10 stakeholders who can learn from the Carillion collapse
Blog by Andrew Morrison, Managing Director, AM Bid Services
The collapse of Carillion needs to provoke a fundamental rethink by all the involved stakeholders. Many of these were operating in silos without it appearing that anyone had grasped the full picture of the house of cards that was about to collapse, except perhaps the senior executives who left with golden goodbyes. As a starter for 10, I have identified 10 stakeholders who have lessons to learn from this corporate failure:
- Board: Good governance is absolutely fundamental to running a successful business. The board needs to have the knowledge, skills and experience to ensure that it provides sufficient challenge to the senior executives. It must ensure that the business model is viable and the company is acting as a good corporate citizen, i.e. paying its taxes, pension liabilities and its suppliers in a timely manner, before it signs off on dividends for shareholders and bonuses for executives.
- Banks: Whilst it was the banks that ultimately called time on Carillion, could this have been done at an earlier stage and thus protected some of the suppliers from continuing to provide goods and services to Carillion that they will now, in all likelihood, not be paid for?
- Senior executives: something was clearly amiss with the controls of this highly diversified business. Risk management, scenario planning, and financial stress testing all appear to have been found wanting. When decisions were made to put suppliers on 120-day payment terms (the reality for many was 180 days-plus) and to defer making payments to the pension fund liabilities, how could they have thought it was still acceptable to recommend shareholder dividends and large executive bonuses?
- Pension trustees: the trustees of the pension fund state that they did not appreciate the full extent of the company’s financial position when they were agreeing to defer pension fund payments. What is wrong with a system where this can happen? Ignorance is not really an acceptable defence.
- The Pensions Regulator: twenty-six years after Robert Maxwell’s plundering of company pension funds came to light, how much different is underpaying your company pension fund liabilities whilst at the same time paying out shareholder dividends and large executive bonuses? If the board and the Pension Trustees are not exercising the proper oversight, at what point does the Pensions Regulator step in to ensure that pensioners and people paying into pensions do not suffer? It would appear that Carillion had been underfunding its pension scheme for 10 years.
- Auditors: Carillion had been given a clean bill of health by KPMG as recently as March 2017. However, many areas of concern with accounting and financial reporting have now come to light. How could KPMG have signed off Carillion as a going concern? Were they unaware of all of the issues, or did they choose to underplay their importance? The Financial Reporting Council has announced a review into KPMG’s audits of Carillion accounts going back to 2014.
- Public Sector Procurement: Whilst there has been a preference for a transfer of risk on large contracts to private sector conglomerates operating on narrow profit margins, this is increasingly becoming an operating model that is unsustainable in the medium to long-term. Various House of Commons Committees are now investigating the Carillion collapse to identify the lessons for the public sector and outsourcing. If this leads to contracts being tendered out in smaller chunks, and made more accessible to SMEs with perhaps greater public sector oversight, then many would say that this will be a change for the better. The public sector will be asked serious questions on why it continued to award contracts to Carillion in spite of three profit warnings.
- Public sector contract management: In addition to financial stress testing needing to be carried out prior to awarding contracts, this should also continue during the lifetime of contracts. For example, Carillion’s policy of delaying supplier payments for inordinate time periods, e.g. 120 days-plus should have merited attention from its public sector paymasters.
- Government and political scrutiny: A number of Commons Committees have now sprung into action to investigate what went wrong. However, Carillion’s problems had been the talk of the City for over four years. How can government get on the front foot and importantly help prevent the next Carillion-style collapse? What is the best operating model for public sector services, especially the ones that have lent themselves to outsourcing? The baby should not be thrown out with the bathwater – there are some excellent examples of public sector contracts that are being successfully delivered with the private sector in a spirit of partnership working.
- Suppliers and sub-contractors: Along with the employees, these are the main victims of the collapse. As business owners, they have to make decisions about what work they accept, on what payment terms and what percentage of their work they will do for a main contractor. Having all your eggs in the same basket is rarely a good idea for a business – especially a business like Carillion that was heading for the rocks.
Whilst it will be some time before all the various investigations report into the Carillion failure, it may prove to be game changing for the days of the big main contractors operating public sector contracts at wafer-thin profit margins. Stakeholder groups, including those mentioned above and there are others, need to be joining the dots to get closer to seeing the full picture – especially when the writing is on the wall, hidden in plain sight – there to be seen, if you know where to look.