UK: Deliberate Engineering

Last Updated: 2 March 2016
Article by ICSA  

Ethical management practices will help rebuild and protect Tesco's reputation

Despite the UK becoming one of the first EU countries to implement late payment legislation back in 1998, it would appear that the culture of prompt payment, that the law was designed to promote, is far from established.

In January, the supermarket ombudsman found Tesco guilty of knowingly delaying payments to suppliers to improve its own financial position. This revelation resulted from the discovery of a substantial black hole in the company's accounts back in September 2014 to the tune of £326 million. £76 million of this was attributed to the way Tesco booked its income from suppliers.

Tesco is not alone. According to the Federation of Small Businesses a number of large household names stand accused of putting the squeeze on their suppliers including leading brewers, pharmaceuticals and major food companies. With BIS estimating that £26 billion is owed in late payments, this presents a significant problem to the UK economy.

Artificial profits

In March 2013, the UK amended its legislation to take the 'European Directive on combating late payment in commercial transactions' into account. Much of the directive was already in place but the rules were made clearer; payment terms for business-to-business contracts can be up to 60 days (although best practice is 30) and for public sector contracts the payment term is 30 days.

Despite this, the grocery ombudsman investigation into Tesco found that a number of suppliers had not been paid for 12 months, with some waiting as long as two years. The net effect was an artificial boost to Tesco profits, found by the ombudsman to have been deliberately engineered ahead of key financial reporting targets. Although the law states that payment terms between businesses should not exceed 60 days, it allows for longer terms to be agreed 'provided it is not grossly unfair to the creditor'.

Many suppliers also still report late payment from public sector bodies, despite the government's own commitment to prompt payment.

Consequently, larger companies are able to lean on their smaller suppliers, requiring them to 'willingly agree' to extended payment terms. As a result no laws are broken and the supplier cannot really complain. Interest rates can be charged, but with suppliers almost always in the subservient position, very few do.

Late payment of suppliers enables large companies to benefit financially, allowing them to operate with the minimum capital requirement; cashflow effectively provided free of charge by their smaller suppliers.

Some may argue that this simply reflects the harsh realities of running a business and delivering shareholder value, but the reputational damage of such behaviour puts a significant dent in a company's share price.

Record loss

The identification of this practice of excessive late payment led to a record quarterly loss for Tesco, with the share price down around 32% since the scandal broke in September 2014. Not only that, the retailer now faces legal claims from shareholders for hundreds of millions. A $12 million claim from US investors has already been settled, making UK investors optimistic of success with their own case.

According to recent research from Experian, supermarkets are among the worst offenders for late payments, taking more than a month longer than the agreed terms to settle debts with suppliers. Recognising the scale of the problem, the coalition government appointed Christine Tacon as the Groceries Code Adjudicator in 2013 with the power to fine supermarkets up to 1% of UK turnover if found to be in breach of the code. Tesco avoided such a fine as the instances of late payment predated the commissioner's appointment, much to the vocal annoyance of many food manufacturers.

Welcome change

The landscape does appear to be changing: former business minister Matt Hancock is calling for the Voluntary Payment Code to be toughened up to mkae 30 days the standard term with a 60-day maximum only in exceptional cases.

From April of this year, large companies will be required to publish their payment practices twice a year, disclosing payment terms; average time taken to pay; proportion of invoices paid beyond agreed terms; proportion of invoices paid in 30 days or less, between 31–60 days and beyond 60 days; and any late payment interest owed and paid.

The government is also proposing to appoint a Small Business Commissioner who will use this reporting data to name and shame the poor performers and promote prompt payers. The commissioner will also be expected to help tackle the imbalance of bargaining power between small suppliers and large customers.

This focus away from simply looking at what is owed to considering what is due is a welcome one and should be beneficial for customers and suppliers alike. Paying suppliers on time will improve business relationships and is likely to lead to better deals from suppliers.

Further legislation is unlikely, but the regulatory landscape has undoubtedly got tougher. Businesses will find themselves in the spotlight if their governance processes fail to scrutinise the ethical conduct of their organisation.

Expectations

In the last 12 months alone, Tesco, VW and Toshiba have faced damaging scandals resulting from unethical behaviour within the organisation. Had senior management taken steps to obtain assurances that responsible and ethical conduct was practiced throughout their organisation, the damaging behaviour that led to the headlines and subsequent collapse in share price could have perhaps been prevented.

In addition to setting out clear expectations of behaviour, organisations should be conducting compliance reviews to ensure that their code of conduct is properly embedded and the right behaviours are being implemented. This should then be reported on at board level to ensure that senior management have the necessary assurances that their management practices are fair, transparent and ethical, and that exposure to financial and reputational damage through misconduct or unfair practices is minimised.

Since the accounting scandal broke, Tesco has made efforts to simplify its payment model with specific concessions introduced to help small and medium-sized businesses. Smaller suppliers with sales of less than £100,000 should be paid within 14 days. A payment model has also been introduced for medium-sized suppliers to ensure that they are paid earlier than their larger counterparts with no UK sourced supplier paid after 60 days and most paid within 30 days.

Beneficial arrangements

Without the correct levels of scrutiny, what in the short term may seem like a good way to manage a business to deliver strong returns, may in fact lead to significant reputational damage and loss of sales. Increased regulation makes the discovery of unethical or unfair practices much more likely, resulting in heavy penalties through hefty fines and the cost of diverting management time away from the core business.

Ethical management practices build and protect company reputations. Building relationships with suppliers, through fair and transparent terms, is likely to lead to beneficial arrangements for customer and supplier alike. Such conduct will also ensure that any data being gathered as a result of the growing number of reporting requirements will be positive. Not only will this protect the organisation from regulatory or legislative penalties, it will prevent the reputational damage caused by high-profile media exposure and protect shareholders' interests. Organisations are increasingly recognising that a 'win at any cost' approach is not a good business model and are looking to ensure that management practices are fair, transparent and above all ethical.

Leo Martin is Director of Goodcorporation

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.