The Combined Code

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Section B

1 The Board is elected from shareholders standing for shareholders' interests. According the Combined Code, the board should use prudent and efficient methods to control internal risk, establish company strategies, make sure both financial and human capitals are allocated properly to achieve company objectives, valuate senior management's performance, do the best to diminish the Agency problem and ensure shareholders' interests. Under the Board, there are four main committees: Nomination, Remuneration, Audit and management of the Group-Executive Committees.

In the annual report, Tesco is not in compliance of provision A 3.2 of Combined Code from 2008 to 2009, which require at least half the Board excluding chair man, should be non-executive directors. Non-executive directors could bring wide range of knowledge and experience and objective and independent judgment, which help Board to make right decision. In 2008 to 2009, because of interest conflicts, two non-executive directors resigned unexpectedly. Balancing Board structure started immediately. After a careful investigation and prudent consideration, four non-executive directors are appointed. Consequently, including non-executive chairman and senior Independent non-executive director, there are 8 non-executive directors and 8 executive directors to keep the Board independent. In order to guarantee Board efficiency, all directors have to be re-elected at least every 3 years, and the new directors should be re-elected the following first year.

Chairman has main responsibility to run the Board, at the same time, chief executive takes the responsibility for Group operation and results, and also chief executive should make some proposals on important strategy of company development handing into Board for discussion and voting. In order to oversight chairman, senior independent director routinely lead some discussion of chairman efficiency. Besides, number of Board meeting and the attendance illustrated in annual report could somewhat show efficiency degree of Board.

There are three statutory Board Committees governed by Board. They are the Audit Committee, Remuneration Committee and Nomination Committee. Fair and attractive remuneration policy, as a tool of corporate governance for senior management, the chairman and executive directors, should be a big issue, which is determined by Remuneration Committee. The Tesco Remuneration Committee consists of entire non-executive directors, and in the meeting, no member's personal financial interest is discussed. Tesco non-executive chairman and chief executive of group are invited to attend the meeting to discuss except for their own remuneration.

Finally, the Remuneration Committee should review its own performance and agree some steps to make its own efficient. At the same time, the remuneration report of each director should be represented in annual report.

2 Tesco is a public limited corporation, which is listed in LSE. According to data from FAME, in 22th January of 2010, number of outstanding shares of Tesco is 7,836,158,147. According to the definition of block-holders ownership in the Free Dictionary (2010), block-holder ownership is if there are some institutional shareholders holding more than $200,000. 10 largest ordinal shareholders are listed in the shareholder's structure table as below. With calculation of holding amount, Blackrock INC via its funds, which hold 7.81%, and other institutional investors should be block holders of Tesco's outstanding shares. From this point, Tesco should be recognized Block-Holder Ownership.

3 For Tesco, PricewaterhouseCoopers LLP is its external auditor. The external independent auditor has audited parent company financial statement of Tesco for 53 weeks and directors' remuneration report based on International Standards. PricewaterhouseCoopers LLP tested and exam the evidence of amount and disclosure in the financial statement. The auditor also evaluated primary estimate and judgment made by directors in preparing group financial statement and at same time, it justified accounting policies are suitable for Tesco's circumstances. PricewaterhouseCoopers LLP asserted its auditor opinion in the 2009 annual report that in accordance with IFRSs, the financial statement offers a true and fair view of the group affair state and financial figures. Moreover, financial statement is properly prepared and consistent with directors' report.

According to Elder, Beasley and Arens (2010), external auditors could offer some assurance services, including positive assurance (audit opinion), limited or negative assurance (review of financial statement) and no assurance (compilation of financial statement). Financial statement review is one of common assurance services with a subset of compilations. Attest service is another kind of assurance that it evaluates an assertion made by one party to a third party.

The external auditor reports to both the Board and the Audit Committee of Tesco. PricewaterhouseCoopers LLP not only provide auditing service, but also some non-audit services to Tesco. In order to keep external auditor's independence, there is some restrict regulations on the fields which non-audit service could be offered by PricewaterhouseCoopers LLP. For Tesco, reviewing the subsidiary statutory accounts, transaction and corporate taxation service are carried by the same external auditor.

In Remuneration Committee, some non-auditing services are provided by Deloitte LLP who is another independent and external advisor for Tesco such as corporate and international taxation, share schemes corporate finance and treasury policy.

Usually, the external auditors frequently would ethically review and check their own auditing process to make sure independence is not compromised due to non-auditing services. In Defond, Raghunandan and Subramanyam's finding (2002), disagree with some regulator's concerns, there is no connection between audit and non audit fees and also for market reputation and litigation reasons, with a correct auditor propensity, non-audit service could not damage auditor independence.

4 According to annual report (2009), Tesco's Audit Committee all consists of 5 non-executive directors. In order to reasonably reduce misstatement and loss and enhance credibility of the published information and independence of the external auditor, the Audit Committee report to the Board and review the internal control system every financial year and approve of financial statement. The Audit Committee always receives reports from external auditor on quality of revenue and accounting technical development, internal auditor, and communicates with the senior management on their running duties. Appointment of external auditors is carried by the Audit Committee, including checking reports made by external auditors and their independence. A proper and regulated non-audit service by external auditor is supervised by the Audit Committee. These daily work of the Audit Committee, to a larger extent enhance good and efficient corporate governance.

In the meetings of Audit Committee, the chairman of the Board, the relevant financial and legal affair directors and representatives, the people from both internal and external auditors would be invited to attend. This kind of meeting could promote the cooperation from different parts within the company and thus to improve the quality of corporate governance. Furthermore, regular private meetings with the head of internal audit and external auditors are held regularly to discuss such as IT security, fraud and corruption more detailed. Simultaneously, the Audit Committee would conduct self review on its own effectiveness and self control.

With the cooperation with external auditors, some training on technical update is held by the Audit Committee. In 2009, the accounting and reporting development and new issued guidance are presented to the training participants. This kind of activity could enrich individuals' knowledge on importance of fair and complete disclosure and make better interpretation of financial regulation requirements.

5 According to Broberg Tagesson and Collin (2009), in the current market, information and transparency is increasingly demanded. With the increasing mandatory disclosure, company would voluntarily disclose some additional information to market. In their finding, there is variance among different companies, and some factors could explain it, such as company size and debt ratio. They suggested that more voluntary disclosure available after IFRS and this disclosure could help company to build reputation to some extent. In Clarke and Gibson-Sweet's finding (1999), there are two social responsibilities conveyed in the voluntary disclosure, environmental impact and community involvement. They also suggested that the higher public involved companies are more likely to disclose some extra information on community involvement and environment impact voluntarily. However there is little significant relationship between voluntary disclosure and reputation and performance.

In Tesco's 2009 annual report, good quality of voluntary disclosure on community and environment is presented. Tesco largely and actively involved in the community and environment, such as helping recruiting unemployed workers in front of financial pressure, providing more greener living brand for customers' choices and establishing for caring environment plans. In the end of voluntary disclosure, some planning on taking social responsibility is shown. Tesco is the largest retailer in UK, keeping social reliability and trust could be achieved by voluntary disclosure to some extent. Mathews (1995) mentioned three function of Voluntary disclosure: 1) it positively related to company market performance, 2) companies' legitimacy, and 3) reflection of company's moral accountability. For Tesco, good quality of volunraty disclosure could help it perform better in the market and build investors' confidence to raise more money.