Author Archives: Simon Laffin Business Services Ltd

About Simon Laffin Business Services Ltd

Chairman of both Flybe Group plc and Assura plc.

“Marking our homework” – Why executives resent non-execs

Management scribbles001


It won’t be long into your first non-executive job when you start to feel as if the executives resent you. It’s okay. You haven’t become paranoid. They really do resent you. Why?




Being an executive director is a tough job. You work all the hours that the Working Time directive allows, then you opt out and work some more. The market is very tough and competitive, and you end up making numerous difficult decisions. You do this for a couple of months and try to summarise what’s happened and why for the Board. Then a few part-time directors waft in and criticise the papers, ask stupid questions and lecture you about governance. What’s not to hate about that?


But being a non-executive director is also a tough role. You are invited to join the board of a company about which you probably know little and possibly in a sector of which you know nothing. You may get a cursory induction programme and then it’s straight into a board meeting. The performance information may be either perfunctory or so detailed that you can’t get any sort of meaningful overview. Management may be defensive, resentful and resistant to questions. You ask yourself, how can I add value to this board?


Executives often say they feel that non-execs come to board meetings ‘to mark their homework’. This is very difficult to avoid. Execs usually work very hard and in their heart of hearts, really want the non-execs to turn up and applaud them. There are few things more irritating than having a non-exec appear and come up with a good idea or question the execs hadn’t thought of. Even if it’s helpful, human nature means that you may resent it.

Here are some suggestions to help harmonious board discussions.

For the executive:

  1. Remind yourself that the non-exec is trying to understand your position and making sure that you have thought of all the angles.
  2. Don’t react immediately, but let the board discussion continue. The initial comment, even if naïve, may lead to a useful discussion.
  3. Remember that you are paying the non-exec to be there. Whether you like it or not, you might as well listen to something you’ve paid for!
  4. Pause a while, as what may seem initially as a strange comment from a non-exec may turn out to give a new insight or angle into a common issue. They won’t necessarily use the same jargon as you, but may still understand the problem.
  5. If the non-execs are well chosen and sensible, remember that their comments are likely to be, or at least intended to be, helpful.
  6. Avoid being defensive at all costs, and watch out for sounding defensive.


For the non-executive:

  1. Avoid stating the obvious or asking a question implying that executives don’t know their job.
  2. It is tempting to review paperwork and point out errors. If this is necessary, do it privately outside meetings, rather than in board discussions.
  3. I think that it is good practice to ask questions that arise from reading advance paperwork directly of executives before the day of the meeting. This can be in person, by telephone or email.
  4. Questions should generally be asked in board meetings only when they have just occurred to you or will elicit an answer that you would like everyone to hear. If the latter, you could also warn executives in advance that you intend to ask the question and give them time to prepare a good response. This will make them much less defensive as they won’t feel that you are trying to catch them out.
  5. Keep interventions and questions short. The longer you go on, the more pent up anger may build in others.
  6. Don’t confuse asking a question with making a speech. There’s a time for both, but not at the same time.
  7. Try to put important questions or points early in the discussion, rather than dropping them in like a depth charge, just as the Chairman is drawing the discussion to a close.
  8. Use cautious language, with plenty of conditional tenses and get-outs (“I was wondering if…” ,“Perhaps this might be an issue…”)
  9. Offer to meet separately (”offline”) if the discussion goes on for a long time or has generated some unwelcome heat.
  10. Remember that when you leave this meeting, you can go onto other things, but the executives are stuck dealing with the same issues full time until the next board meeting.


I have been in executive and non-executive roles on quite a few boards, and even temporarily moved from non-executive to executive on some boards, so I have seen these issues from both sides. I am grateful (and would like to apologise) to all my boards for allowing me to make all the mistakes listed here, and now to write from bitter experience!


Board meetings can very sensitive affairs. A good one informs all participants and pools their knowledge and experience to come up with good decisions. A poor meeting just stokes resentment between the various participants. Directors should remind themselves that it’s not an aural exam and board papers are intended to be the genesis for a two-way discussion. There is no marking of papers required!



Sir Ken Morrison – a retail giant, but still human

mrw-high-wycombeSad news came last week with the death of Sir Ken Morrison. It made me reflect on his tremendous lifetime achievements. His career is sometimes viewed as 50 years of success, until at 73 he led the 2004 Safeway acquisition followed by four difficult years until retirement. He built up a leading supermarket chain making £320m pa. Few people will, or can ever, achieve such a feat. The last four years should never lessen that achievement, but inevitably the latter attracts more interest, as it is the story of how things went wrong and why, even when led by someone as talented and experienced as Sir Ken.

I met Sir Ken quite a few times during the Safeway take-over, as I was the CFO. He was always very polite and proper, even warm. However, he never let that Yorkshire reserve go, so you were never sure whether you were seeing what he was really thinking. He always seemed to agree with you, even when you expected to disagree. Eventually, I realised that this was how he handled situations with people he wasn’t comfortable with; his close associates and subordinates. He would listen carefully and politely to what people said, nodding and smiling, but saying very little. You would think that he was agreeing, but in fact quite often you would hear later that he completely disagreed.

It is well-known he despised consultants, analysts and non-executive directors in equal measure, but he knew every one of his 100 store managers, how his business ran and, above all, what his customers wanted. When you met him, you knew you were in the presence of a retail giant.

So why did it all go so wrong? Why did the £600m combined profits of Safeway and Morrisons, not to mention another £300 odd of synergies, dissolve into a £300m loss two years later? To be fair, by the way, by the time Sir Ken retired in 2008, profit had recovered to over £600m, which is incidentally more than twice the profit today.


The Morrison success story was built on a simple concept

We all know that simple businesses have the best chance of success. Morrisons was a chain of near-identical stores built largely in downmarket demographic areas in the midlands and northern England. Sir Ken loved simplicity and wanted all stores to be very similar to adhere to that principle. Morrisons offered great ‘everyday value’ with low base prices and around 1,000 promotions, largely multi-buys (perfect for growing families), with many service counters offering variety and a ‘good honest quality’ feel. Little went to waste, as food near its sell by date would be used in the customer and staff restaurants or recycled in a service counter (eg prime meat as mince).

Sir Ken didn’t believe in complex systems. He told me once that he designed their ordering system one day in a store canteen. He described what he meant. I said but that’s just a stock & order card. Yes, he agreed, and that’s all the system is. But how does this do forward ordering, I asked. Ah, he replied, we are just trialling a system now. This was in 2003, some 10 years after the other majors, including Safeway, had automated re-ordering.


Sir Ken dreamt of growing faster

The Safeway takeover started when Safeway approached Sir Ken. Safeway had struggled as No4 in the UK grocery market, and had tried a number of strategies without any lasting success. Eventually the board concluded that scale was the major issue. A couple of attempts to merge with Asda failed, and it was considered highly unlikely that the competition authorities would allow such a merger of No3 and No4 anyway. That left Morrisons. I had presented a number of competitor analyses to the Board over the years and every one concluded how well Morrisons performed. The answer was obvious, to put the two businesses together to rival Sainsbury and Tesco in size.

Sir Ken, however, had less lofty ambitions. He wanted to grow faster and coveted the Safeway superstores and hypermarkets. He was initially very cautious, not wanting to threaten what he had created so far, and took many months to agree to explore the idea. Sir Ken told us, at the time, that it was his fellow executive directors that were more ambitious. It was they who were urging him to go for a takeover and who were so confident of making it a success.


Simplicity has its own challenges

Morrisons was a simple business run in an efficient uncomplicated way. Reordering was manual. Ranges were near identical in all stores, each with very similar layouts. Sir Ken made almost all the decisions in a Thursday morning weekly meeting in his office. He didn’t need complex processes. He claimed that new store development decisions were made by counting chimney pots, ie driving round the neighbourhood for a while, at a time when the other chains were using sophisticated geographical databases. He spent a lot of time visiting stores and fixing problems there and then.

Sir Ken didn’t believe in sophisticated management. He had confidence in his own judgement on decisions. He didn’t need strong management around him. He needed people who would implement his decisions. As a result, his colleagues on the board were not the strongest, and there was very little middle management. This made for a simple lean structure, but also contained the seeds of future problems. It was not a structure that could cope easily with complexity or a heterogeneous store portfolio and customer base.


Safeway was a complex business

 Morrisons acquired a difficult situation when it acquired Safeway;

  1. Safeway was a much bigger business than Morrisons, with 500 stores and a turnover of nearly £9bn, against 120 stores and less than half the turnover.
  2. Safeway was a much more heterogeneous business. Almost all Morrisons stores were bigger than 2,400 sq m, barely the average size of the Safeway stores. Safeway was a multi-format business, with five formats (hypermarkets, superstores, supermarkets, convenience stores and BP petrol stations), where Morrisons had one.
  3. Safeway had a very diverse customer base with slightly upmarket demographics, across all UK regions including Scotland, whereas Morrisons had a more homogeneous, downmarket customer base principally in the midlands and northern England.
  4. Safeway had built itself complex logistics and IT systems, while Morrisons had experience only of relatively simple IT and two regional distribution depots.
  5. All Safeway formats were profitable, so selling off small stores, as Morrisons did, wouldn’t improve profitability, even if it reduced complexity.

This complexity was one reason why Safeway had struggled over the previous decade. Itself the product of a takeover, by the Argyll Group (Presto supermarkets) in 1988 of the UK arm of US Safeway, initially this new group had performed very well until the downturn in 1993. Under Sir Alastair Grant, Argyll managed to merge the range excellence and customer service of Safeway with the canny northern financial and cost management of Argyll. Safeway Group, as it became, flourished with a management and culture that was roughly a third Safeway, a third Argyll and a third new recruits from other businesses.

However, the synergies of the merger hid for a while the longer term problems of lack of scale and complexity/heterogeneity of the resulting business. This became evident in the mid 1990s, when not even the advice of McKinsey, which ironically also played a lead role in the contemporaneous turn around of Asda, seemed able to lift Safeway’s stagnating profit. Later a new CEO, the glamorous Argentinian Carlos Criado-Perez, similarly struggled.

Carlos added significant extra complexity himself. His vision was for a Safeway that had a warmer, Mediterranean feel, where; cream replaced white colour; real pizza ovens provided theatre and ambience; large fish counters established food credibility; overflowing ‘misted’ produce counters literally dripped fresh food allure; and block colour merchandising made grocery lines impactful. He also understood that Safeway couldn’t offer lower prices than Tesco or Asda (not least because of lesser scale buying), and complained that Tesco immediately matched any significant Safeway promotion. To counter this, he devised a rolling series of deep promotions across different sets of geographically disparate stores. Whilst very complex, these promotions proved impossible for any competitor to match effectively.

The promotions then developed into a portfolio of transaction-driving (ie loss-making promotions exciting enough to draw in new customers) and basket-driving (ie an existing customer would buy additional products on promotion). In business school jargon, this was an extreme, local form of high-low pricing.

Carlos believed that a No4 player had to be high-low, i.e. promotional, because it would lack scale benefits of larger players. However, the extreme nature of the Safeway version was intended to be temporary. It was a holding action while the new formats were being developed and would generate customer trial when the formats were refitted and rolled out. However, it later became clear that not only did the new formats not bring significant additional sustained revenue, but they brought permanent extra costs. In the end, this failure bequeathed extra complexity for the incoming Morrisons team.


Safeway customers didn’t shop at Morrisons

 Safeway, in the run up to the takeover, did some research that showed that in areas where there were both Safeway and Morrisons stores, Safeway customers tended to be Morrison-rejectors. The Safeway customers would also shop at Tesco or Sainsbury, but rarely Morrisons. Morrisons dismissed this evidence, but it would come back to haunt them.

Almost all grocery customers have a choice of where to shop. Indeed, maintaining this was at the heart of the later competition inquiry into and remedies for the takeover. Safeway attracted customers who liked strong, largely price-led (ie not multi-buy) promotions. They appreciated a wide range with upmarket lines tailored to their demographics. These were the key factors why Safeway customers were choosing to go there, rather than to Morrisons and, to a lesser extent, Sainsbury and Tesco.

It was therefore quite a brave decision by the incoming Morrisons management to stop the price promotions, replacing them largely with multibuys. They then reduced range, especially on fresh lines, and put in a more generic downmarket product range. As the Trading Director asked us: “Why do you stock balsamic vinegar?” We explained that it is regarded as an essential in Sutton and Reigate, southern towns of which she knew little. In another example, they replaced freshly squeezed orange juice at £2 a litre and a 45% gross margin, with Morrisons entry-level orange at 40p and a 30% gross margin. If customers wanted that type of juice, they were already shopping at Lidl and Aldi, but if they wanted upmarket orange juice they now had to go to Tesco, Sainsbury and Waitrose.

And they did. Post takeover Safeway suffered a dramatic loss of customers, who fed revivals at all its rivals. The transaction loss was somewhat offset by an influx of very price sensitive customers who did want the lower ‘everyday’ prices of the new range. However, these customers often could not afford to spend very much money, targeting only cheaper, lower margin lines.

This represented a victory for simplicity and less fresh food wastage, but it was a somewhat pyrrhic one as customer numbers dwindled.


Morrisons wanted to purge Safeway

There was to be no merger of management. Initially Morrisons agreed to ‘best man for the job’, but the reality was different. Safeway’s head office, west of London, was closed progressively and employees could either take redundancy or apply for a job in Morrisons head office in Bradford. Few took the latter, fearing for their long-term future. As a result, Morrison lost the people who knew how to manage the complex Safeway business.

Morrison simplified the supply chain by disposing of the automated replenishment system, explaining to store managers that they would have to go back to writing their own forecasts again. The core multimillion-pound ERP system that Safeway had just finished installing was cancelled (a consultant later told me that he loved Morrisons. Why, I asked. Because, he said, it was the only company that had, as Safeway, paid him to install an ERP system, then paid him to remove it after the takeover and then paid him a third time to reinstall it later when they realised their mistake).

Morrisons rejected Safeway’s promotional strategy. They disliked, with some justice, that supplier funding for the promotions tended to come in as lump sum monies at the year-end, with other volume and activity-related rebates. The year-end sum was around £600m, twice the annual profit, so you can understand why this disturbed them so much. Controlling such an accrual was a very tricky task for the finance team, but Morrisons management went further and said that they didn’t believe the (externally audited) sums were real and that they didn’t approve of collecting them. They were men and women of their word. They stopped trying to collect these monies and then fired the finance team and the buyers, who knew where the money was.

There is an established principal for a retailer when it moves from high:low to everyday low price (ie reduce promotions). You add up promotional funding and then tell suppliers that you want that same money now taken directly off invoiced cost prices. However Morrisons management lost control of the funding sums, and lost the people who could have retrieved the situation when they realised their error. They then did the only thing they could do, and blamed Safeway for fiddling the numbers. In fact, one supplier told me that all his Christmases had come at once. Morrisons had apparently forgotten that he owned them a couple of million pounds and he was able to reverse his accrual to the direct benefit of his bonus. He was not alone.

This was not an error of strategy, as reducing the promotional weight was very sensible, but one of execution by the people Sir Ken had charged with managing the integration.


Simplicity plus complexity results in more complexity

Sir Ken had built a brilliant model. His was a simple, homogeneous business with a thin management structure under his clear management. However, this also limited its growth. Morrisons didn’t want to develop new stores that were significantly smaller or larger or in different demographics. There was a limit to how many stores Morrisons could run with this model, not least as Sir Ken couldn’t know and visit each one regularly. There was a limit to its scaleability.

Safeway had been complex partly because it struggled with a variegated store portfolio. It wasn’t possible to simplify the combined business just by imposing the Morrison model. In so far as this happened, the result was then not what the Safeway necessarily customer wanted.

The Safeway acquisition didn’t cause these problems for Sir Ken, but it revealed them in spectacular fashion. Trying to impose Morrison simplicity on Safeway customers and processes was like trying to herd cats into one of Ken’s cowsheds.


Maybe managing Safeway was just too tough for anyone

We can analyse the Safeway acquisition with 20:20 hindsight, but maybe this was a business that was too difficult for anyone to manage successfully. Two successive CEO’s at Safeway struggled and Morrisons then laboured. Grocery retailing is a tough business and scale takes a toll on the smaller players.


Sir Ken – a retail giant of his time

You have to admire the entrepreneurial and retail genius of Sir Ken Morrison. Maybe in another time, he would have retired with Morrison as a growing successful fifth player. Perhaps he cursed the day that David Webster, Safeway Chairman, darkened his door with a siren call to merge. However no one is perfect and Sir Ken is not, and won’t be, the last entrepreneur to be seduced by a tempting corporate acquisition.

The best tribute to him is to learn from the experience:

  • To appreciate the value of strong independently minded executives and a few challenging non-executives:
  • To move with the times, embracing change and new methods. The development of IT and the digital economy simply cannot be ignored.
  • To balance the huge benefits of simplicity with the necessary complexity of the business you actually have, rather than the one you wished you had.
  • To evaluate acquisitions, without understating the risks of upsetting customers, losing key staff, setting the right inclusive culture and understanding the different business models.








Tesco and Booker – The Great British Food Merger?


I was just leaving the room on Friday, when I thought I heard on the radio that Tesco was merging with Booker. I smiled as I’d clearly misheard. When I realised it was true, my mind drifted back to the past.

The UK grocery chain, Safeway, used to own both a cash & carry and a delivered wholesale chain. I was a non-executive director of both these, as well as finance director at Safeway itself. So I have direct experience of managing both wholesale and retail in one group. This made me a bit surprised that Tesco is so keen to try the same thing.

What does it tell us about Tesco?

Tesco has struggled with both accounting scandals and weak grocery sales growth in recent years. The former revealed a poor culture in the business, but the latter will have been the more significant issue weighing with the board. Grocery has become more centred on internet/home delivery and convenience stores. The former is lower margin, as customers are not prepared to pay the full picking and delivery costs. Convenience stores are less profitable as they have higher costs than larger stores. Meanwhile the grocery market has been stagnating, not helped by low sales inflation.

Supermarket non-food has not produced much growth in the economic downturn and is also affected by the growth in online retailing. So Tesco has been in search of growth from somewhere outside grocery retailing.

The fact that Tesco has not bought a general retailer tells us that it doesn’t have much faith in non-food retailing for growth. As with its own non-food offering, general retailing has been struggling. The obvious partner for Tesco, M&S, was probably considered too expensive and too difficult. Sainsbury has already secured the leading bricks/online combo retailer, Argos.

Tesco has been eyeing the catering market for some time as a growth opportunity. It took however a misstep by buying Giraffe and Harris + Hoole – too small and with too much complexity to move the needle.

This also tells us that the strategy to grow Tesco internationally is being put more on the back burner. After the expensive debacle of launching in the US, Tesco feels suitably cautious.

Tesco now is trying to buy a cash and carry and delivered wholesale business. This will bring it exposure to catering (£1.9bn Booker revenue and growing) as well as small grocery retail supply (£3.1bn and flat).

Is it a merger or take-over?

This is a takeover in all but name. Tesco is paying a 15% (24% on a 3 month average basis) premium, and only the talented Charles Wilson, CEO, and the Stewart Gilliland, Chairman, are joining the Tesco board, in neither case as CEO or Chairman. Booker will contribute 14% operating profit in return for 16% of the equity. The premium however looks a little low for a takeover, which would usually be 30-40%. This tells you that Booker is pretty keen for this to happen, possibly an indication of their own concerns about future growth.

Has anyone else tried running retail & wholesale food?

Tesco may have been inspired by Germany’s Metro Group, that does indeed include a cash & carry and a hypermarket business, Real. However the performance of the Real hypermarkets has been disappointing and Metro sold the Eastern European Real businesses in 2012. There appear to be few synergies between the cash & carry and retail businesses.

The Big Food Group, a merger of Iceland Frozen Foods and Booker, lasted only five years.

Will the merger actually happen?

It looks as if the main block will be the competition authority (CMA). Tesco will explain to them that the only overlap is on retail, as catering is a different market. The CMA will look at the degree to which Tesco will use its ownership of Booker to influence small retailers. Small convenience stores will protest about this, and Tesco will almost certainly have to offer pledges that it will behave itself and not try to influence retail prices. Suppliers would do well to protest, not least as the largest element of the synergies is from ‘procurement’ ie squeezing them. The CMA will need to look hard at the prospect of Tesco getting access to wholesale cost prices. The investigation is likely to look at the market for convenience stores, although this could be broadened out to all grocery retailing, and the market for grocery supplies. This could take a year, potentially even longer, delaying the deal considerably.

The end result of this takeover would undoubtedly be a significantly stronger grip by Tesco on the grocery market. Will the CMA approve it? Logically, it probably shouldn’t allow it, but my three years experience at Safeway spent dealing with the Competition authorities is that bare logic is rarely the determining factor. I’d give this 50:50 at best.

What’s the benefit?

Take-overs are generally justified by synergies. In this case, they are a modest £200m pa after 3 years. It’s always good for an acquirer to focus on a Year 3 target, as after 3 years everyone has forgotten about the synergy target or dismisses it as irrelevant given all that has happened since.

Revenue synergies are given as £25m by year 3. At a marginal profit margin of say 20%, this implies additional revenue of £125m. With a current sales level of £60bn, that’s an uplift of 0.2% after 3 years. Blink and you’ll miss it. This is clearly just a notional number, so they either can’t justify, or they don’t believe in, any significant revenue uplift.

The cost synergies of £175m are the heart of this deal. Given that Tesco seems to have been working on this deal since June, it is very noticeable how lacking in detail these synergies are:

Procurement: Over half the savings are from procurement. This means two things; comparing different cost prices and using the combined volume to demand new lower cost prices from suppliers. On the former, it has been a holy grail for retailers to get access to wholesale prices, and this would appear to offer wholesale prices to Tesco. However, in my personal experience, suppliers are very aware of this issue and have in the past refused to give wholesale prices to retailers. They monitor sales to wholesalers and will stop supply if they see demand suddenly increasing as deliveries are being shipped onward from wholesale to a large retailer.

Tesco talks about ‘full crop procurement’ as a key, if obscure, benefit, but this is likely to be a red herring. This will be about pressurising branded suppliers. Tesco undoubtedly wants very much to get access to Booker’s cost prices, and if it does, it probably will be able to use its huge muscle to exploit this information. On top of this, Tesco will almost certainly be successful in just using its bigger scale to get better deals from suppliers generally.

Other cost savings: £60m odd from logistics seems a lot, especially as no detail is given. However, joint logistics costs are probably around £1.8bn, so this would represent a saving of some 3%, which is frankly not very much synergy! About £17m from other costs is also barely a rounding error, maybe 1.5% of other costs. The big issue will be whether they close the Booker head office and merge all the support functions.

What are the risks?

  1. Distraction: Booker will be the new shiny toy that all Tesco managers will want to play with. It will be very difficult keeping focus on the Tesco brand, only slowly now recovering, when there will be so much focus on another business, the integration and inevitable redundancies.
  2. Cost drift: This is a key reason that supermarket operators don’t run discount chains or cash & carries. When Safeway owned the discount chain, Lo-Cost, the moment anyone from the supermarket business got anywhere near the discount chain, they wanted to add cost. A cash & carry business has to have a very lean cost structure, even more so than a discounter, so Tesco management will have to work very hard indeed not to avoid extra costs creeping into Booker.
  3. Daddy knows best”. The acquirer’s management always tend to think that they are cleverer and more gifted than the acquiree’s. Functions move to the acquirer business and redundancies are concentrated in the acquiree business. This has already happened in the “merger” of the two boards, with only two Booker men surviving.
  4. Retailers think they understand cash & carry and catering. Charles Wilson will have his work cut out keeping Tesco management away from a very different business, of which they know next to nothing.
  5. Internal focus. It is inevitable that on a merger, focus tends to turn inwards as integration teams drive out synergies and managers jockey for position. It would be challenging for the combined group to keep developing the customer offering of both businesses over the next few years.
  6. Not understanding the risks at the start. It would have been more reassuring for the launch presentation to have at least mentioned possible risks!

Conclusion – is this a marriage made in heaven?

We are likely to have a competition inquiry that will last a year before we know if it will happen. If it gets approved, the businesses will then spend a couple of years integrating and settling down. If in this period, Tesco starts to lose out to grocery rivals in its core chain, then the synergies could easily be lost in weaker like-for-like sales growth.

Retail take-overs, as in other sectors, have a very mixed record. Iceland/Booker failed and was unwound. When Morrisons bought Safeway and merged two grocery retail chains, it decimated the combined profits of over £600m operating profit (excluding any synergies). Today Morrisons still only makes just over £300m, half that of the different businesses 13 years ago. A failed takeover generally proves very expensive.

On a £20bn joint market capitalisation, the synergies would be worth some £1.6bn (less tax, using a 10x multiplier), so this is an 8% opportunity. This is pretty much the uplift in Tesco’s share price after the announcement this week.

I suspect that the synergies are well grounded and sufficiently discounted that the target £200m in 3 years will be delivered. However investors need to consider four other questions;

  1. Will it get competition approval?
  2. Will Booker accelerate Tesco’s medium term revenue growth, especially in catering?
  3. Will combining wholesale and retail be disruptive to the two businesses?
  4. Will management distraction damage core performance of either business?

Overall the deal gives immediate one-off consolidation growth to Tesco, justified by cost synergies. But it also raises major risks in competition clearance and execution. This doesn’t feel like a marriage made in heaven, but very much made of convenience.


What’s your favourite part of being a non-executive director?


Now I’m going to take a wild guess here, that the least favourite part of a typical NED role is setting executive remuneration. To the media, and now even the government, it appears that NEDs love nothing more than awarding large pay increases, bonuses and pay-offs to executives. It often seems that investors share this perception, and believe that it is only institutional shareholder intervention that can restrain the irrational generosity of the average non-exec.

Meanwhile executives are usually demanding higher remuneration and showing the Remuneration Committee comparisons that reveal how underpaid they are.

There is no right answer as to how much to pay someone. The only ‘objective’ measure is to pay what you perceive is the ‘market rate’ for the role, or some fixed relationship to it (eg upper quartile or 10% above/below). This is the first stop of the remuneration consultants, who advise NED’s. However market rate setting causes inbuilt inflation. Many companies want to pay above the average, but few want to pay below average. The rest is mathematics.

Remuneration consultants will tell you that FTSE 250 benchmark is 150% of salary in annual bonus, and it’s difficult to argue down from that. Long-term bonuses are now generally signed off any way by large shareholders from the start.

Of course not all Remuneration Committees do a good job and some make bad judgements. Personally I agree that much executive pay, like that of a few other occupations, is too high, especially long-term incentives.

The question is what to do about it. The latest proposal from a Tory MP last week, and apparently backed by leading fund manager, Neil Woodford, is that large companies should form a committee of their five largest shareholders, with a worker representative and the company chairman invited as observers. This committee would approve pay deals, recommend appointment and removal of directors and question strategy.

Most non-execs would be only too delighted to delegate remuneration to someone else. The problem is that remuneration decisions are closely linked in to the detail of a company’s operation, career development or recruitment and retention. This means that the decisions need to taken with full knowledge of a number of complex and potentially price-sensitive issues.

Many larger fund managers currently delegate governance issues to a specialist corporate governance department. However these individuals inevitably lack the knowledge of the company and sector that the fund manager has. To have any chance of this working, institutional shareholders would have to send the fund managers, not corporate governance specialists, to these committees. My suspicion is that this would not be a welcome extra task for fund managers. Mr Woodford is already a busy man.

Institutional shareholders can already nominate, vote directors in and out. Do they really want to become the Nomination Committee, even without seeing how directors perform in board meetings?

Why would it take a committee of five large shareholders to challenge company strategy? In my experience most shareholder meetings talk strategy and there is plenty of opportunity for shareholders to express their views.

There are many smaller shareholders who would be worried about how this proposal would increase the power of a few large holders. Recent rule changes have strengthened protection for smaller shareholders from single dominant shareholders. Protection of minority shareholder’s interests is a key role for directors, which could be undermined by strengthening the power of the top five over director selection.

There isn’t an easy solution to setting executive pay. Remuneration has become a leviathan, taking up absurd amounts of board time, as directors try to balance executive aspirations with many different shareholder demands and compliance requirements.

I would welcome clearer guidelines from institutions as a whole on how they would like remuneration to be set. They would of course need to agree those guidelines amongst themselves first. Fund managers could engage more with non-exec directors, both to evaluate them and to communicate their wishes, and then to vote at AGMs for non-execs they trust.

If there were clear unitary guidelines, investors could vote out directors who don’t follow these rules. Shareholders don’t need to, don’t want to, and can’t, manage companies that they invest in. They should set the rules, and then judge the directors who do manage their companies.

This would build on our existing strong corporate governance framework, rather than bowing to media and political pressure by creating new parallel structures.



Who pays for low interest rates?


Bank of England


So the Bank of England has cut interest rates again, to 0.25%, as ‘the outlook for growth in the short to medium term has weakened markedly’. It is also pumping £70bn new money into the financial sector, that is ‘monetary easing’ or ‘printing money’. Meanwhile, the government is denouncing businesses for running deficits on their pension schemes. These two, apparently unconnected, events are very much two sides of the same newly minted coin.


The last two governments, led by the Conservatives, have presided over a weak economy recovering from the financial crisis, arguing that the prime economic problem has been the budget deficit, necessitating cuts to government expenditure. They have left it to the Bank of England to boost the economy, by lowering interest rates and printing money. However monetary easing has had only limited impact. If people or businesses are worried about the future, and indeed the impact of government expenditure cuts, they won’t necessarily spend more, whatever the cost of debt. As the economy therefore grew more slowly than forecast, and consequently tax revenues languished, the budget deficit remained stubbornly high. Meanwhile the Bank of England has had to cut interest rates even further and pump even more money into the economy. The logic is to end up at zero interest rates, perhaps not so far away now.

However, even the Bank of England has now admitted that its monetary expansion is having limited effect now. Explaining the recent fall in growth estimates, it admits; ‘Much of this reflects a downward revision to potential supply that monetary policy cannot offset’.

Recent governments have refused to use their fiscal armoury to boost the economy, because of the supposed need to reduce the fiscal deficit. ‘You cannot spend beyond your means’, they still say. That is dogma, not economics. Of course you can – by borrowing. If you use that spend to boost the economy, the increased growth and jobs will provide the tax revenue to pay back that debt. How different is this really to printing an extra £70bn new money?

Actually, it is a lot different. If the government boosted the economy by increasing infrastructure spend or increased NHS funding, there would be an immediate boost to jobs and investment. With 10-year gilts now at 0.6%, it wouldn’t take much of a return on infrastructure investment to deliver a positive project benefit, even aside from the general economic boost. Increased NHS funding would deliver significant social benefits, as well as reducing sickness.

On the other hand, low interest rates have reduced mortgage costs and so pushed up house prices. High house prices may make the middle class feel good, but do nothing for the economy. In fact, their main result is to transfer wealth from younger, first-time buyers and renters to their parents and grand parents. This stealth wealth redistribution is no different to raising taxes on the young and the less well off, and then giving tax breaks to the middle class. Except that the government then describes the resulting reduction in home ownership as a crisis, which it blames on house builders and buy-to-let landlords.

The other big losers are company pension schemes. Longer life expectancy and recent poor investment returns have increased pension deficits. But so have low interest rates. Not only do they reduce expected returns on pension investments but, in a double whammy, they also reduce the discount rate on pension liabilities. Has the government admitted its role in the pensions crisis? No, it has condemned companies struggling to pay ever-higher contributions to largely closed legacy schemes.

Governments prefer monetary expansion over fiscal stimulus, partly because it enables them to blame others for the consequences. Printing money and reducing interest rates are down to the independent Bank of England. Fiscal deficits are the fault of the dim and distant Labour administration. The housing crisis is due to land-banking house builders, greedy landlords and banks not lending. Struggling pension schemes are due to corporate greed and governance failures.

Philip Green, for example, has a lot to answer for BHS’s 13,000 pensioners. But so has the government, and it’s time it accepted responsibility too.


New PM, but corporate governance is still a political punchbag

“I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors who are supposed to ask the difficult questions, think about the long-term and defend the interests of shareholders.

“In practice, they are drawn from the same, narrow social and professional circles as the executive team and – as we have seen time and time again – the scrutiny they provide is just not good enough. So if I’m Prime Minister, we’re going to change that system and we’re going to have not just consumers represented on company boards, but employees as well.”

This speech was by Theresa May, not Jeremy Corbyn. It’s a topsy-turvy world. This is our new Conservative Prime Minister who is stooping to kick the corporate world – the dreaded ‘big business’ – as she strides into No10. Even madder, it was the Institute of Directors, not the Trades Union Congress, that welcomed her ideas. Let’s have a look at her charge sheet and her remedy.

“Non-executive directors… are drawn from the same, narrow social and professional circles, as the executive team”

It’s certainly true that non-executives are often serving, or more commonly former, executives. Normally that’s because running a company is a difficult, acquired skill, and so if non-executives are going to supply oversight, they too need to understand how companies are run. Pretty much all boards will have to have a chair of audit committee, who has to have a senior finance background. Similarly most will have a chair of remuneration committee who has experience of HR or corporate remuneration. Frankly, when it’s my money they are using, I want experienced non-execs looking after my interests.

“…time and time again – the scrutiny they (non-execs) provide is just not good enough.”

There are 3.5m active companies in the UK, of which 2,500 are listed on the stock exchange. How many companies have shown inadequate non-exec scrutiny? The banks perhaps in the financial crisis eight years ago? BHS? This was a private company through the recent scandal. Volkswagen in Germany perhaps?

We’ve seen many more scandals at the Home Office alone, let alone Parliament, in that time. Perhaps Mrs May could define ‘time and time again’?

“…we’re going to have not just consumers represented on company boards, but employees as well.”

When the Treasury Select Committee investigated Northern Rock’s failings, it highlighted a lack of banking qualifications on the board. It didn’t suggest that a consumer or worker on the board would have helped. Volkswagen does of course have worker representation, in line with the standard German model, of which presumably Mrs May is an admirer, although the Germans haven’t gone as far as a consumer director.

By the way, did she mean customer director, rather than consumer?

Where do we start?

Perhaps we can just ask Mrs May some simple questions;

  1. Do you believe that if I invest my money in a company, then I should decide who manages it, or do you think that Government needs to decide it for me?
  2. Do you believe that boards should be more diverse in composition than the Cabinet?
  3. How many corporate scandals have been due to poor non-exec supervision?
  4. What evidence have you got that worker and consumer directors would improve non-exec supervision?

Corporate governance is by no means perfect, and I, for one, would be delighted to hear new ideas to improve it. But this is the same old business bashing – ill thought-out and populist policy, backed by neither evidence nor analysis.

Le Roi est mort, vive la Reine.


Someone getting emotional?


 People are only human. Occasionally they fall in love with other people. Ideally, the ‘other person’ works elsewhere, but sometimes the two work together.

Many executives will have come across co-workers, who are in a relationship. This knowledge can vary from being a matter of mild interest to one of real discomfort. I had a boss once who was having an affair with their deputy in our small team. It was very uncomfortable most of the time, but also hilarious at others, especially when they tried comically to hide what everyone already knew. Most companies these days will have policies against relationships with subordinates, particularly as they could be construed as sexual harassment.

However, rules don’t guarantee compliance, especially in matters of the heart. So, as a non-executive, what do you do if you discover that there is a relationship at a company at board level or involving a board member?

Firstly look up the rules to establish the legal position. Is there a company rule that forbids or defines parameters for such relationships? The rules may well be different for relationships between co-workers as opposed to those between boss and subordinate.

The easiest thing for a non-exec is to ignore the situation. You may feel that you should ‘do something’ but if it doesn’t seem to be interfering with work and you don’t feel that it is exploitative, there may be plenty of other more important matters to worry about. Just keep an eye on it. If you don’t feel comfortable with this, the next step is to quietly mention it to the Chairman, and leave the ‘hot potato’ steaming nicely in their lap.

The most problematic relationship is often one a CEO and a senior executive. I have seem this a few times, and it is rarely a good thing. Inevitably other executives know about it, resent the special bond, and fear the pillow talk. This cannot, I think, be ignored. A non-exec would be wise to discuss it privately with the Chairman, and if they refuse to engage on it, raise it at a non-exec meeting. The very least you should aim for is that all non-execs are aware of the issue and can take it into account when they participate in board discussions and decisions.

If you feel that the relationship is exploitative, then you must raise it at board level. If the board declines to take any action, then you must decide whether to live with it or resign.

Beyond this, any non-exec has to apply their own discretion and judgement. How dysfunctional is the relationship to the company and its board? How concerned are the other non-execs? How much fuss do you want to make? There is no right answer here, but you should try to work out, all things considered, what is in the best long term interests of the company?

A final word on your due diligence when you join a board. When one Chairman asked me to lunch shortly after I joined the board, I assumed that he was being welcoming and that we could get to know each other a little better. In fact, he wanted to tell me that there was a relationship that I needed to know about. How kind of him to tell me a week after I had signed on. That taught me as much about the Chairman as it did about the participants.

I would recommend that in your final due diligence before being appointed as a non-exec, you ask the Chairman a direct question as to whether there is anything you should know about personal relationships in the senior management and the board. If you get an astonished denial, you can rest more easily. That’s what due diligence is for. But you might just find out something that could save you a lot of trouble later on.


  1. Relationship happen at work. They are not necessarily harmful.
  2. Check the company rules on relationships.
  3. You can ignore it, if it does no harm. If in doubt, consult the Chairman.
  4. If the Chairman doesn’t do anything, you can consult your fellow non-execs.
  5. If the relationship risks being exploitative, you should take action.
  6. Worth asking a question during your due diligence.