Carillion: compliance without complying

On January 15, Carillion plc, a U.K. construction and facilities management firm, entered into compulsory liquidation, following months of earings warnings and predictions of the multinational firm's imminent demise. The Carillion collapse comes after a string of other scandals among private, publicly listed and public sector supplier companies, including BHS, RBS, Northern Rock, BT, Tesco, GKN, Serco, G4S. It again shows that compliance with the U.K. Corporate Governance Code, either the one in existence or the one proposed, can still do nothing to prevent bad actors from making bad decisions. The story has everything to enrage the public: mismanagement, ever larger dividends for shareholders and boardroom pay excess which together led to job losses, pension cuts for former and existing employees, and bankruptcy or major losses for smaller suppliers, public services and the taxpayer. 

The collapse was apparently caused by badly priced contracts (which later became too expensive with cost overruns), along with poorly managed risks and too much debt. Why for example, would a company with an already enormous pension deficit spend too much money servicing debt and too much money paying out 16 years of unbroken dividend growth? But all this is just bad management, it doesn’t indicate a lack of compliance necessarily.

The widely held answer to Carillion’s problems, however, is Carillion’s board, which, while checking all the boxes, was either not paying attention or was incompetent, or both. Ironically, Sir Philip Green, Carillion’s chairman, is adviser to the Prime Minister on corporate responsibility. But Carillion’s board has a very high compliance record: “During the year ended 31 December 2016,” says its 2017 annual report, “as detailed in our Corporate Governance report on page 57 and in the Remuneration report on page 65, the Company complied fully with the requirements of the U.K. Corporate Governance Code (September 2014).” Such a statement has been repeated for years in its annual reports.

The board looks good on paper: not too long-tenured, somewhat diverse, and not just the three regular committees but a sustainability committee and a business integrity committee as well. The latter committee has, among its duties, the following: “Monitors legislation and/or regulations that might affect the Group or its stakeholders and other matters which could impact corporate reputation and the management of any such matters.” It all sounds great.

However, the Board recognises that on their own policies and procedures are not enough and, in order to achieve consistently high standards of governance and service excellence, we have to ensure that our values are at the heart of everything we do.
Carillion's corporate governance report



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Again, in accordance with the code, Carillion said in its 2017 annual report that the board was externally assessed and was judged highly effective. “Some of the key strengths highlighted by the 2016 evaluation included board composition and expertise, relationship between the Board and executive directors, strategic oversight provided by the board, the board’s approach to risk management and internal control and its processes for managing succession planning and human resource management. The evaluation also confirmed that the Board’s performance and effectiveness had further improved during 2016.”

In addition, its policies for ethics and integrity were externally benchmarked by the Institute of Business Ethics, which resulted in the company being awarded the Investing in Integrity Charter Mark, covering its businesses globally. The award remains valid until 2019. Carillion was also highly commended in the 2016 Building Public Trust Award for the FTSE 250 Sustainability Reporting category. These organisations must be feeling much the same way as CFO Magazine did after it awarded Enron’s Andrew Fastow the CFO of the year award.

All the new audit requirements from the 2016 code were implemented and complied with in full, says the report. The Financial Reporting Council (FRC) did raise issues with the 2015 annual accounts but, after dialogue with management, nothing was changed and everything seems to have been resolved. The board also discussed the FRC’s annual Audit Quality Inspection report, published in May 2016, on KPMG LLP and KPMG Audit plc, its auditors, but it seemed not to have raised any red flags for the audit committee.

Code provisions on remuneration are also complied with: 50 percent of the annual bonus is deferred for three years, and performance shares held for further two years after the three-year performance period, for example.

And Carillion’s most recent sustainability report is mapped against the UN’s new, best practice Sustainable Development Goals and was compiled using Global Reporting Initiative standards. The company was, until recently, a constituent of the FTSE4Good index of well-managed and sustainable companies.

The board even makes the point that I am trying to make: “However, the Board recognises that on their own policies and procedures are not enough and, in order to achieve consistently high standards of governance and service excellence, we have to ensure that our values are at the heart of everything we do. Our values are helping to shape the culture, character and beliefs of our business.”

Among its values are: “We care. We respect each other.” This also sounds good until you put it together with the pension deficit that will lead to pension cuts for its current and former employees and job losses resulting from the company overreaching itself and put that together with the rich remuneration packages for executives and the steady drip of rising dividends for shareholders looking the other way, for example, while the company put to a vote a decision to remove “corporate failure” as a clawback/malus event. In other words, as they did in 2016, shareholders approved a change to the remuneration policy so that if there were a corporate failure, executives could keep bonuses awarded for “outstanding performance.”

Every box ticked, and yet still we have bankruptcy.

Under current company law, there is no positive obligation on directors to take steps to prevent serious impacts on employees, suppliers, customers, the community or the environment. Rather than tinkering, as proposed in its response to corporate governance green paper, the government should reform the Companies Act to create an obligation of this kind.
Marilyn Croser, the Director of the Corporate Responsibility Coalition

Carillion's directors and executives might not get away with that last piece of derring-do, however. It is possible to take action to claw back bonuses that have already been paid, noted Prime Minister Theresa May. “The Official Receiver does have the power,” she said “to ensure that, in reviewing payments to executives, where those payments are unlawful or unjustified he can take action to recover those payments.” She added that the investigation would “look into the conduct not just of current directors but also of previous directors and their actions.” Yes, lots of executives had already resigned, taking with them rich compensation for loss of office packages that have now been suspended by the Official Receiver.

And, of course, the calls for reform have come flooding in, even as the timing of this with the new iteration of the corporate governance code out for comment for a few weeks more is, well, timely.

Marilyn Croser, the director of the Corporate Responsibility Coalition, blaming a systemic problem with U.K. corporate governance said: “Under current company law, there is no positive obligation on directors to take steps to prevent serious impacts on employees, suppliers, customers, the community or the environment. Rather than tinkering, as proposed in its response to corporate governance green paper, the government should reform the Companies Act to create an obligation of this kind.” Croser’s first recommendation was to revive and make mandatory putting worker representatives on boards. Her second was to hold directors to account under company law. “Only individual accountability will address this problem,” she said. “Presiding over serious corporate failings should be grounds for directors’ disqualification.”

There appear also to be calls to give The Pensions Regulator specific powers to fine directors in cases of clear wrongdoing. Both this option, and another allowing regulators to claw back bonuses from executives who have presided over a pension scheme collapse, are being discussed in Whitehall. In addition, the Work and Pensions Committee has recommended a system of “mega fines” on executives and directors that would act as a “nuclear deterrent” against pension scheme abuse.

The scandal, coming after those at G4S, Serco and LearnDirect, which also represent public private partnerships, is also calling into question the government’s practice of private sector contracting altogether. And recent research by the Labour Party suggests a “chumocracy,” with many of the crown representatives appointed to oversee private sector firms which are public sector suppliers facing potential conflict of interest charges. The research lists a series of them who hold external directorships at companies within the same sector—which may make them expert in it, but also leads to accusations of an old boys’ club protecting its members.

Among a number of reforms suggested by the Big Innovation Centre’s Purposeful Company Taskforce is to make “declaring a purpose beyond profit-making mandatory, and incorporating it in the constitution of the company—its articles of association.” The taskforce also calls for a tougher incorporation of stakeholder interests than is proposed either by the government’s green paper or the new corporate governance code. Will Hutton, the co-chair of the taskforce, reports that an international money manager says that these kinds of scandals are seen far more regularly in the U.K. than other western economies. Given the not even complete but still lengthy list at the beginning of this article, it’s hard to disagree. Real regulations and real fines, actual consequences in other words, rather than the current comply-or-explain regime, would seem to be the only way forward.