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(Hugo Dixon is Editor-at-Large, Reuters News. The opinionsexpressed are his own.)
By Hugo Dixon
LONDON, Oct 6 (Reuters Breakingviews) - How should companiesmanage a crisis? Tesco is the latest large corporate togo through the wringer after it revealed last month that it hadoverstated its half-year profit estimate by 250 million pounds.The Financial Conduct Authority has started a probe andspeculation is swirling that the UK retailer may need a rescuerights issue.
Tesco's travails offer a case study about what to do (andwhat not to do) when disaster strikes. Two other big UKcorporate crises - the ones that afflicted Barclays following the Libor interest-rate scandal in 2012 and BP after its Macondo oil rig blew up in 2010 - back up theselessons.
The main one is to take things seriously and apologise.Tesco is doing better on this score than either BP or Barclaysdid. The UK retailer immediately suspended four seniorexecutives and called in an independent firm of accountants toinvestigate. A month earlier, after an earlier profit warning,it cut its dividend by 75 percent.
One of BP's mistakes post-Macondo was to try to hang ontoits dividend. As crude spewed into the Gulf of Mexico and U.S.politicians including President Barack Obama lambasted thecompany, this became politically and financially impossible. Butby then, BP had lost credibility with investors and the public.
Both BP and Barclays also tried to keep their chiefexecutives for too long. They mistakenly thought they could ridethe storm. Eventually, both Tony Hayward, the BP boss, and BobDiamond, his Barclays counterpart, had to quit. But in theprocess the reputation of the rest of the board was tarnished.
In Barclays' case, the chairman, Marcus Agius, bizarrelytried to take the heat off his chief executive by resigninghimself. He was put firmly back into his box by Mervyn King,then Bank of England governor, and Diamond quit instead. Agiushimself left soon after.
With Tesco, there is no question of Dave Lewis, the chiefexecutive, having to quit as he only joined last month and sobears no responsibility for the profit misstatement. However,the position of his chairman, Richard Broadbent, who has beenthere for three years, is not secure. He may yet have to leavedespite saying he wants to be part of the solution.
One of the criticisms of Broadbent is that he hasn'tcommunicated well. In particular, he said "things are alwaysunnoticed until they are noticed." This sophistry made it looklike he was making light of the problem or, at least, trying toavoid responsibility for it.
But this was not half as bad as some of Hayward's gaffespost-Macondo. The BP boss said the spill was "relatively tiny"compared to the "very big ocean." In a moment of exasperation,he also said he wanted "my life back." That didn't go down wellafter 11 workers had lost their lives. Hayward also attended asailing regatta shortly after the disaster. In a crisis, the topteam needs to focus 24/7 on solving the problem.
Carl-Henric Svanberg, the BP chairman, also made gaffesincluding describing the people of Louisiana, where the oilspill reached land, as "small people." But he managed to clingonto his position, in part because he had only been chairman forthree months and so couldn't be blamed for its past failings.
But how a company fares in a crisis is not just a functionof how it behaves when the balloon goes up. Disasters typicallyreveal long-standing weaknesses in governance, culture andbusiness model. The leadership's ability to survive oftendepends on whether it has reserves of goodwill with keystakeholders.
Here Tesco is in a weak position. It engaged in a longperiod of aggressive international expansion and diversificationinto financial services. Not only were many of these venturespoorly thought out; the group milked its core UK business tofund them at a time when it was facing heightened competitionfrom discount retailers.
Part of the case against Broadbent is that he took too longto remove the last chief executive, Philip Clarke, and that hedidn't do enough to ensure there was adequate talent both on theboard and in the business. Astonishingly, no director has retailexperience, suggesting the board was ill-equipped to understandwhat was going wrong. The company was also operating without afinance director for five months this year. Tesco has now movedto remedy these weaknesses with the appointment of the formerIkea boss as a non-executive director and the acceleratedarrival of the former Marks & Spencer finance director as itschief financial officer.
The governance weaknesses were, if anything, even greater atBarclays. Diamond had been allowed to amass a huge amount ofpower even before he became chief executive. Agius wasn't aneffective counterweight.
A low reserve of goodwill was also a big reason why Barclayswas so badly hit by the Libor scandal. Shareholders were furiousthat Diamond had just pocketed a big bonus despite himselfadmitting the bank's results were unacceptable. Politicians wereunhappy at Barclays' aggressive tax-avoidance schemes forclients. And its main regulator thought it was often pushing theenvelope on what was acceptable.
Tesco isn't in as bad a situation. But last year'srevelation that it kept four corporate jets didn't go down wellwith shareholders given that its performance was alreadyflagging. The news, reported by the Financial Times at theweekend, that the retailer has recently taken delivery of a newGulfstream jet worth $50 million has rubbed salt into thewound. At least, it is now committed to selling the entirefleet.
Crisis management is an important skill. But the biggerlesson from Tesco, BP and Barclays is the importance of havinggood governance before the crisis hits.
CONTEXT NEWS
- Tesco said on Oct. 6 it would appoint two newnon-executive directors - Richard Cousins, chief executive ofCompass, and Mikael Ohlsson, former chief executive andpresident of Ikea. The two directors will take up their roles onNov. 1.
- The UK supermarket has recently taken delivery of a newcorporate jet, the Financial Times reported on Oct. 3. Tescocame in for criticism last year when it emerged it had a fleetof four jets. The company told the FT that "all aircraftoperated by Tesco are in the process of being sold."
- Reuters: Tesco strengthens board with two newnon-executive directors
- Tesco statement about new board http://bit.ly/1pG5sCy
- For previous columns by the author, Reuters customers canclick on
(Editing by Chris Hughes and Carol Ryan)
(On Twitter https://twitter.com/Hugodixon)
