Tesco’s former finance director, Laurie McIlwee, is to receive a £1m payoff next week, even though the crisis-hit retailer is embroiled in a £250m accounting scandal.
Although the investigation has only just got under way, McIlwee will be paid the cash as set out in his contract. He quit the business in April and was told to stay away from the office – a period when it appears the finances of the UK’s largest retailer spun out of control.
In McIlwee’s absence the finance team was overseen by then chief executive Philip Clarke, and on Monday the company admitted that profits for the first six months of its financial year were now likely to be £250m less than previously stated due to suspected mishandling of payments from suppliers.
Despite his services not being required, McIlwee was paid more than £400,000 during a six-month so-called “transition” period after his resignation. That period ends next Friday. As of that date he ceases to be a Tesco employee and, in line with his contract, is entitled to a “termination payment” of £970,800, which takes in a year’s salary of £886,420 as well as other benefits including private healthcare and a car worth £84,460, according to the company’s annual report. The payment will be made the following month.
A Tesco spokesman confirmed that the payment is not being withheld until the investigation is complete and will be as detailed in the annual report. There is no suggestion that McIlwee played any role in the alleged mishandling of payments.
Tesco’s shares have lost 15% of their value this week and lost a further 1.2% on Thursday, closing at 192.5p, despite backing from an unusual source: the Sports Direct retail chain run by billionaire Mike Ashley on Thursday outlined a complicated derivatives deal, made with investment bank Goldman Sachs, that is essentially a bet on Tesco’s shares rising. Details of the deal were sketchy but Ashley’s group will have to pay Goldman if the share price falls, and will make a gain if they rise.
McIlwee’s departure left a vacuum at the top of the finance department of the world’s third biggest retailer. Tesco has two experienced former finance directors on its board – Ken Hanna and Mark Armour – but neither was asked to step into the role in the interim period before McIlwee’s replacement, Alan Stewart, was free to join from Marks & Spencer.
Some shareholders questioned whether the decision to leave this key post empty contributed to the error, which wiped £2bn off the company’s market value on the day it was announced.
Adrian Bailey MP, chairman of the powerful Commons business select committee, suggested on Thursday that the “merry-go-round” of directors may have contributed to the crisis. Bailey is considering whether to launch a wider grocery industry inquiry depending on the results of the company’s own investigation.
The retailer has defended its handling of the gap between finance directors – new chief executive Dave Lewis has since managed to negotiate Stewart’s early release from his gardening leave – stating that a “group of senior finance personnel was established to ensure co-ordination and oversight of all financial matters”. That committee helped prepare the guidance, issued along with a profit warning at the end of August, that it expected to make a trading profit of some £1.1bn over the last six months. That figure is now judged to be £250m too high, possibly as a result of payments from suppliers – to cover costs like promotions and prime shelf space – being booked too early.
“It seems unbelievable that a retailing colossus like Tesco should not have a full-time finance director overseeing everything,” said Bailey.
The suspected hole in Tesco’s accounts was revealed by Lewis. Acting on information received from a whistleblower, he called in a team of external accountants and lawyers from city firms Deloitte and Freshfields to assess the true financial position.
To clear the path for the investigators, Lewis suspended four senior executives, including Chris Bush, who runs Tesco’s domestic supermarket chain. The investigators likely to have questions for Clarke, who remains on the payroll until January when he too is entitled to a payoff of a year’s salary.
A supermarket ombudsman was established in 2013 to police the relationship between the big supermarkets and their suppliers but Bailey is concerned the situation at Tesco is a sign that all is not well.
“The Groceries Code Adjudicator was to try and get a fairer balance of power between suppliers and retailers,” he said. “If they are being forced to provide income or bonuses to suit the accounting regime of retailers, that is a matter of some concern. We will look at the outcome of the investigation, but if we think it is a whitewash we will have to ask what is going on.”
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