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TESCO AT A GLANCE USRevenue mStoresEmployeesTotal3491453,246EUROPERevenue mStoresEmployeesCzech Republic1,28713612,949Hungary1,69817620,079Poland1,94233623,655Republic of Ireland2,28211914,158Slovakia891818,105Turkey5951057,630United Kingdom38,5582,482287,669Total47,2533,435374,245AsiaRevenue mStoresEmployeesChina8448822,668Japan4491424,636Malaysia633329,423So uth Korea4,16230522,739Thailand2,34466334,775Total8,4321,23094,241

Introduction This report is aimed at critically analysing the macro, meso and micro business environment of Tesco, one of the largest food and grocery retailers in the world, operating around 4,331 stores. Strategic evaluation tools such as PESTEL, Porters Five Forces, SWOT and Value Chain analysis have been used by researchers in order to achieve this aim. Tesco Company Overview Tesco is among the largest food retailers in the world with revenue in excess of 54 billion in 2009 and employing over 470,000 people . They operate approximately 4,331 stores in 14 countries around the world. The company operates primarily in the USA, Europe and Asia and their Head Office is based in Hertfordshire, UK. According to Datamonitor (2010), the commercial network portfolio of Tesco comprises : over 960 Express stores which sell approximately 7,000 products including fresh foods at suitable localities ; 170 Metro stores which sell a variety of food products in town and city centres; and 450 superstores which sell both food and non-food items including books and DVDs. Tesco also provides online retailing services through their website and Tesco Direct . In addition, they provide broadband I nternet connections and financial services through Tesco Personal Finance (TPF). Tesco was founded in 1919 and launched its first store in Edgware, London, UK in 1929 (Tesco, 2010); however, over the decades it has evolved to become the market leader within the UK food retail segment (Datamonitor, 2010). The comparative positioning of Tescos market share with respect to other leading players in the market has been illustrated as follows (Euromonitor, 2010):

PESTEL Analysis The PESTEL framework below analyses the dynamic and unpredictable environment in which Tesco operates by identifying the forces that have the most impact on Tescos performance: Political Chinas accession to the WTO has promoted a free flow of foreign trades by removing all barriers encouraging Western companies, including Tesco, to make way into the worlds most profitable market encompassing over 1.3 billion people (Straits Times, 2010). In 2009 an agreement was signed by Tesco to set up a premeditated series of joint ventures for the development of shopping malls in China. This joint venture included three malls: Anshan, Fushan and Qinhuangdao. Furthermore, 18 new hypermarkets are expected to open in China by 2010 (Tesco, 2009). The growth of Tescos international business segment is on the rise and it is predicted to account for one quarter of the companys profit. Economic Economic factors are a matter of concern for Tesco since they impact directly on the buying behaviour of customers. Although the UK economy was declared officially under recession in 2008, the governments substantial reduction in interest rates helped to minimise further rises in unemployment during 2009 (Euromonitor, 2010). As a result of this, the spending power of consumers is again on a steady rise as they are more confident about their current financial situation. However, there is still a lot of financial uncertainty meaning that consumers are likely to spend less on premium products, encompassing organics and ready prepared meals, which will adversely affect both sales value and margins (Keynote, 2010). The economic downturn has been brought to light with the assistance of the following GDP growth graph since 1989 (Mintel, 2009):

Fig 3: UK GDP Growth 1989-2009 Social An analysis of the UK population shows that there are more retired people than children representing the Baby Boom generation (Herald Scotland, 2010). The ageing population is discouraging for the food retailers older people tend to eat less .They are less likely to travel to supermarkets to shop compared with the younger generation. Although internet literacy level drops over the age of 65 years within the population (Turban et al., 2001), it has nevertheless been predicted that the ageing population would find online shopping more convenient. However, small deliveries are considered to be ineffective and expensive. Technological One of the key macro-environmental variables that have directly influenced the supply chain, operations and processes of grocery and food retailers is technology. The operation of supermarkets is being affected by the use of the Internet through online grocery retailing, which is showing steady growth. Subscriptions to the Internet have grown by over 50% and it has been estimated that the Internet is being used by 70% of the population in the UK ( Office for National Statistics, 2010). Environmental Environmentally friendly, reduced packaging is being promoted by the Government. It has been found by the Office for National Statistics (2010) that the percentage of consumers using reusable bags has risen from 71% to 74% and that those trying to cut down the number of plastic bags they take from the shops has risen from 65% to 68%. This assists in reducing the overall cost and is good for Tescos corporate social responsibility image. Legal It has been predicted that VAT would have to rise to 20% since the Government has to finance a huge budget deficit (HM Treasury, 2010). This will affect the nonfood sectors of Tesco, such as clothing.

Drawing upon the Low Pay Commission Report (National Minimum Wage, 2009), the 2008 and 2009 combined up-ratings have resulted in an increase in the minimum wage of 15.5%. This will result in an increase of operating costs of supermarkets. Porters Five Forces Analysis An analysis of the structure of the industry should be undertaken in order to find effective sources of competitive advantage (Porter, 1985). Therefore, in order to analyse the competitive environment of Tesco, Porters five forces analysis has been used by the researcher as follows: Threat of substitute products and services The threat of substitutes in the grocery retail market is considerably low for food items and medium to high for non-food items. In the food retail market, the substitutes of major food retailers are small chains of convenience stores, off licences and organic shops which are not seen as a threat to supermarkets like Tesco that offer high quality products at considerably lower prices (Financial Times, 2009). Moreover, Tesco is further getting hold of these shops by opening Express stores in local towns and city centres creating a hurdle for these substitutes to enter the market. However, the threat of substitutes for non-food items , for instance clothing, is fairly high. It should be noted that so long as the economic recession prevails , customers will be inclined towards discounted prices hence Tesco is a threat to the speciality shops. Threat of entry of new competitors The threat of entry of new competitors into the food retail industry is low. It requires huge capital investments in order to be competitive and to establish a brand name. Major brands that have already captured the food retail market are Tesco, Asda, Sainsburys and Morrisons and they account for 80% of all shopping in the UK (Mintel, 2010). Therefore, new entrants have to produce something at an exceptionally low price and/or high quality to establish their market value. Gaining planning authorisation from local government takes a considerable amount of time and resources to establish new supermarkets and this is therefore a considerable barrier to new entrants.

TESCO Strategy Tesco has a well-established and consistent strategy for growth, which has allowed us to strengthen our core UK business and drive expansion into new markets. The rationale for the strategy is to broaden the scope of the business to enable it to deliver strong sustainable long-term growth by following the customer into large expanding markets at home such as financial services, non-food and telecoms and new markets abroad, initially in Central Europe and Asia, and more recently in the United States. The strategy to diversify the business was laid down in 1997 and has been the foundation of Tesco's success in recent years. The new businesses which have been created and developed over the last 12 years as part of this strategy now have scale, they are competitive and profitable - in fact we are now market leader in many of our markets outside the UK. The Group has continued to make good progress with this strategy, which has five elements, reflecting our four established areas of focus, and also Tesco's long-term commitments on community and environment. Importantly, the momentum which it has given the business has allowed the Group to continue to grow well through the economic downturn. The objectives of the strategy are: To be a successful international retailer To grow the core UK business To be as strong in non-food as in food. To develop retailing services - such as Tesco Personal Finance, Telecoms and To put community at the heart of what we do. Core UK The UK is our biggest market and the core of our business. We aim to provide all our customers with excellent value and choice.

Community Making Corporate Responsibility integral to our business is essential in applying our values as a responsible business. We believe it is also an opportunity for growth. Non-food Our aim is to be as strong in non-food as in food. This means offering the same great quality, range, price and service for our customers as we do in our food business. Retailing Services Tesco has followed its customers into the growing world of retailing services, aiming to bring simplicity and value to complex markets. International Tesco is an international retailer and wherever we operate we focus on giving local customers what they want.

Core UK
Our core UK business is significant within the group, with over 285,000 employees and over 2,200 stores. Around 70% of group sales and profits come from the UK business. Growth in the UK business comes from new space, extensions to existing stores and a multi-format approach. Sales of non-food, which forms another key part of our strategy, also contribute to the overall UK growth picture. lStore Formats We have four different store formats, each tailored to our customers' needs and one trial format called Homeplus: lExpress (up to 3,000 sq ft) We have over 960 Express stores offering customers great value, quality and fresh food close to where they live and work. We opened our first Express store in 1994. They sell a range of up to 7,000 products including fresh produce, wines and spirits and in-store bakery. lMetro (approx. 7,000-15,000 sq ft) We opened our first Metro in 1992, bringing the convenience of Tesco to town and city centre locations, and now have over 170 stores. Metros cater for thousands of busy customers each week and offer a tailored range of mainly food products, including ready-meals and sandwiches. lSuperstore (approx. 20,000-50,000 sq ft) We began opening superstores in the 1970s and during the 1980s and 1990s built a national network, to which we are adding every year, currently totalling around 450. We have an ongoing programme of extending and refreshing our superstores to improve the overall experience for customers. In recent years we have introduced a number of new non-food ranges into superstores such as DVDs and books. lExtra (approx. 60,000 sq ft and above) Since opening our first Extra in 1997, the one-stop destination store has proved extremely popular and we now have more than 175 Extra stores. Extra stores offer the widest range of food and non-food lines, ranging from electrical equipment to homewares, clothing, health and beauty and seasonal items such as garden furniture.

lHomeplus (approx. 35,000 sq ft to 50,000 sq ft) Our Homeplus stores are dedicated to non food, including clothing. These 10 stores offer our widest range of non food products in store, with more available through their Tesco Direct order and collection points. Our latest, largest stores have our Tesco Direct catalogue ranges on display, with most products available to take home today. Following the early promise of our first seven stores, weve committed to opening a further ten as part of the trial. lBroad appeal In addition to a variety of formats, we ensure we have a broad appeal by continually innovating and investing in new lines to increase choice for our customers. From Value to Finest and lifestyle ranges like Organic, Free From, Healthy Living and Wholefoods, our various own brands enable customers to buy products to compliment their lifestyle. Our nutritional 'signpost labelling' aims to provide customers with the key information they need to help them choose a balanced diet. This recession has provided a new challenge because although customers tend to shop around more for the best prices when times are hard - it doesn't mean they want to compromise on quality of the shopping trip or on choice. That is why last year we made the biggest change to our range in a decade, launching around 500 new products as part of our 'Discount Brands at Tesco' initiative. The new range means that every customer can have a product to match their budget without compromising on choice or quality. It creates a completely new way to shop for customers who want to spend less. lUnderstanding our customers Tesco Clubcard is a world-leading loyalty card scheme, with around 15 million active cardholders. Information provided by Clubcard enables us to better understand our customers and say thank you for shopping with us. There are over eight million unique coupon variations with each Clubcard mailing, making sure that everyone receives the kind of offer that is appropriate for them. lLooking after our people Tesco is the biggest private sector employer in the UK with over 285,000 employees. We offer a market-leading package of pay and benefits such as childcare vouchers and two share schemes: Save as You Earn - a savings scheme with an option to buy shares at a discounted rate - and Buy as You Earn. In addition, our Shares in Success scheme rewards eligible staff for their hard work and commitment with free Tesco shares and our award-winning defined benefit pension scheme, which has around 160,000 members, allows members to build up a pension based on their earnings and service.

Community Making Corporate Responsibility integral to our business is essential in applying our values as a responsible business. We believe it is also an opportunity for growth. Our core purpose is to create value for customers to earn their lifetime loyalty. Our values, which underpin everything we do, are that no-one tries harder for customers and to treat people how we like to be treated. Our Steering Wheel or balanced scorecard gives us the tools to deliver our strategy. As well as customers, we must also consider the impact of our decisions on the community, on our people, on finance and on operations. This therefore ensures that in all the decisions we make we take into account impacts on the community. We have adopted this approach in each of the countries in which we operate. They all have different challenges and opportunities, but in each we believe in the power of the consumer to drive positive change. Business also has an enormous role to play, and we believe that it is by being successful that business can make the biggest contribution. It is efficient businesses that can invest in deprived areas from which other companies have retreated. It is successful businesses that understand the needs of their customers including low income customers and those with specific needs. It is growing businesses that can bring new jobs and careers to those who do not have them. And it is strong businesses that will prove that the challenge of climate change will be met through innovation and growth. Non-food Our strategy aims to be as strong in non-food as in food. This means offering the same great quality, range, price and service for our customers as we do in our food business. Our widest range of non-food can be seen in Extra stores and Homeplus, including electricals, home entertainment, clothing, health and beauty, stationery, cookshop and soft furnishings, and seasonal goods such as barbecues and garden furniture in the summer. 115 of our stores also have opticians and around 270 have pharmacies In 2006 we launched Tesco Direct , a new online and catalogue non-food offer, with over 12,500 products available online. Next day delivery is standard for small items with a unique two-hour delivery window. We issued 11.5 million catalogues last year. The popularity of our in-store Direct desks, which are now in 231 stores, continues to increase as more customers order and collect items from their local Tesco. We plan to add clothing to our online offer later this year. To find out more visit lRanges and Value All our stores sell some non-food, with our Extra format and trial Homeplus format offering the biggest choice. By introducing these ranges to more of our

stores we can bring down prices and offer customers the convenience of shopping for great value non-food along with their food and household goods. Value, Tesco standard and Finest own-brand products are available across our non-food offer. We offer over 2,000 Value lines and increasingly, many Finest lines too, including cashmere jumpers and bedding. lClothing Tesco clothing brings fashion to a wide audience at fantastic prices. One in seven of our customers have bought from our clothing ranges. F&F is the label of fashion, style and great value, while our Cherokee brand offers essential trend-led kids clothing and adult casual wear. Visit which enables customers to preview what's in store, find their nearest shop with clothing and sign up to the Fashionfile email. We also have plans to open an online clothing shop. lMaking it happen We have 25 distribution centres, 6 of which handle our non-food and clothing ranges. Getting the right product to the right store at the right time means customers can get what they want, when they want it. Tesco now has a team of people sourcing non-food products globally, to make sure we can buy in the most efficient way and pass on the savings to customers. Retailing Services All our customers are different, and their needs are continually changing. Thats why we continue to offer more than one way to shop. lTesco Personal Finance (TPF) Tesco Personal Finance recently celebrated its eleventh anniversary and over the last decade it has grown to be the UKs most successful supermarket bank. Customers have a choice of 28 products ranging from savings accounts and credit cards to car and travel insurance. In July 2008 we announced that we had reached an agreement with RBS to buy its fifty percent shareholding in TPF. RBS had been a good partner, and through them we learnt a lot about how to manage a financial services business. The joint venture structure was right for TPF but it had reached a size where Tesco ownership was the most sensible way to run and grow the business going forward. In December we completed the acquisition of the remaining 50% of TPF from Royal Bank of Scotland Group PLC (RBSG ). This was an important move for Tesco, allowing us to build on the success of TPF and eventually offer customers the products you would expect from a full-service retail bank. This will mean growing our existing customer base across the 28 simple products we offer from home insurance to credit cards, but also attracting new customers at a time when many have lost trust in their high street bank.

All our current financial products are available to buy online and at present over 50% of our customers choose to buy this way. However, in the same way as customers value the service offered by our telecoms centres, we understand that many would like to discuss their financial needs with someone knowledgeable. We plan to increase our presence for TPF by extending the trial of our in-store branches which offer customers the opportunity to talk to our specially trained finance advisors in a convenient location and have recently opened six more. We have also officially opened the new TPF headquarters at Haymarket in Edinburgh. Tesco Personal Finance has committed to establishing and building its bank from Edinburgh and around 250 members of staff have already relocated from the South Gyle, while the business expects to recruit an additional 200 over the next 12 months. Since launching in 2000, has gone from strength to strength, with over 1 million active customers now choosing to buy online. Shopping for groceries online has been a revolution for people leading busy lives and those without access to transport. In the last year we have introduced bag-less deliveries, an offer which 40% of our customers now choose, helping our customers to reduce their overall single-bag use in stores and online by a staggering trhee billion carrier bags since Green Clubcard Points were launched in August 2006. lTesco Telecoms Tesco Telecoms offers simple, straightforward telecoms services with great value tariffs. Customers can benefit from our mobile network, home phone service, internet access and an internet phone service. Tesco Telecoms also offers a wide range of telecoms products in store and online. Our mobile network, Tesco Mobile, was launched in 2003 as a joint venture with O2. It is currently the fastest growing mobile networks and was ranked as the number one network for customer service by Which? magazine in 2009. It offers fantastic value tariffs such as triple your credit with its pays as you go tariff and quadruple flexible credit with its pay monthly offers. Customers can choose SIM only or select a new handset from a comprehensive choice instore and online.

International Since the mid-90s, we have been investing in new markets overseas, seeking out new opportunities for growth and ways of generating long term returns for shareholders. Today the Group operates in 13 markets outside the UK, in Europe, Asia and North America. We also announced our entry into the Indian market last year, where we are establishing a cash & carry business. Over 180,000 employees work in our international businesses, serving in 2,026 stores and generating 17.9 billion sales and over 700 million profit. Over half of our selling space is now outside the UK. lOur International Strategy The full emergence of international retailing is not something that will happen overnight - it requires a long term approach. With more than ten years of experience overseas, Tesco has evolved a strategy based on six elements: 1.Be flexible - each market is unique and requires a different approach. In Japan, customers like to shop for small amounts of extremely fresh food, every day. Existing hypermarket formats don't meet the needs of local customers, so Tesco's entry into the Japanese market was through the acquisition of a discount supermarket operator. 2.Act local - local customers, local cultures, local supply chains and local regulations require a tailored offer delivered by local staff. In Thailand, customers are used to shopping at traditional wet markets, interacting with vendors and rummaging through piles of produce to choose what they want. Rather than adopting the Western approach of neatly packaged, convenient portions, our Rama IV store in Bangkok tries to meet local customers' expectations. 3.Maintain focus - we understand that customers want great service, great choice and great value. To become established as the leading local brand is a long term effort and is not about planting flags in map. 4.Use multi-formats - no single format can reach the whole of the market. A whole spectrum from convenience to hypermarkets is essential and you need to take a discounter approach throughout. Our experience of trading a mix of stores means we can now move to multi-format quicker and we have recently opened Express stores in Hungary and the Czech Republic.

5.Develop capability - it's not about scale, it's about skill - so we make sure we have capability through people, processes and systems.- We believe that investing in our people is the right way to live our values and brings sound business benefits, too. Developing individuals at every level means that we have home-grown managers who understand our culture and can effectively develop our business. 6.Build brands - brands enable the building of important lasting relationships with customers. In China, our first Tesco branded store called Tesco Legou opened in February 2007 and we have now completed re-branding of all stores. TYPES OF INTERNATIONALISATION METOD STRATEGY EXPORTING ALLIANCE JOINT VENTURE FOREIGN DIRECT INVESTMENT - FDI RECOMMENDED INTERNATIONALISATION METHOD STRATGY FOREIGN DIRECT INVESTMENT FDI ANALYSIS FULL CONTROL FDI will allow company to control leading to full over operations to all resources of investment and alliances. Present JV with TATA sons in India as example, have limited access and benefit over retail expertise and actual engagement. RAPID MARKET ENTRY FDI can apply through Acquisition and you can enter market very rapidly in compare to other 3 strategies. TESCO can acquisition such as MORE, ADANI brands of supermarket to place up fast them in India as example. CAPITAL ANTICIPATION

FDI initiative can encourage host countries government as may your Greenfield project and may government anticipate companies capital needs. Many government now realise and retail sector is also now profitable industry world-wide. EMPLOYMENT GENERATION This plan surely generate some employment, which helps you in business and adaption over companys brand name and their pro-ducts. TESCO can increase their loyalty and leverage each other citizen globally. HUMAN RESOURCES INTEGRATION FDI allows new HR integration over the boundaries for deploy and catch up new talent. This integration prosper new project and assignment over work culture and TESCO can reap new HR Capital level over an industries. These are the indicative analysis and recommendations which TESCO can reap through in this turbulent time.



lDirectors' Report on Corporate Governance Tesco PLC is committed to the highest standards of corporate governance as we recognise that strong governance is crucial in helping the business to deliver its strategy, generating shareholder value and safeguarding our shareholders longterm interests. Below Board level, the company fosters a strong culture of good governance, including maintaining high ethical standards and strong personal integrity. This is formalised in the Group Code of Business Conduct which sets out our expectations of employees clearly. All businesses within the Group are required to monitor their compliance with the Group governance framework and this information is reviewed at Board level. Compliance with the Combined Code The Combined Code on Corporate Governance sets out guidance in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice. The Financial Services Authority (FSA) requires companies listed in the UK to disclose, in relation to Section 1 of the Combined Code, how they have applied the principles and whether they have complied with its provisions throughout the financial year. Where the provisions have not been complied with companies must provide an explanation for this. The Board considers that Tesco PLC complied in full with the Combined Code principles of Corporate Governance and Code of Best Practice for the whole of the year ended 27 February 2010, with the exception of provision A.3.2, in respect of which the company was not in compliance for part of the year. Provision A.3.2 requires that at least half of the Board, excluding the Chairman, should comprise Non-executive Directors determined by the Board to be independent. The Board recognises the importance of a balanced board with an appropriate level of independence. Due to unexpected changes to the Board in the previous year, with the resignation of Carolyn McCall and Mervyn Davies as Non-executive Directors, the Board was not in balance at the beginning of the year. At that stage, Ken Hannas impending appointment to the Board had already been announced, and he joined the Board with effect from 1 April 2009, at which point the Board became balanced and once again fully compliant with provision A.3.2.

Board composition and independence The Board of Tesco PLC currently comprises eight Executive Directors, seven independent Non-executive Directors and David Reid, Non-executive Chairman. Patrick Cescau is Senior Independent Director. The size of the Board is appropriate given the diverse markets the business operates in and the breadth of operations and services offered in each market. The structure of the Board and the integrity of the individual Directors ensure that no single individual or group dominates the decision making process. Biographies for the Directors Election of Directors All Directors have to submit themselves for re-election at least every three years if they wish to continue serving and are considered by the Board to be eligible. The Companys Articles of Association require all new Directors to be submitted for election by shareholders in their first year following appointment. The Chairman Clear divisions of accountability and responsibility exist and operate effectively for the positions of Chairman and Chief Executive. The Chairman has primary responsibility for leading the Board and setting its agenda, while the Chief Executive has executive responsibilities for the operations and results of the Group and making proposals to the Board for the strategic development of the Group. Senior Independent Director The Board has appointed one Non-executive Director, Patrick Cescau, to act as Senior Independent Director. The Senior Independent Director is available to shareholders to assist in resolving concerns, should the alternative channels be inappropriate. The Senior Independent Director is also required to lead the discussion in relation to assessing the effectiveness of the Chairmans performance. Non-executive Directors The Non-executive Directors bring a wide range of skills and experience, as well as independent judgement on strategy, risk and performance to the Company. The independence of each Non-executive Director is assessed at least annually. The Combined Code suggests that a Non-executive Director should be independent in character and judgement and be free from relationships or circumstances which are likely to affect, or could appear to affect, the Directors judgement. Board responsibilities The Board has set out a clear Schedule of Matters Reserved for Board Decision in order to ensure its overall control of the Groups affairs. These include the approval of:

the Companys strategic and operating plans; annual and interim financial statements; major acquisitions and disposals; authority levels for expenditure; treasury policies; risk management and internal control systems; group governance policies; and succession planning for senior executives. The Board delegates to management the detailed planning and implementation of these matters in accordance with appropriate risk parameters. The Board monitors compliance with policy and achievement against objectives by holding management accountable for its activities through regular updates. In addition, each substantial business within the Group is required to present to the Board on a regular basis, giving it the opportunity to understand and explore issues as deemed necessary. All Directors have access to the services of the Company Secretary and may take independent professional advice at the Companys expense in conducting their duties. The Company provides insurance cover and indemnities for its Directors and officers. Attendance at meetings It is expected that all Directors attend Board and relevant Committee meetings, unless they are prevented from doing so by prior commitments, and that all Directors will attend the AGM. Where Directors are unable to attend meetings due to conflicts in their schedules, they receive the papers scheduled for discussion in the relevant meetings, giving them the opportunity to relay any comments to the Chairman in advance of the meeting. Directors leave the meeting where matters relating to them, or which may constitute a conflict of interest to them, are being discussed. The table below shows the attendance of Directors at scheduled Board meetings and at meetings of the Audit, Remuneration and Nominations Committees during the year. Board process The Board governs through a number of Board Committees in particular, the Audit, Remuneration and Nominations Committees to which certain responsibilities and duties are delegated. These Committees are properly authorised under the constitution of the Company to take decisions and act on behalf of the Board within the parameters laid down by the Board. The Board is kept fully informed of the work of these Committees and any issues requiring resolution are referred to the full Board as appropriate. A summary of the operations of these Committees is set out below. The effectiveness of the Audit,

Remuneration and Nominations Committees is underpinned by their Nonexecutive Director membership, which provides independent insight on governance matters. The Board is serviced by the Company Secretary, who reports to the Chairman in respect of his core duties to the Board. lNominations Committee The Nominations Committee leads the process for Board appointments and the reelection and succession of Directors, as well as making recommendations for the membership of the Audit and Remuneration Committees. The Committee is chaired by David Reid and the Company Secretary also attends meetings in his capacity as Secretary of the Committee. Where matters discussed relate to the Chairman, the Senior Independent Director chairs the meeting. As well as reviewing the performance and development of the Executive Directors and the senior executive levels below the Board, the Committee also regularly considers: the Board structure, size, and composition; the skills, experience and knowledge of the Board and identifies candidates to fill Board vacancies and enhance its capability; succession planning for directors and other senior executives in the course of its work, taking into account the challenges and opportunities facing the company, and what skills and expertise are therefore needed on the Board in the future; the time commitment required from Non-executive Directors; the leadership needs of the organisation, both executive and non-executive, with a view to ensuring the continued ability of the organisation to compete effectively in the marketplace; and strategic issues and commercial changes affecting the Group and the market in which it operates. lRemuneration Committee The Remuneration Committees role is to determine and recommend to the Board the remuneration of the Executive Directors. It also monitors the levels and structure of remuneration for senior management and seeks to ensure that the remuneration arrangements are designed to attract, retain and motivate the Executive Directors needed to run the Company successfully. At the invitation of the Committee, the Chairman of the Board normally attends meetings and the Chief Executive attends as appropriate. Representatives of the Groups Personnel and Finance functions attend as appropriate to provide support and the Company Secretary also attends in his capacity as Secretary of the Committee.

Each year the Committee conducts a review of its own effectiveness and its Terms of Reference.

lAudit Committee The Audit Committees primary responsibilities are: to review the financial statements; to review the Groups internal control and risk assurance processes; to consider the appointment of the external auditors, their reports to the Committee and their independence, which includes an assessment of their appropriateness to conduct any non-audit work; and to review the programme of Internal Audit. Other regular attendees at the invitation of the Committee include: Chairman of the Board Finance Director and his representatives Head of Internal Audit Corporate and Legal Affairs Director Relevant Executive Directors External Auditors The Company Secretary also attends in his capacity as Secretary of the Committee. The Combined Code requires the Audit Committee to include at least one member with recent and relevant financial experience. The Committee Chairman fulfils this requirement, and all other Committee members have an appropriate understanding of financial matters. The Committee usually meets four times per year and additional ad hoc meetings are called when necessary. While fulfilling the above responsibilities, the Committee receives presentations from significant businesses within the Group, as well as on fraud, bribery and corruption, business continuity, IT controls and governance and whistleblowing. Each year the Committee conducts a review of its own effectiveness and its Terms of Reference. The Committee also has regular private meetings with the external auditors and the Head of Internal Audit during the year. The need for training is kept under review and the annual agenda ensures time is dedicated to technical updates which are generally provided by external experts. Recently, training has been provided on accounting and reporting developments under IFRS and IAS and governance developments proposed by the FRC. With respect to Tesco Bank, training was provided on regulatory, accounting,

governance and risk management requirements. Training is also provided to meet specific individual needs of Committee members. lManagement of the Group - Executive Committee The Board delegates responsibility for formulating and implementing the Groups strategic plan and for management of the Group to the Executive Committee, which is chaired by the Chief Executive and comprises the eight Executive Directors. The Committee has authority for decision-making in all areas except those set out in the Schedule of Matters Reserved for Board Decision and meets formally on a regular basis. A number of senior executives also attend the Committee and their valuable operational experience helps broaden the debate. Their attendance facilitates the communication of the Committees decisions to the rest of the Group. The Company Secretary attends in his capacity as Secretary of the Committee. The Executive Committee is responsible for implementing Group strategy and policy and for monitoring the performance and compliance of the business, drawing on the work of relevant committees, and reporting on these matters in full to the Board. The Executive Committee has set up further committees including the Finance, Compliance and Corporate Responsibility Committees (which are described in more detail below) and operational groups which have responsibility for implementing the key elements of the Groups strategic plan and managing its UK and international operations, joint ventures, property acquisitions, finance, funding and people matters. These committees and groups have as members an appropriate mixture of Executive Directors and senior management from relevant functions. Procedures to deal with Directors conflicts of interest The Company has procedures in place to deal with the situation where a Director has a conflict of interest. As part of these procedures members of the Board are required to: consider each conflict situation separately on its particular facts; consider the conflict situation in conjunction with the rest of their duties under Companies Act 2006; keep records and Board minutes as to authorisation granted by Directors and the scope of any approvals given; and regularly review conflict authorisation. Training and development All new Directors receive a personalised induction programme, tailored to their experience, background and particular areas of focus, which is designed to develop

their knowledge and understanding of the Groups culture and operations. The programme has evolved taking into account feedback from new directors, and will usually include an overview of the business model and Board processes, meetings with the Executive team and senior managers, site visits at home and abroad and briefings on key issues (including social, ethical and environmental (SEE) issues). Directors also receive an induction to those Board Committees he or she will serve on. The need for Director training is regularly assessed by the Board and regular training sessions are arranged to provide an opportunity for upskilling of the Directors on a variety of areas relevant to the Groups business, including SEE issues. In the last year the Board received training focusing, inter alia, on the regulatory and governance issues associated with operating a financial services business, following the acquisition of Tesco Bank in the previous year. Board performance evaluation The performance of the Board is a fundamental component of the Groups success. The Board regularly reviews its own performance. During the year ended 27 February 2010, the Board assessed its own performance. This assessment was coordinated and directed by the Chairman with the support of the Company Secretary. The Chairman and the Company Secretary carried out in-depth interviews with each Director. The results of the evaluation were considered by the Board, and confirmed the strength of the strategic and entrepreneurial leadership of the Company, a sound governance framework and practices compliant with the Combined Code. The Chief Executive reviews the performance of each Executive Director. The Chairman reviews the performance of the Chief Executive and each Non-executive Director. During the year, the Chairman met several times with the Non-executive Directors, without the Executive Directors present, to discuss Board issues and how to build the best possible team. The Senior Independent Director met with the Non-executive Directors, in the absence of the Chairman, to assess the Chairmans performance. Internal control & risk management Accountabilities Accepting that risk is an inherent part of doing business, our risk management systems are designed both to encourage entrepreneurial spirit and also provide assurance that risk is fully understood and managed. The Board has overall responsibility for risk management and internal control within the context of achieving the Groups objectives. Executive management is responsible for implementing and maintaining the necessary control systems. The role of Internal Audit is to monitor the overall internal control systems and report on their

effectiveness to Executive management, as well as to the Audit Committee, in order to facilitate its review of the systems. Background The Group has a five-year rolling business plan to support the delivery of its strategy of long-term growth and returns for shareholders. Every business unit and support function derives its objectives from the five-year plan and these are cascaded to managers and staff by way of personal objectives. Key to delivering effective risk management is ensuring our people have a good understanding of the Groups strategy and our policies, procedures, values and expected performance. We have a structured internal communications programme that provides employees with a clear definition of the Groups purpose and goals, accountabilities and the scope of permitted activities for each business unit, as well as individual line managers and other employees. This ensures that all our people understand what is expected of them and that decision-making takes place at the appropriate level. We recognise that our people may face ethical dilemmas in the normal course of business so we provide clear guidance based on the Tesco Values. The Values set out the standards that we wish to uphold in how we treat people. These are supported by the Group Code of Business Conduct which was launched this year, replacing the Code of Ethics, and offers guidance on relationships between the Group and its employees, suppliers and contractors. Risk management The Group maintains a Key Risk Register. The Register contains the key risks faced by the Group including their impact and likelihood, as well as the controls and procedures implemented to mitigate these risks. The content of the Register is determined through regular discussions with senior management and reviewed by the Executive Committee and the full Board. A balanced approach allows the degree of controllability to be taken into account when we consider the effectiveness of mitigation, recognising that some necessary activities carry inherent risk which may be outside the Groups control. Where our risk management process identifies opportunities to improve the business these are built into our future plans. We recognise the value of the ABI Guidelines on Responsible Investment Disclosure and confirm that, as part of its regular risk assessment procedures, the Board takes account of the significance of SEE matters to the business of the Group. We recognise that a number of investors and other stakeholders take a keen interest in how companies manage SEE matters and so we report more detail on our SEE policies and approach to managing material risks arising from SEE matters and the KPIs we use at To provide further assurance, the Groups Corporate Responsibility KPIs are audited on a regular basis by Internal Audit.

Internal controls The Board is responsible for the Companys system of internal control and for reviewing the effectiveness of such a system. We have a Group-wide process for clearly establishing the risks and responsibilities assigned to each level of management and the controls which are required to be operated and monitored. The CEOs of subsidiary businesses are required to certify by way of annual governance returns that appropriate governance and compliance processes have been adopted. For certain joint ventures, the Board places reliance upon the internal control systems operating within our partners infrastructures and the obligations upon partners boards relating to the effectiveness of their own systems. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The Board has reviewed the effectiveness of internal controls and is satisfied that the controls in place remain appropriate. Monitoring The Board oversees the monitoring system and has set specific responsibilities for itself and the various committees as set out below. Both Internal Audit and our external auditors play key roles in the monitoring process, as do several other committees including the Finance Committee, Compliance Committee and Corporate Responsibility Committee. The Minutes of the Audit Committee and the various other committees (Finance, Compliance and Corporate Responsibility Committees) are distributed to the Board and each Committee submits a report for formal discussion at least once a year. These processes provide assurance that the Group is operating legally, ethically and in accordance with approved financial and operational policies. Audit Committee The Audit Committee reports to the Board each year on its review of the effectiveness of the internal control systems for the financial year and the period to the date of approval of the financial statements. Throughout the year the Committee receives regular reports from the external auditors covering topics such as quality of earnings and technical accounting developments. The Committee also receives updates from Internal Audit and has dialogue with senior managers on their control responsibilities. It should be understood that such systems are designed to provide reasonable, but not absolute, assurance against material misstatement or loss. Internal Audit The Internal Audit department is fully independent of business operations and has a Group-wide mandate. It undertakes a programme to address internal control and

risk management processes with particular reference to the Turnbull Guidance. It operates a risk-based methodology, ensuring that the Groups key risks receive appropriate regular examination. Its responsibilities include maintaining the Key Risk Register, reviewing and reporting on the effectiveness of risk management systems and internal control with the Executive Committee, the Audit Committee and ultimately to the Board. Internal Audit facilitates oversight of risk and control systems across the Group through risk committees in Asia and Europe and audit committees in a number of our international businesses and joint ventures. The Head of Internal Audit also attends all Audit Committee meetings. External audit PricewaterhouseCoopers LLP, who have been the Companys external auditor for a number of years, contributes a further independent perspective on certain aspects of our internal financial control systems arising from its work, and reports to both the Board and the Audit Committee. Our policy in relation to the reappointment of the external auditors is to consider their engagement and independence annually. The Committee has satisfied itself that PricewaterhouseCoopers LLP is independent and there are adequate controls in place to safeguard its objectivity. One such measure is the non-audit services policy that sets out criteria for employing external auditors and identifies areas where it is inappropriate for PricewaterhouseCoopers LLP to work. Non-audit services work carried out by PricewaterhouseCoopers LLP is predominantly the review of subsidiary undertakings statutory accounts, transaction work and corporate tax services, where their services are considered to be the most appropriate. PricewaterhouseCoopers LLP also follows its own ethical guidelines and continually reviews its audit team to ensure its independence is not compromised. Finance Committee Membership of the Finance Committee includes Non-executive Directors with relevant financial expertise, Executive Directors and members of senior management. The Committee is chaired by Sir Terry Leahy, CEO. The Committee usually meets twice a year and its role is to review and agree the Finance Plan on an annual basis, review reports of the Treasury and Tax functions and to review and approve Treasury limits and delegations. Compliance Committee Membership of the Compliance Committee includes three Executive Directors and members of senior management. The Committee is chaired by Lucy Neville-Rolfe, Corporate and Legal Affairs Director. The Committee normally meets six times a year and its remit is to ensure that the Group complies with all necessary laws and regulations and other compliance policies in all of its operations world-wide. The Committee has established a schedule for the regular review of operational activities and legal exposure. Each business in the Group has a Compliance

Committee designed to ensure compliance with both local and Group policies, and each Compliance Committee reports to the Group Compliance Committee at least once a year. Corporate Responsibility Committee The Corporate Responsibility Committee is chaired by the Corporate and Legal Affairs Director, Lucy Neville-Rolfe and membership is made up of senior executives from across the Group. It meets at least four times a year to support, develop and monitor policies on SEE issues and to review threats and opportunities for the Group. Progress in developing Community initiatives is monitored by the use of relevant KPIs for the businesses within the Group. The Board formally discusses the work of the Committee on a regular basis, including progress in implementing our Community Plan. Whistleblowing The Group operates a whistleblowing policy and has a confidential Protector Line service accessible to concerned employees where they can report, anonymously if necessary, on issues of malpractice within the business. Such issues include illegal and unethical behaviour such as fraud, dishonesty and any practices that endanger our staff, customers or the environment. Complaints made are treated as confidential and are investigated. Where appropriate, matters will be escalated to the Director of Group Security for further action. Management In our fast moving business, trading is tracked on a daily and weekly basis, financial performance is reviewed weekly and monthly and the Steering Wheel is reviewed quarterly. Steering Wheels are operated in business units across the Group and reports are prepared of performance against target KPIs covering the five segments of the Steering Wheel (Customer, Operations, Community, People and Finance) on a quarterly basis, enabling management to measure performance. All major initiatives require business cases normally covering a minimum period of five years. Post-investment appraisals, carried out by management, determine the reasons for any significant variance from expected performance. Relations with stakeholders We are committed to having a constructive dialogue with stakeholders to ensure we understand what is important to them and allow ourselves the opportunity to present our position. Engagement helps us identify new risks and opportunities to ensure that our long-term strategy is sustainable. In some instances we find that working with stakeholders in partnership can help deliver shared goals. We might not be able to satisfy all stakeholder concerns all the time but through engagement we can do our best to balance competing demands. We know that customers need

to be able to trust our business and they will only trust us if they believe that we are engaging on an appropriate basis with our stakeholders. Our programme of engaging with stakeholders including customers, staff, suppliers, investors, government, regulators, non-governmental organisations and others, is set out in more detail at Shareholder engagement We are committed to maintaining a good dialogue with shareholders through proactively organising meetings and presentations as well as responding to a wide range of enquiries. We seek shareholder views on a range of issues from strategy to corporate governance and SEE issues. We recognise the importance of communicating appropriately any significant Company developments. An Investor Relations report is produced for the Board periodically. This report summarises feedback from shareholders particularly in terms of our management and strategy, and ensures the Board has a balanced perspective on the views of our major shareholders. It is normal that institutional shareholders may be in more regular contact with the Group than other shareholders, but care is exercised to ensure that any price-sensitive information is released to all shareholders, institutional and private, at the same time in accordance with applicable legal and regulatory requirements. All major presentations to institutional shareholders are made available to private shareholders through this website. Pension funds Our award-winning defined-benefit pension scheme is an important part of our competitive benefits package, which helps Tesco recruit and retain the best people. The trustees manage and fund our scheme on an actuarial valuation basis and, at our triennial valuation dated 31 March 2008, the scheme had a small deficit of 275m. Following the valuation, member and company contributions have increased and, to further improve the security of the scheme for members, the trustees will be granted contingent property assets worth 500m. lPension risks The Groups pension arrangements are an important part of our employees overall benefits package. We see them as a strong contributor to our ability to attract and retain good people. Since the implementation of IAS 19 there is a risk that the accounting valuation deficit (which is recorded as a liability on the Group Balance Sheet) could increase if returns on corporate bonds are higher than the investment return on the pension schemes assets. The Group has considered its pension risks and has taken action by reducing risk in its investment strategy.

Compliance The Remuneration Committee has been constituted and operated throughout the year in accordance with the principles outlined in the Listing Rules of the Financial Services Authority derived from Schedule A and B of the Combined Code. In framing the remuneration policy full consideration is given to best practice. The Remuneration Report complies with the disclosures required by the Director Remuneration Report Regulations 2002.

Ethical Behaviour Policy And Practice In Organisations 1 ETHICS 1.1Defining ethical behavior Ethics is a philosophical term derived from the Greek word "ethos" meaning character or custom (Sims, 1992). Ethical behaviour is behaviour that is morally accepted as good and right, as opposed to bad and wrong (Wood, Zeffane, Fromholtz & Fitzgerald, 2006). An ethical dilemma requires a person to make a choice between competing sets of principles based on how morally good and right as opposed to how bad and wrong they are (Wood et al., 2006). While striving to always do right, with this paradigm sound ethical conduct will likely become second nature in todays world (Zazaian, 2006). 1.1Ethical behaviour in the modern organisations of today Philosopher and theologian Paul Tillich once said: Ethics is not a subject, its a life put to the test in a thousand daily moments (Lagan, 2006, pg.72). This wisdom is relevant to the modern organisations of today that are challenged in every way to uphold high ethical and moral standards which are demanded by the public for the betterment of society (Kranacher, 2006). Organisations have established codes of conduct to guide their employees regarding their ethical responsibilities while trying to minimise unethical behaviour and solve ethical dilemmas appropriately (Kranacher, 2006). Unethical behaviours such as lying to important clients and giving insufficient or inaccurate information to shareholders can result in misinformed strategic decisions and problems for organisations (Collins, 2006). One only has to look and ponder upon the fate of the large corporations HIH Insurance and One Tel, whom both suffered collapses due to their unethical decisions (Wood et al., 2006). 2 ETHICAL BEHAVIOUR POLICIES AND PRACTICES 2.1 Why ethical behaviour policies and practices are needed in an organization Ethical managerial behaviour in organisations conforms to the law and the broader moral code that is common to society as a whole, and yet ethical behaviour policies are especially.

Ethics in business, or business ethics as it is often called, is the application of the discipline, principles, and theories of ethics to the organizational context. Business ethics have been defined as "principles and standards that guide behavior in the world of business." Business ethics is also a descriptive term for the field of academic study in which many scholars conduct research and in which undergraduate and graduate students are exposed to ethics theory and practice, usually through the case method of analysis. Ethical behavior in business is critical. When business firms are charged with infractions, and when employees of those firms come under legal investigation, there is a concern raised about moral behavior in business. Hence, the level of mutual trust, which is the foundation of our free-market economy, is threatened. Although ethics in business has been an issue for academics, practitioners, and governmental regulators for decades, some believe that unethical, immoral, and/or illegal behavior is widespread in the business world. Numerous scandals in the late 1990s and early 2000s seemed to add credence to the criticism of business ethics. Corporate executives of WorldCom, a giant in the telecommunications field, admitted fraud and misrepresentation in financial statements. WorldCom's former CEO went on trial for alleged crimes related to this accounting ethics scandal. The discussion that follows is organized into three parts: (1) the major theories or "moral philosophies" that are applied to business ethics; (2) a well-established model of ethical decision-making in business; and (3) the factors that affect individual ethical decision-making in the business context. APPROACHES TO ETHICAL DECISION-MAKING Philosophers have studied and written about ethics for thousands of years. The moral philosophies or ethical "theories" that have been developed form the foundation for ethics in business. Table 1 shows some of the major ethical philosophies that are applied to business ethics. Each of the ethical philosophies is briefly considered in this section. TELEOLOGY. Teleological theories of ethics focus on the consequences caused by an action and are often referred to as "consequentalist" theories. By far the most common teleological theories are egoism and utilitarianism. EGOISM. Egoism defines right and wrong in terms of the consequences to one's self. Egoism is defined by self-interest. An egoist would weigh an ethical dilemma or issue in terms of how different courses of action would affect his or her physical, mental, or emotional well being. Thus, an egoist, when faced with a business decision, would tend to choose the course of action that he or she believes would best serve self-interest.

This point of view is notably espoused by the famous economist Milton Friedman, who suggested that the only moral obligation of business is to make a profit and obey the law. However, it should be noted that Smith, Friedman, and most others who advocate unregulated commerce, acknowledge that some restraints on individuals' selfish impulses are required. Teleological Actions are judged as ethical or unethical based on their results. Egoism Actions are judged as ethical or unethical based on the consequences to one's self. Actions that maximize self-interest are preferred. Utilitarianism Actions are judged as ethical or unethical based on the consequences to "others." Actions that maximize the "good" (create the greatest good for the greatest number) are preferred. Deontological Actions are judged as ethical or unethical based on the inherent rights of individual and the intentions of the actor. Individuals are to be treated as means and not ends. It is the action itself that must be judged and not its consequences. Justice Actions are judged as ethical or unethical based on the fairness shown to those affected. Fairness may be determined by distributive, procedural, and/or interactional means. Relativism Actions are judged as ethical or unethical based on subjective factors that may vary from individual to individual, group to group, and culture to culture. UTILITARIANISM. Utilitarianism is like egoism in that it advocates judging actions by their consequences, but unlike egoism utilitarianism focuses on determining the course of action that will produce the greatest good for the greatest number of people. Thus, it is the ends that determine the morality of an action and not the action itself (or the intent of the actor). Utilitarianism is probably the dominant moral philosophy in business ethics. Utilitarianism is attractive to many business people, since the philosophy acknowledges that many actions result in good consequences for some, but bad consequences for others. This is certainly true of many decisions in business. DEONTOLOGY. Deontological theories of ethics focus on (1) the rights of all individuals and (2) the intentions of the person(s) performing an action. Deontological theories differ substantially from utilitarian views on ethics and would not allow, for example, the harming of some individuals in order to help others. To the deontologist, each person must be treated with the same level of respect and no one should be treated as a means to an end. JUSTICE. Justice-based theories of ethics concern the perceived fairness of actions. A just (ethical) action is one that treats all fairly and consistently in accord with ethical or legal standards. Justice theories of ethics are closely associated with the philosopher John Rawls.

To determine the fairness of an action, one often appeals to distributive, procedural, and/or interactional rules. Distributive fairness is based on the outcomes received by individuals and their perceptions of these outcomes. Procedural fairness is based on the processes (policies, procedures, rules) employed to reach decisions. Individuals evaluate the fairness of these processes in addition to (or instead of) the outcomes received. RELATIVISM. Teleological, utilitarian, and justice theories of ethics are all "universal" theories, in that they purport to advance principles of morality that are permanent and relatively enduring. Relativism states that there are no universal principles of ethics and that right and wrong must be determined by each individual or group. INDIVIDUAL ETHICAL DECISION-MAKING There are many approaches to the individual ethical decision-making process in business. However, one of the more common was developed by James Rest and has been called the four-step or four-stage model of individual ethical decisionmaking. Numerous scholars have applied this theory in the business context. The four steps include: ethical issue recognition, ethical (moral) judgment, ethical (moral) intent, and ethical (moral) behavior. ETHICAL ISSUE RECOGNITION. Before a person can apply any standards of ethical philosophy to an issue, he or she must first comprehend that the issue has an ethical component. This means that the ethical decision-making process must be "triggered" or set in motion by the awareness of an ethical dilemma. Some individuals are likely to be more sensitive to potential ethical problems than others. Numerous factors can affect whether someone recognizes an ethical issue; some of these factors are discussed in the next section. ETHICAL (MORAL) JUDGMENT. If an individual is confronted with a situation or issue that he or she recognizes as having an ethical component or posing an ethical dilemma, the individual will probably form some overall impression or judgment about the rightness or wrongness of the issue. The individual may reach this judgment in a variety of ways, as noted in the earlier section on ethical philosophy. ETHICAL (MORAL) INTENT. Once an individual reaches an ethical judgment about a situation or issue, the next stage in the decision-making process is to form a behavioral intent. That is, the individual decides what he or she will do (or not do) in regard to the perceived ethical dilemma. ETHICAL (MORAL) BEHAVIOR. The final stage in the four-step model of ethical decision-making is to engage in some behavior in regard to the ethical dilemma. Research shows that behavioral intentions are the strongest predictor of actual behavior in general, and ethical

behavior in particular. However, individuals do now always behave consistent with either their judgments or intentions in regard to ethical issues. FACTORS AFFECTING ETHICAL DECISION-MAKING In general, there are three types of influences on ethical decision-making in business: (1) individual difference factors, (2) situational (organizational) factors, and (3) issue-related factors. INDIVIDUAL DIFFERENCE FACTORS. Individual difference factors are personal factors about an individual that may influence their sensitivity to ethical issues, their judgment about such issues, and their related behavior. Research has identified many personal characteristics that impact ethical decision-making. The individual difference factor that has received the most research support is "cognitive moral development." This framework, developed by Lawrence Kohlberg in the 1960s and extended by Kohlberg and other researchers in the subsequent years, helps to explain why different people make different evaluations when confronted with the same ethical issue. It posits that an individual's level of "moral development" affects their ethical issue recognition, judgment, behavioral intentions, and behavior. Theoretically, there are three major levels of development. The lowest level of moral development is termed the "pre-conventional" level. At the two stages of this level, the individual typically will evaluate ethical issues in light of a desire to avoid punishment and/or seek personal reward. The pre-conventional level of moral development is usually associated with small children or adolescents. The middle level of development is called the "conventional" level. At the stages of the conventional level, the individual assesses ethical issues on the basis of the fairness to others and a desire to conform to societal rules and expectations. Thus, the individual looks outside him or herself to determine right and wrong. According to Kohlberg, most adults operate at the conventional level of moral reasoning. The highest stage of moral development is the "principled" level. The principled level, the individual is likely to apply principles (which may be utilitarian, deontological, or justice) to ethical issues in an attempt to resolve them. According to Kohlberg, a principled person looks inside him or herself and is less likely to be influenced by situational (organizational) expectations. The cognitive moral development framework is relevant to business ethics because it offers a powerful explanation of individual differences in ethical reasoning. Individuals at different levels of moral development are likely to think differently about ethical issues and resolve them differently. SITUATIONAL (ORGANIZATIONAL) FACTORS. Individuals' ethical issue recognition, judgment, and behavior are affected by contextual factors. In the business ethics context, the organizational factors that

affect ethical decision-making include the work group, the supervisor, organizational policies and procedures, organizational codes of conduct, and the overall organizational culture. Each of these factors, individually and collectively, can cause individuals to reach different conclusions about ethical issues than they would have on their own. Almost all large companies and many small companies have ethics codes. However, in and of themselves ethics codes are unlikely to influence individuals to be more ethical in the conduct of business. To be effective, ethics codes must be part of a value system that permeates the culture of the organization. Executives must display genuine commitment to the ideals expressed in the written codeif their behavior is inconsistent with the formal code, the code's effectiveness will be reduced considerably. ISSUE-RELATED FACTORS. Conceptual research by Thomas Jones in the 1990s and subsequent empirical studies suggest that ethical issues in business must have a certain level of "moral intensity" before they will trigger ethical decision-making processes. Thus, individual and situational factors are unlikely to influence decision-making for issues considered by the individual to be minor. Certain characteristics of issues determine their moral intensity. In general, the research suggests that issues with more serious consequences are more likely to reach the threshold level of intensity. Likewise, issues that are deemed by a societal consensus to be ethical or unethical are more likely to trigger ethical decisionmaking processes.


Relations with stakeholders We are committed to having a constructive dialogue with stakeholders to ensure we understand what is important to them and allow ourselves the opportunity to present our position. Engagement helps us identify new risks and opportunities to ensure that our long-term strategy is sustainable. In some instances we find that working with stakeholders in partnership can help deliver shared goals. We might not be able to satisfy all stakeholder concerns all the time but through engagement we can do our best to balance competing demands. We know that customers need to be able to trust our business and they will only trust us if they believe that we are engaging on an appropriate basis with our stakeholders. Our programme of engaging with stakeholders including customers, staff, suppliers, investors, government, regulators, non-governmental organisations and others, is set out in more detail at Shareholder engagement We are committed to maintaining a good dialogue with shareholders through proactively organising meetings and presentations as well as responding to a wide range of enquiries. We seek shareholder views on a range of issues from strategy to corporate governance and SEE issues. We recognise the importance of communicating appropriately any significant Company developments. During the year ended 27 February 2010, the Chairman, Chief Executive and Finance Director met with most of our leading shareholders to discuss issues relating to the Board, strategy and governance matters, as well as new developments within the business. The Chairmans meetings with major shareholders took place independently from the Executive team. In addition to this, our Investor Relations team engage with shareholders on a regular basis, and on a wide range of issues. The Corporate Secretariat team also organise regular meetings, on both a one-to-one and group basis, with Socially Responsible Investors (SRIs) to discuss the work the Group is doing on corporate responsibility and governance-related issues. These meetings are attended as appropriate by Directors and other members of senior management. An Investor Relations report is produced for the Board periodically. This report summarises feedback from shareholders particularly in terms of our management and strategy, and ensures the Board has a balanced perspective on the views of our major shareholders. It is normal that institutional shareholders may be in more regular contact with the Group than other shareholders, but care is exercised to ensure that any price-sensitive information is released to all shareholders, institutional and private, at the same time in accordance with applicable legal and

regulatory requirements. All major presentations to institutional shareholders are made available to private shareholders through this website. Every shareholder may choose to receive a full Annual Report and Financial Statements or the Annual Review and Summary Financial Statements, either in paper or electronic form. These reports, together with publicly-made trading statements, are available on TESCO APPROACH IN TERMS OF ITS STAKEHOLDERS. Customers Interests and expectations of TescoInteraction with Tesco in 2009Customers want us to provide a good shopping trip and be a good neighbour. They want us to be fair and honest and provide choice and quality, including sustainable, healthy and affordable products. They are at the forefront of our policy and we look to empower them and inform them, for example through carbon and nutrition labelling.We talk to our customers every day of the year so we can identify and respond to their changing needs. Customer Question Time (CQT) meetings help us do this. These meetings are held in stores in all markets and enable staff and managers to hear customer views on how we are serving them and our role in the community. CQTs inform our Customer and Community Plans. In 2009, we also held CQTs on specific issues, including community and the environment. Investors Interests and expectations of TescoInteraction with Tesco in 2009Our investors seek competitive returns from their shareholdings, as well as assurance that their investments lie with a sustainable, well-governed business. They expect us to have a robust strategy and report on our processes and progress in a meaningful and transparent way.We actively engage investors in a structured annual programme of presentations and meetings to help us understand their views on our strategy (of which corporate responsibility is an integral part), and the way our business is governed. In addition, we arrange updates on both a one-to-one and group basis in which we issue briefings to and respond to queries from our Socially Responsible Investors (SRIs) throughout the year. We also communicate with shareholders through our Annual General Meeting, Investor Relations website, and our participation in initiatives such as the Carbon Disclosure Project and the Business in the Community CR Index. After we published our report for 2009 we carried out feedback sessions with a range of different stakeholders, including SRIs. Many of their comments have been incorporated into this years Report. Employees

Interests and expectations of TescoInteraction with Tesco in 2009Our staff want secure, interesting jobs with fair terms and conditions, and the opportunity to get on. They want a helpful manager, to be treated with respect and to have a safe and healthy workplace. We also see them as ambassadors for our community and environmental causes. Engaging them is vital to the success of our initiatives.Our staff need to feel good about their employer to do a good job for our customers. We listen to and communicate with our staff constantly. We get feedback at Staff Question Time sessions and through our annual Viewpoint survey. Our Pulse survey also tracks staff views on how they feel about working for Tesco.

Communities Interests and expectations of TescoInteraction with Tesco in 2009Our neighbours want job opportunities especially in the current economic climate. They also want healthy, regenerated communities and support for local causes and initiatives.We communicate and engage with local people in our stores and at public consultations and exhibitions, through leaflets and focus groups, and through our work with local charities and community groups. In 2009 we have continued this engagement with our first Community Fairs and the continued expansion of our network of Community Champions. Suppliers Interests and expectations of TescoInteraction with Tesco in 2009Our suppliers want to be treated fairly and honestly. They seek long-term relationships and opportunities for growth.We hold regular meetings with our suppliers, processors and manufacturers. We also bring them together to share experiences at our Producer Clubs, and seek their feedback through our annual Viewpoint survey. We provide training and capability building for suppliers where appropriate and share information with them, for example through our Tesco Link website. In 2009 we have seen an increasing involvement in our charity activities. Procter & Gambles involvement with Charity of the Year is an example of this. We are also seeing a much more collaborative approach to the big issues such as climate change.

Governments and regulators Interests and expectations of TescoInteraction with Tesco in 2009Governments and regulators expect us to comply with the law, provide secure, family-friendly job opportunities and goodquality training. They seek our support on various initiatives, such as those relating to health policy.We engage with governments, parliamentarians, regulators and officials on a range of issues affecting our business and communities. These include the environment, skills and regeneration planning, healthy eating and alcohol. We work hard to ensure our responses to government consultations are aligned with our CR policies and practices. Nongovernmental Organizations (NGOs) Interests and expectations of TescoInteraction with Tesco in 2009NGOs want us to show leadership on CR issues from climate change to ethical trading. They expect us to provide clear policies and principles and for us to communicate views to them transparently and openly.Engaging with NGOs helps us better understand current and emerging issues related to our business. This work informs our CR strategy and helps us better manage our impacts. We met many NGOs in 2009 to discuss issues including climate change, animal welfare, ethical trading and sustainability. We also contribute to research and surveys, and respond to requests for information from NGOs as fully and promptly as we can. We ask NGOs to share their findings with us to help us improve our performance. We also worked with WWF, were involved in Earth Hour and worked with HRH the Prince of Wales on the Princes Rainforest Project.