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Tesco law

25 September 2014

It’s not that long ago that Tesco was seen as the great success story: the model to which even the legal profession should be moulded. Jonathan Guthrie has an excellent piece in today’s Financial Times on the company’s decline, placing its difficulties in a broader context than fiddled accounting. While detail remains sparse (and I should emphasise that we don’t know exactly what happened, or why, and that I have no personal knowledge here of any wrongdoing) it seems that, at the very least, judgements about some tricky accounting issues have been strained in favour of early profit recognition. And profit means bonuses. For (it is alleged) those making the judgements.

So far our legal system has resisted payment by results, at least for those on the bench. The principle is nemo judex in sua causa – a man shall not be a judge in his own cause, as Lord Goff put it when one of his distinguished colleagues failed to recuse himself in Pinochet (one reason for keeping Latin is that it avoids the awkward choice between linguistic elegance and the political incorrectness of the gender choice). You don’t have to demonstrate bias, the suspicion of the possibility is enough.

What the Tesco story exposes, to a wider audience than hitherto, is the fundamental flaw in the concept of alignment. You can’t divorce performance and control at the top level of an organisation: and if you give one group bonuses and not the other, you will rapidly find where the power lies. So once you start remunerating people on the basis of results, you create not only alignment but also the temptation to manipulate. What is supposed to protect shareholders has the opposite effect.

You may be aware that Tesco has recently set up a bank. That’s no reason for the whole organisation to behave like bankers. There’s no need to pay grocers like bankers, and if you start there will be a queue of them asking for more. And they won’t even preface their demand with “please, sir”.

From → Justice

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