We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2017, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

By clicking Proceed I confirm I have read the important information and agree to the terms of use.


The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.


Board composition, remuneration and supply chain management

Tesco is the UK's largest retailer, with further substantial businesses in Central Europe and Asia.

In the summer of 2014, its board made the decision to appoint a new CEO, which we viewed positively, as the retailer had been underperforming, leading to a series of profit warnings. In addition, in September 2014, the business announced that it had identified an overstatement of profits, principally due to the accelerated recognition of commercial income and delayed accrual of costs.

The company’s new management identified three immediate priorities, namely regaining competitiveness in its core UK business, protecting and strengthening the balance sheet and rebuilding trust and transparency with key stakeholders. In the UK, it reset its target margins significantly and embarked on a far-reaching turnaround programme to reverse negative like-for-like sales growth and market share loss. It also initiated extensive restructuring, with large UK property write-downs and the sale of a number of assets, including its South Korean business.

More recently, we successfully engaged with the company on improving its board effectiveness, executive remuneration and supply chain management, which we describe below.

Our engagement
In meetings with the new directors, in particular the chair, we raised our concerns about size, skills gaps and a lack of diversity on the board. The chair acknowledged that the board would benefit from appointing new non-executive directors, while emphasising the importance of gender and geographic diversity, as well as retaining the right board dynamics.

We also intensively engaged with the company on its executive remuneration schemes, which were extremely skewed towards shareholder-oriented metrics, including the high weighting of relative total shareholder return. The remuneration chair acknowledged the need to review the executive remuneration policy and to include more stakeholder-related performance targets. This was particularly important for Tesco, as some of the retailer’s earlier problems directly arose from losing focus on the needs of the key stakeholder groups of customers, suppliers and employees.

In addition, at meetings with the new executive CEO and CFO, chair and head of global supply chain management, we raised concerns about Tesco’s treatment of its suppliers, specifically in relation to payment practices. As part of its own internal response to the accounting issues identified in September 2014, Tesco carried out an inquiry into previous commercial practices and shared these findings with the UK Groceries Code Adjudicator, which subsequently completed an independent investigation into these issues. The findings of this report confirmed many of our concerns. The adjudicator’s report found Tesco to be in breach of rule 5 of the Groceries Supply Code of Practice, in relation to the timely release of supplier payments. The adjudicator did not find any evidence that Tesco had breached rule 12 by requiring payments in order to secure better positioning or an increase in shelf space. As the regulatory body’s authority to levy financial penalties did not come into force until April 2015, after the period under investigation, no fines were imposed.

Changes at the company
To improve board effectiveness, in line with our engagement request, Tesco initially rightly focused on establishing the optimal board composition. The retailer has substantially widened its membership base, hiring non-executive directors with an appropriate range and balance of skills, experience and knowledge that reflect its new strategic direction. The newly appointed non-executive directors possess critical skills and knowledge of value to the board, for example direct experience of food, grocery, property, IT and retail brand development, as well as relevant experience in key regions, such as the UK and Southeast Asia. In addition, the appointment process took into account the benefits of diversity, including gender, resulting in female representation on the board of 25%. We were also pleased that the company undertook an external board evaluation to ensure the effectiveness of its board.

We are satisfied with the changes made to Tesco’s executive remuneration schemes, in particular the improved alignment of its incentive plans with its strategic priorities, including rebuilding the trust with its key stakeholders. In a meeting with the chair of the remuneration committee, the company acknowledged that the committee had specifically taken into account our recommendations in devising a more balanced and aligned executive long-term incentive plan (LTIP), considering its stakeholders, including customers, suppliers and employees, thus demonstrating greater alignment with the strategic focus.

In September 2016, the Grocery Code Adjudicator published its views on the progress made by Tesco towards the recommendations set out in its original report. According to the report, the retailer has put in place the appropriate systems to avoid late payments, unilateral deductions and data input errors. Furthermore, sufficient steps have been taken to provide more transparency and clarity in its dealings with suppliers. Elsewhere, a survey, commissioned by the adjudicator, carried out on behalf of the majority of direct suppliers, showed that most UK retailers have improved their behaviour in the past few years, with Tesco emerging as the highest performer, with 65% of those supplying the retailer stating that its practices had improved.

The positive findings of the progress report were also confirmed at the 2016/17 interim results announcement, as the retailer reported a strong improvement in its supplier surveys, with the UK supplier satisfaction measure at 78%, up significantly on the 51% from 2014/15. We are encouraged by these positive developments, which illustrate that Tesco has been successful in rebuilding trust and creating transparent relationships with its suppliers, including the redefinition of its payment terms and practices.

Overall, we have been impressed by the capabilities of the new executive team over the past few years, in particular given the sheer size and scope of the issues at hand.

Share this post:
Roland Bosch Roland Bosch is sector lead for financial services and responsible for corporate engagements in Europe and the US. He engages with corporate boards on relevant strategic, governance, social and environmental issues to foster long-term sustainable value creation. Prior to joining Hermes EOS, he worked as an investment manager at F&C Asset Management, where he was responsible for managing institutional equity portfolios, as well as providing investment analysis and recommendations. Before that, Roland was based in the Netherlands, working as an investment manager for insurance group Achmea and as an equity analyst at HSBC. Roland is a certified investment analyst (RBA), EFFAS financial analyst and holds a degree in Business Economics from Groningen University. Roland is fluent in Dutch and English, with a good working knowledge of German and French.
Read all articles by Roland Bosch
Previous article:
Next article:

Engagement objectives

Social: Rebuild trust with suppliers and establish new payment terms

Governance: CEO remuneration to include stakeholder-related performance targets, Retail, grocery and technology experience on the board

Find posts by author

  • Alex Knox, ACA
  • Andrew Jackson
  • Bill Mackenzie
  • Bruce Duguid
  • Christine Chow
  • Claire Gavini
  • Colin Melvin
  • Darren Brady
  • Dominic Burke
  • Dr Michael Viehs
  • Emeric Chenebaux
  • Emma Hunt
  • Geoffrey Wan, CFA
  • Hans-Christoph Hirt
  • Harriet Steel
  • Ilana Elbim
  • Jaime Gornsztejn
  • Jonathan Pines, CFA
  • Joseph Buckley
  • Justine Lutterodt
  • Leon Kamhi
  • Louise Dudley
  • Mark Sherlock, CFA
  • Maxime Le Floch, CFA
  • Maxine Wille
  • Michael Russell, CFA
  • Michael Vaughan
  • Michael Viehs
  • Natacha Dimitrijevic
  • Nick Spooner
  • Nina Röhrbein
  • Peter Hofbauer
  • Philip Nell
  • Rochelle Giugni
  • Roland Bosch
  • Sachi Suzuki
  • Saker Nusseibeh
  • Silvia Dall’Angelo
  • Tatiana Bosteels
  • Tim Goodman
  • Tommaso Mancuso
  • Yasmin Chowdhury

Find posts by category

  • eos
  • governance
  • social
  • strategy