Advertisement
Editor's letter

Lessons from Carillion

If we are to prevent another Carillion from happening, boards and institutional shareholders need to take responsibility, says Merryn Somerset Webb.

The collapse of construction and support-services group Carillion has left a lot of people with a lot of explaining to do. First up, the UK's equity analysts. Even in 2015, says the Financial Times, two-thirds rated Carillion's shares a buy despite warning signs in its accounts. The managers are also in the firing line. Why on earth were they taking huge bonuses in the face of a failure they surely saw coming? Why did they take on so much debt (if there is one lesson for investors here, it is to avoid companies with high levels of debt)? And why did they keep paying dividends, even as their cash-flow woes mounted?

Advertisement - Article continues below

The UK's institutional shareholders are hardly blameless either. They bore on endlessly about how they take a long-term view so why were they demanding those dividends from a firm that was clearly stressed? Short-termism at its worst(see this week's cover story for more on firms who pay dividends that they probably shouldn't). Next there is the civil service (and hence the government) awarding major contracts to firms you know might not be able to deliver is embarrassingly irresponsible. So to whom should all of these people be explaining themselves?

Advertisement
Advertisement - Article continues below

There is the taxpayer: equity and bondholders will take the first financial hit, but the taxpayer will be next: all the contracts will have to be re-tendered and interim arrangements made while the bids come in and that's before we get the bill for the inevitable inquiries. There are the small subcontractors who may find the administration and cash-flow crunch of Carillion's bankruptcy leads to their own. And the workers some will lose jobs; all will have sleepless nights.

Advertisement - Article continues below

Finally, there are the pensioners. The Pension Protection Fund (PPF), which takes on the schemes of bankrupt firms, reckons it will cost around £900m to look after members of Carillion's various schemes, even though they will pay current pensioners lower cost-of-living increases than they have been used to, and slash the eventual payments of those who aren't yet retired. But Carillion's pensioners aren't the only victims.

The PPF works like a reverse tontine: it is financed by a levy on all other defined-benefit schemes. The more that fail and have to be taken on by the PPF, the more the survivors have to pay which can only make them a little more vulnerable themselves (the PPF levy for next year is currently £550m it will now surely rise).

None of this will make the firms that finance those remaining schemes feel confident: with not just your own pension scheme hanging around your neck but everyone else's too, why would you raise wages or invest heavily in the future? That's not a dynamic that is good for any of us. My point is simple, and it is one I have made many times before. Too many institutional shareholders and too many boards act as if their behaviour only affects them. It isn't so.

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
7 Aug 2020

Most Popular

Gold hits the big $2,000 level – are Aim miners about to play catch up?
Gold

Gold hits the big $2,000 level – are Aim miners about to play catch up?

With the price of gold shooting through $2,000 an ounce, the yellow metal looks unstoppable. Things are so bullish, even Aim-listed junior gold miners…
5 Aug 2020
Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Too embarrassed to ask: what is “real return”?
Too embarrassed to ask

Too embarrassed to ask: what is “real return”?

MoneyWeek's latest "too embarrassed to ask” video explains what a real return is and why it's so important for investors.
5 Aug 2020