Tesco this year has seen its share price fall by 25% and eight directors have been suspended following the over reporting of profits by £250m. The Financial Conduct Authority is looking into the matter and now even the Serious Fraud office has expressed an interest in the situation. All this is on top of the premature exit of the previous CEO. How can a business the scale of Tesco and operating under close financial and investor scrutiny get itself into such a mess? How did PwC, its auditors not spot and act upon the risk of flaws in accounting? What were the non-executive directors doing?
If an organisation this size can do this then what hope every other organisation? Or is it because of the size that they got it wrong? No, I rather believe that the flaws are to be found in leadership and perhaps a large part of the culture of an organisation.
Tesco has been notable for a very aggressive approach to most aspects of business. Be it expansion, discounts, market share, land banks or cost pressure on suppliers; Tesco has been a force to be reckoned with and the former CEO Terry Leahy seemed to preside over unstoppable commercial growth during his tenure 1997 to 2011. But almost as soon as he retired the performance dipped.
The pressure and expectation placed upon a FTSE company such as Tesco is enormous. If excessive creative accounting had ever been used then the temptation would have been there to continue doing so. But if the business’ performance trend looked to be continually downward then ‘creative accounting’ will be caught up with in time. Financial lies cannot be sustained in a downturn. This is perhaps why there was a whistleblower within Tesco, that person knew that a) the message to the outside was misleading and that b) it was going to come out in the open at some later date when the issue would be far worse.
The admission by Tesco that there was a whistle blower clearly indicates that this person was acting counter to accepted behaviour by at least some of the senior management. How can such incorrect behaviour be sustained? Often this is done through obfuscation, bullying and even blackmail. This alone may lead to acquiesce of poor or even illegal practices. Sometimes its is just laziness that leads to poor practice going unchallenged or worse still ‘not wanting to rock the boat’.
This brings us to Group Think, the state where a team gets into when acquiescence, lack of inquisitiveness, fuzzy thinking, poor communication, bullying and habitual ‘blind eye’ turning become the norm. The Challenger disaster of 1985 was found to have been caused at least in part by this. Senior team members can have an illusion of invulnerability, accompanied with hubris and over optimism. This can extend to a misplaced sense of morality leading to integrity being left behind.
Team members collectively and individually rationalise warning signs to fit their pre-conception or desired state of affairs. People develop clichéd and unsupported negative views on ‘naysayers’ to the extent that they can become the evil opposition and as such not worth discussing issues with. Counter arguments are habitually diminished. Sometimes consciously, sometimes sub-consciously.
Disastrously, team members can censor themselves from deviations from accepted wisdoms.
How can leaders and indeed the current Tesco CEO prevent such things happening?
Functional leaders traditionally mind their own functions and do not over challenge other senior leaders. The ‘stones and glasshouses’ ethos come into play here. However, the CEO must give the team free rein to evaluate, question and even criticise the thinking of other board members.
The CEO must not ‘lead’ board members excessively with their own opinions on other’s roles in completing a task. The habit of ‘leading thinking’ leads to abdication of responsibility on the part of the board member. ‘It was OK, the CEO said as much…’.
CEOs must not micro manage and must not interfere or even participate in the tasks and team meetings of board members. Micro management undermines, weakens functional authority and crucially erodes the credibility of any counter arguments from the board member.
Critical tasks are often best set amongst more than one team. Not to compete but to act as a ‘check and balance’ and reduce group think.
All options should be openly and objectively placed on the table and assessed. Board members with an independent standing should be appointed as guardians of this principle. Decisions and principles should be discussed judiciously with senor people outside the board. This helps prevent assumptions and out of date views coming into play. Sometime external, totally independent expertise should be brought in to assess options and decision-making. Finally, whilst every board member must be prepared to be devil’s advocate; at least one should be explicitly appointed with this role. Challenging thinking and integrity will usually win through to ensure that the CEO and the board stays within legal, safe and productive boundaries.
Being part of a group even if guilty of groupthink gives a warm feeling and speaks to human nature. However, the less comfortable but constructively challenged team is a safe and in the end a better place to be.