Heads roll at G4S but Buckles survives - UPDATE

Nick Buckles, Group Chief Executive Officer (CEO) of security firm G4S, is to keep his job after dodging the blame in the group's internal report into the Olympics staffing fiasco.

David Taylor-Smith, Chief Operating Officer and Regional Chief Executive Officer of UK and Africa, and Ian Horseman Sewell, Managing Director, G4S Global Events, have been thrown under the bus, however.

G4S's report concluded that the firm should have been able to handle a project of the size and complexity of the London Olympic and Paralympic Games security contract, but it screwed up on the delivery.

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The report implies that there might have been elements of complacency in the firm's approach, as it failed to recognise structures and processes that had served it well in the past needed augmenting for the Olympic contract.

The monitoring and tracking of the security workforce, management information and the project management framework and practices were ineffective to address the scale, complexities and dependencies of the Olympic contract, the report concludes.

By the time G4S realised there was a massive problem it was too late to do much about it except ask for outside help. That came in the form of additional military and police.

G4S attempted to repair some of its battered reputation by highlighting the "substantial contribution from the thousands of G4S employees" who worked alongside military personnel and the police, "which led to a safe and secure games with continuously positive ratings on venue security from games visitors."

As for Buckles's culpability - or lack of same - in the whole sorry mess, the report concludes that he should stay at the helm.

"Whilst the CEO has ultimate responsibility for the company's performance, the review did not identify significant shortcomings in his performance or serious failings attributable to him in connection with the Olympic contract," the report says.

The board has accepted the resignations, however, of Taylor-Smith and Horseman Sewell, and made some changes to the management structure as a result.

Richard Morris, currently the Group Managing Director of G4S Care & Justice Services in the UK, has been appointed as the CEO for the UK Region.

Kim Challis, who currently runs a portfolio of UK commercial and Government businesses, will take on direct line management responsibility for all government businesses in the UK - assuming the company still has any in the future - as CEO, G4S Government and Outsourcing Solutions; this is a new role created to enhance G4S's focus on "this critically important area of our business".

The Group Executive committee will also be strengthened with the appointment of a Group Chief Operating Officer (COO), who will work closely with the CEO, with responsibilities to include a specific focus on operational procedures, risk management and quality customer service and delivery. The Group COO role will be an external appointment.

The group is also in the process of interviewing potential non-executive directors, with a view to adding two to the board.

John Connolly, who joined G4S as Chairman on June 8th, said: "G4S has accepted responsibility for its failure to deliver fully on the Olympic contract. We apologise for this and we thank the military and the police for the vital roles they played in ensuring the delivery of a safe and secure Games.

"Our review of the company's performance on this contract has been extremely thorough and, whilst the failures are largely specific to the very special nature of this contract, we will learn from mistakes made. We are taking actions in relation to both the management and governance of G4S to ensure we continue to deliver the highest standards of customer service and contract delivery across the group."

Analysts reactBroker Seymour Pierce saw little in the statement to persuade it to change its view on the stock.

"When G4S admitted that it would not be able to fulfil its contractual obligations with LOCOG [the London Olympics organising committee], we downgraded our recommendation to a HOLD. In our view, little has changed since. It is still too early to assess the full ramifications of the Olympics affair. Restoring its reputation with the UK government is crucial to G4S: circa 10% of group sales are generated from the UK's public sector government and just under half of the UK's bidding pipeline is for government work (45%).

"We leave our FY12E [fiscal 2012] estimates unchanged. expecting adj PBT [adjusted profit before tax] £424.3m. The shares are trading on a prospective P/E [price/earnings ratio] of 11.9x. We reiterate our HOLD recommendation with a target price of 255p."

JH