If you are involved in the biggest demolition job in over a decade, you can expect that it will take a while for the dust to settle. Since the liquidation of Carillion announced on 15 January, the cloud of dust still hangs over this corporate collapse, with considerable debate over the manner of its falling, the timing and the causes.
Like most corporate collapses, Carillion ultimately ran out of cash. With allegedly some £29 million of cash to meet some £1.5billion of liabilities, some might ask why the warning signs were not seen sooner. This situation had built up over a long period, and it would now seem that Carillion’s history of bidding for contracts on thin margins, possibly endemic in the construction and services sector, combined with problems in receiving payment from troublesome contracts, has led to its downfall. But what lessons can be learned from the manner of its falling, and the way in which this corporate failure is now being assessed? In the immediate aftermath of the liquidation announcement, there was a predictable response in the media covering the undeniable hardship that this caused to employees and subcontractors. Failure in the construction industry is not new, and Carillion’s payment terms had been lengthening over the last 18 months also. This was seemingly well known throughout the industry, yet there were also people who were unaware of the depth of Carillion’s plight.
In 2018 this is what can happen for directors and non-executive directors everywhere in the face of failure
Yet some were anticipating of the seriousness of the situation. Some Institutional Investors were forecasting problems ahead, and its shares frequently featured in the most shorted shares throughout 2017, according to the weekly list compiled by Money Week magazine. Clever foresight or the opportunity for a quick buck in falling market?
The position with its banking covenants was publicly acknowledged, and reported in the Financial Times on 17 November 2016, when the company announced that it would breach of its banking covenants on 31 December. A clear warning sign, although not one much discussed outside the financial media. Despite the awareness of the situation with some groups, many remained in the dark about the depth of the problem. In early December a participant in one of my finance training programs shared with us that they were a subcontractor to Carillion. When they noticed me turning a whiter shade of pale at that news, they asked what the problem was, as Carillion was a large company, they had worked with them for years, although they had recently taking taken to paying later than usual. At that time, they were waiting for payment on £120,000 of outstanding invoices, this for a company with a turnover of some £3 million. They were unaware of the news in the Financial Times. (I understand they received a payment of some of that money owing before 15 January, but they have still lost a significant sum.) Having worked with Carillion for a considerable period, they thought the size and regularity of the work, and nature of their payment was just normal. An expensive lesson, which for some subcontractors will be terminal.
If the view from the ground was somewhat cloudy, the view from the bridge (or at least the boardroom) appears little clearer. The appearance by former CEOs, FDs, a chairman and a remuneration chief in front of the MPs from the work and pensions and business select committees on 7 February, showed what appeared to be members of a board who had rarely met, let alone worked together to successfully run a business. This was arguably not helped by the MPs present sometimes looking as though they were point scoring for political purposes rather more then seeking an in-depth rationale for business failure. This may be understandable because by this stage there was little that could be done apart from apportion blame. As business select committee co-chair MP Rachel Reeves said, “All of you are sitting here, multi-millions of pounds of payment from the company over a period of years and you say how ‘sad’ and ‘disappointed’ you are, but what actions do you take to show that? It’s just words, isn’t it?”
This was matched by chairman Philip Green who accepted “responsibility, but not culpability”. Here lies a lesson: the much-heard phrase about your actions, and how they look when spread across the front page of the Daily Mail. In this instance the reflection upon the Carillion board both past and present was not flattering. In 2018 this is what can happen for directors and non-executive directors everywhere in the face of failure. It is not just the failure that is the problem, but they desire for some sense of justice even where there is seemingly no criminal wrongdoing. As David Price from Construction News puts it the select committee hearing “feels more an exercise in justice being seen to be done, rather than anything actually being done.”
Another elephant in the Carillion room is the role of the auditors, KPMG, who signed off Carillion’s accounts without qualification. The issue of the accounts and the picture they have painted remains a painful one. Even some banks were taken in by the gloss which may have been applied to Carillion’s situation, as several them have now confirmed that they have lost money because of the liquidation. The role of the auditor is now also receiving the attention of the Financial Reporting Council, and they too are now looking into possible miss conduct by former finance directors Richard Adam and Zafar Khan. Here a further lesson emerges: the problem the watchdog faces in not just barking, but administering a bite. And one of their perennial issues, namely that they can only apply a bite after an event, and rarely in anticipation, let alone prevention of the problem.
The FRC and arguably government will also consider the nature of the audit market, with a concentration of 4 large firms, all of whom have seen issues without auditors’ warnings – not just Carillion but BT’s Italian unit, and Steinhoff of South Africa, to name just the largest headline grabbers.
With the enormous cloud of dust still settling on the largest corporate collapse in the UK for over a decade, some could see the situation coming, but perhaps not those who were most vulnerable to it. The directors, and especially the finance directors, are firmly in the spotlight for either not sounding the alarm, or blindly carrying on in the face of warning signs. When failure occurs, it may not just reflect the culture of the company, but also a reflection of the way in which society needs justice to be seen to be done.
If you are a company director or a regulator, prepare for the decisions you take today to be seen in the light of the media spotlight tomorrow.
