Tag: Tesco

Is ESG Mania Out of Hand?

This week the mania for Environmental, Social and Governance (ESG) issues in companies appeared to get totally out of hand. ESG is a ragbag of policies that companies like to support to show how socially aware they are and are in keeping with the times and the mood of the public. Here are a couple of examples of this mania:

A report by Cliff Weight on the Tesco AGM noted this response to a question: “Are you plainly making a token gesture to climate change? Answer. We have >350 people working on these issues. We are very conscious of our responsibilities”. What exactly can these 350 people be working on? It seems a ridiculously high figure even allowing for the fact that Tesco has about 2,700 stores in the UK. The cost of 350 people must be high and these people are simply an unproductive overhead which all good businesses try to minimise. They are not adding to sales or making the business more efficient.

I also read the Annual Report of Speedy Hire – all 212 pages of it printed on heavy paper to add to our postman’s load. For a company that is in the business of hiring out tools and equipment they found it necessary to spend 2 pages on ESG issues and how they are reducing carbon emissions by converting to electric or hybrid vehicles. Their new “innovation centre” depot in Milton Keynes is powered by 670 solar panels and is also “home to a wellbeing and wildflower garden, an 18-metre living wall and beehives made from repurposed hard hats”.

The Report also says: “Speedy has long been committed to sustainable growth and recognises the increasing stakeholder focus on climate change and the related environmental, social and governance considerations within its business. A new Sustainability Committee of the Board has been established to assist the Board in its oversight of the Company’s ESG strategy and support the Board on all sustainability matters. This will include supporting the Board’s ongoing evaluation of environmental risks and our reporting under the Taskforce for Climate Related Financial Disclosures”. So that’s more unproductive effort to divert the attention of management.

These are typical examples of what every Annual Report of public companies now contain with companies keen to demonstrate that they are in the vanguard of a social revolution. But does it really help to improve the returns to shareholders?

A report in the FT suggests there is some reaction against this mania with an article headlined “Shareholders back away from green petitions in US proxy voting season”. The article suggests shareholder resolutions on ESG issues are being defeated, particularly those that impose prescriptions on management although there is more support for improved reporting.

Perhaps if we are heading into a recession as some people believe, we may see a reduction in this needless expenditure of money and management time on unproductive issues.

Note that I hold no shares in Tesco or Speed Hire at the present time.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Tesco and Barclays Legal Cases; Rent Controls and Telford Homes

A few events transpired last week which I missed commenting on due to spending some days in bed with a high temperature. Here’s a catch-up.

The remaining prosecutions of former Tesco (TSCO) executives for the accounting scandal in 2014 that cost the company £320 million and resulted in the company signing a Deferred Prosecution Agreement (DPA) and paying a big fine has concluded. The defendants were found not guilty. The prosecutions of other executives were previously halted by the judge on the grounds that they had no case to answer. Under the DPA, Tesco were also forced to compensate affected shareholders.

Everyone is asking why Tesco agreed to the DPA, at a cost of £130 million, when it would seem they had a credible defense as no wrongdoing by individuals has been confirmed. The defendants were also highly critical of the prosecution on flimsy evidence that destroyed their health and careers. This looks like another example of how the UK regulatory system is ineffective and too complicated. The only winners seem to be lawyers.

Another case that only got into court last week was against former Barclays (BARC) CEO John Varley and 3 colleagues. This relates to the fund raising by the company back in 2008 – another example of how slow these legal cases progress in the UK. This case is not about illegal financial assistance given to Qatari investors as one might expect, those charges were dropped, but about the failure to disclose commissions paid to those investors as part of the deal and not publicly disclosed. The defendants deny the charges.

Comment: this long-running saga seems to stem from the Government’s annoyance over Barclays avoidance of participation in the refinancing of banks at the time. Lloyds and RBS ended up part-owned by the Government, much to the disadvantage of their shareholders. Barclays shareholders (I was one at the time) were very pleased they managed to avoid the Government interference, precipitated by the Government actually changing the capital ratios required of banks. Barclays were desperate for the Qatari funds of at least one £ billion with one Barclays manager saying “They’ve got us by the balls….”.

Will this case conclude with a conviction, after a few millions of pounds spent on lawyers’ fees? I rather doubt it. And even if a guilty verdict is reached, how severe will be the likely penalty? Bearing in mind that the damage suffered by investors as a result seems minimal, i.e. it’s purely a technical breach of the regulations, it seems both pointless and excessive to pursue it after ten years have elapsed. Again the only winners seem to be lawyers.

One amusing aspect of this case was the grim “mug-shots” of 3 of the defendants attending court that appeared in the Financial Times. It was clearly a cold day and one of them was wearing a beanie hat. Is this the new sartorial style for professional gentlemen? Perhaps so as my doctor turned up wearing one to attend my sick-bed. Clearly I may need to revise by views on what hats to wear and when.

One has to ask: Are the cases of Tesco and Barclays good examples of English justice? Prosecutions after many years since the events took place while the people prosecuted have their lives put on hold, their health damaged and with potentially crippling legal costs. This is surely not the best way of achieving justice for investors. Justice needs to be swift if it is to be an effective deterrent and should enable people to move on with their lives. Complexity of the financial regulations makes high quality justice difficult to achieve. Reform is required to make them simpler, and investigations need to be completed more quickly.

Investors might not have noticed that London Mayor Sadiq Khan is going to include a policy of introducing rent controls in his 2020 election manifesto. Rent controls have never worked to control rents and in the 1950s resulted in “Rackmanism” where tenants were bullied out of controlled properties. It also led to a major decline in private rented housing as landlords’ profits disappeared so they withdrew from the market. That made the housing shortages in the 1960s and 70s much worse. The current housing shortage in London would likely be exacerbated if Sadiq Khan has his way as private landlords would withdraw from the market, leaving tenants still unable to buy although it might depress house prices somewhat.

But the real damage would be on the construction of new “buy-to-let” properties which would fall away. Institutions have been moving into this market in London and construction companies such as Telford Homes (TEF) have been growing their “build-to-rent” business in London.

Sadiq Khan is proposing a policy that he would require Government legislation to implement, which with the current Government he would not get. No doubt he is hoping for a change in that regard. Or is it simply his latest political gambit to get re-elected? In the last election he promised to freeze public transport fares as a vote winner, so he clearly has learnt from that experience. But he’s probably already damaging the private rented sector.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Acquittals Over Tesco Fraud

Yesterday (6/12/2018) was another sad day for those who would like to stop false accounts being published by public companies. Two former executives of Tesco who had been charged with their involvement in the inflating of Tesco’s profits by including supplier credits were discharged by the court on the basis that they had no case to answer. The judge, Sir John Royce, said the case was so weak that it should not be put to a jury.

It appears that the problem was proving that the defendants, John Scouler and Christopher Bush, knew about the false accounting or were the cause of it. This is despite the fact that Tesco, the company, entered into a Deferred Prosecution Agreement (DPA) with the SFO over the case, and the company agreed with the FCA to compensate affected shareholders who relied on the false accounts.

A DPA does not include any admission of guilt, so it seems we now have the situation where nobody is to be held personally liable for these events.

Was this a trivial technical offence committed by a low-level employee? Not exactly. Tesco plc made an exceptional charge of £235m in respect of the DPA of £129m, the expected costs of an FCA compensation scheme of £85m, and related costs.  The profit figure of Tesco was reduced by £250 million in one quarter alone.

Auditors PwC also escaped any censure over their audits of the accounts of Tesco after an investigation by the Financial Report Council (FRC).

In summary we now have the situation where a major fraud on investors took place by the publication of false accounts but nobody is held accountable. Not until UK law is tightened considerably will such events no longer happen. Directors should be held strictly liable for the publication of false accounts on their watch, and auditors likewise. It is simply not good enough when everyone can evade responsibility by saying “nobody told me”.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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