of Tesco’s culture. They help to align everyone to the sameobjective and ensure that everyone at Tesco understands that customers are theheart of the business. The values are instilled throughout the organisationthrough numerous communication channels and are supported by Tesco’s Code ofBusiness Conduct which sets out the standards that are required throughout theorganisation.
Colleagues must complete mandatory Code of Business Conducttraining and annually attest to compliance with the Code (Tesco Annual Report,2017). Communication is an important part of the organisational culture atTesco (Tesco Annual Report, 2017). There are a number of ways for employees tocommunicate to senior management such as team meetings, feedback forms andTesco’s employee intranet, ourtesco.com.
The board recognise that feedback fromemployees on ground level is important as it allows them to gain insight intothe real issues and make appropriate changes (Tesco Annual Report, 2017). Key Elements of Risk ManagementTesco has anestablished risk management process which allows them to identify, assess andmonitor the principle risks that they face as a business (Tesco Annual Report,2017). The organisation’s internal audit function conducts interviews withbusiness leaders as part of the risk identification process. A risk which canimpact the ability of the organisation to implement its strategy is termed aprinciple risk.
A risk assessment is then conducted to determine the potentialimpact and likelihood of each risk, taking into account internal controls inthat are in place. A risk register is maintained containing all of theprincipal risks faced by the organisation. This is cascaded down theorganisation and is considered and discussed during regular meetings withsenior management. Risks are managed on an ongoing basis and are regularlysubject to review to ensure relevance and completeness (Tesco Annual Report,2017). The principal risks faced by the organisation are shown in the diagrambelow: Tesco’s 2017 annual report presents each of its principalrisks in a table which has three columns. The first column gives detailsregarding each of the risks and how they relate to the business; this columnalso contains a numbering system which links each risk to the organisation’sstrategic drivers:1) Build a differentiated brand2) Reduce operating costs by £1.
5 billion3) Generate £9 billion cash from operations4) Maximise the mix to achieve a 3.5% – 4.0% groupmargin5) Maximise value from property6) InnovationThe second column gives details regarding risk movement anduses an arrowing system to state whether the risk has increased, decreased oris the same as the previous year. The third column gives details of the key controlsthat the company has in place to manage each risk. Whilst not defined as a principal risk, Tesco’s annualreport also contains a section identifying the potential effects that Brexitcould have on the business. As there has been little agreed between thenegotiating teams of the U.
K and the E.U, it is difficult to say what thelong-term effects of Brexit on the retail sector might be. However, CBI(Confederation of British Industries, 2017) has identified a number of keyareas of importance to the retail sector:- EU trade: tariffs and other barriers mayincrease- Migration: access to labour from the EU supportsgrowth in the retail sector- Regulation: changes to the existing regulatoryenvironment presents a risk to stability which producers and consumers need- Currency: the lower value of the pound may causeprices to rise even furtherTesco recognise that these key areas could have an adverseeffect on the business and its operations. Tesco’s annual report states thatmanagement will continue to monitor and assess the potential risks and impacts ofthese on Tesco stakeholders.Does Tesco Have Effective Risk Management?The information provided in Tesco’s annual report providesin-depth insight into how risk is managed throughout the organisation. From theinformation provided, it is evident that Tesco make use of an enterprise-wideapproach to risk management.
An enterprise-wide approach allows for enhancedplanning and performance, promotes information processing and communication,improves accountability, and protects organizational and individual reputations(Kleffner, 2003). The board of directors is responsible for ensuring that theorganisation has effective risk management in place and also for setting therisk appetite. The risk appetite is defined amount of risk that theorganisation is willing to accept in pursuit of their strategic objectives(Brown et al., 2009). It is executive committee’s responsibility to ensurecompliance with the risk appetite and also to promote the organisations riskmanagement philosophy and strategy throughout across the organisation (Beasleyet al.
, 2010). Tesco’s board is also supported by an audit committee, which Lloyd& Fanning (2007) state is critical for organizational success in a dynamicenvironment like the retail sector. Paape and Speklé (2012) indicated thataudit committees are essential in the oversight of risk management practices. Tesco’s risk management process is effective because thereis a clear link between risk management and the organisation’s strategy. Eachof the principal risks detailed in the annual report are assigned to thestrategic drivers which they have the potential to affect. The primary goal ofenterprise risk management is to assist an organisation in achieving itsstrategic objectives, therefore, ERM must be part of the strategic planningprocess and the strategy execution process (Beasley et al, 2007). Consideringrisk during strategic planning also allows organisations to identify riskopportunities (Frigo, 2011).
In some situations, ERM may highlight areas wherean organisation is being too risk averse or is ineffectively responding tosimilar risks that exist across multiple silos of the organisation. In othersituations, ERM may identify risk opportunities which may create value for theorganisation (Fraser & Simkins, 2010). Greater awareness of risks andopportunities faced by the organisation as a whole allows for more efficientuse of resources and promotes better decision making throughout the entireorganisation (Slywotzky, 2012). Tesco also have a monitoring system for each of theirprincipal risks, documented in their annual report, which shows whether riskshave increased, decreased or stayed the same as the year before.
This isessential to ensure relevance and completeness of each principal risk. Risk isdynamic in nature, so controls and risk management processes that work well nowmay need to be improved in the future (Gordon et al, 2009).Tesco has a strong organisational culture which is essentialfor effective risk management. Executive management’s top-down communications helpto emphasize the organisation’s strategic direction and make sure everyemployee from top to bottom knows exactly what is expected of them. The boardand senior management provide also employees with numerous platforms to communicatewhat is going on within the business and what is happening in the externalenvironment. When everyone in the organisation is effectively communicatinginformation regarding risks and coordinating risk management activities, theorganisation will be better positioned to achieve its strategic goals (Nocco& Stulz, 2006).After Tesco’s accounting scandal came to light,the company experienced a major dip in profits and a loss of reputation.
Sincethen, the organisation has been on a road to recovery with profits steadily increasingeach year. In 2015/16, the organisation’s operating profit was £985 million andin 2016/17 the operating profit has increased by 24.9% to £1.28 billion. Saleshave also increased by 1.
1% from 15/16, meaning customers are buying moreproducts, more often at Tesco. Cash flow has also increased by 9.1% from theprevious year. There has also been an increase in shareholder value in terms ofROCE (Return on Capital Invested). After the accounting scandal, this plummetedfrom 13.6% to 4.0% but has been increasing year on year – 6.
2% in 2016 and 8.1%in 2017. These performance measures suggest that Tesco is a company on its wayback to the top; it is with no doubt that this should be accredited to goodgovernance and effective risk management