To stop more Carillions we must break this supine conspiracy

How many more corporate disasters and banking failures do we have to endure before there is meaningful change? 

Over 1,000 of the company's staff have been made redundant, while 11,800 are waiting to hear about their prospects
Over 1,000 of the company's staff have been made redundant, while 11,800 are waiting to hear about their prospects

How many more does it need? How many more Carillions must we endure before lawmakers and regulators sit up and take notice? How many more corporate disasters and banking failures do we have to endure before there is meaningful change?

The reason I ask, is that with Carillion we’ve been here before. Too often.

It’s as if we learn nothing. Ten years ago, banks hit the wall and the markets almost went into meltdown. Perhaps that was the most significant word – almost. The financial world was rocky for a period, but then, thanks in Britain to an almighty leg-up from the taxpayer, it pulled through.

And on we went. It was not long before backs were being slapped again in bars in the City of London. Business as usual, perhaps with a few of those compliance directives and reminders to take extra care, attached. Hey ho, what the hell. High fives all round. In for a penny, in for many millions of pounds. Of someone else’s money.

As ever, when corporate crashes occur, opprobrium is heaped upon the senior executives. But there are two safety devices in the system that are meant to help prevent such calamities. And – as with earlier collapses – on this occasion, they seemingly failed lamentably to function.

One is the non-executive directors. There were three on the Carillion board of six. Did anyone know?

The Companies Act of 2006 bears some repetition. It states the directors must exercise reasonable care, skill and diligence in discharge of their duties and promote the long-term success of the company. In particular, section 172 states:

“(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and in doing so have regard (amongst other matters) to —

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers, customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.

(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.”

Show me the fostering of relationships, in £2bn owed to 30,000 suppliers. The company’s pension scheme had a deficit of over £800m. Not much acting fairly there either.

In four years, Carillion paid out £217m more in dividends than it obtained in cash from its operations. How did it make up the difference? By borrowing. Over seven years, Carillion’s debts increased from £242m to £1.3bn. Hard to see how any of that qualifies as being in the long-term interests of the company.

The feeling of a business run by the few for the few prevails. As Prem Sikka, professor of accounting at University of Sheffield and emeritus professor of accounting at University of Essex, points out, shareholder funds were £730m, so they provided just 16.5 per cent of the capital while enjoying 100 per cent of the controlling rights. The rest, 83.5 per cent, was provided by unsecured creditors and employees who had no board representation. Where was the “duty of care” owed to them?

It’s no use looking to the courts, says Sikka: “The wording of the law suggests that only the company can bring legal proceedings against directors to enforce their duties. So it will be a matter for a company’s board to bring proceedings against a current or a former director.

“This is unlikely because the proceedings might show that their own discharge of statutory duties may have been deficient. It seems that employee, supplier and customer interests are only to be considered to the extent that it would promote company success for the benefit of shareholders as members. It is hard to see how the law protects the interests of employees and suppliers.”

As with the banks that plummeted and numerous other spectacular blow-ups, the Carillion non-execs were found wanting.

Which brings me to the second buffer. In theory, the non-executive directors are supposed to pay heed to the interests of the shareholders. In practice that means taking their cue from the professional, institutional fund managers.

At the 2017 Carillion annual general meeting, 13 per cent of shareholders voted against the executive remuneration report and another 33 per cent abstained. Seemingly, disapproval from 46 per cent or nearly one in two, of shareholders did not impress the non-executive directors enough to require closer scrutiny of the company’s affairs.

We’ve seen this behaviour all too glaringly in the past. It was the institutional shareholders that pushed the banks to chase ever greater profits and league table rankings and to take ever larger risks – risks that, as with Carillion, were not spotted (that’s if they even understood them) or acted upon, by the non-execs.

This conspiracy of passivity has to stop. Supine fund managers beget supine non-execs. And another company perishes, along with thousands of jobs, prospective pensions and supplier contracts. It’s the moment for action or else Carillion will take its place on a long list of shame – ahead of numerous places still to be filled.

Chris Blackhurst is a former editor of The Independent and executive director of C|T|F Partners, the campaigns and strategic communications advisory firm.

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