Lessons from Carillion

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?

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?

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.

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.

  • Jab

    Can moneyweek do an article on how to spot these problems ? I worry about debt but sometimes this gets hidden in accounts.

  • Peter Mcintosh

    The real reason for it,s failure is simple!
    Poor management regarding contract quotes, the bid far too low to be sustainable!
    These were UK contracts

  • Kit Allen

    and what about the auditors…! Vast fees and yet nothing that really made anyone wake up and smell the coffee.

  • Kit Allen

    And how about criminal charges for non execs who sign off on compensation packages which reward failure. They are meant to represent the shareholders yet, time and again, they are rewarded for their utter incompetence.

  • Chris Ray

    I agree with all of this but you have forgotten all the greedy city lot who shorted the shares to get a profit at any expense and also helped bring the company down ! What a world we live in ?

    • Peter Mcintosh

      Don,t agree with that , you only short shares when the skids are under the company!

      financially sound companies are immune

  • Ralph

    Bonus payments over a certain level should all be expressed in shares of the company and those shares should be held in trust for a reasonable period of time. I know we’ve been here before but it’s time to revisit it again.

    If I recall correctly the main objection in the past was that the remuneration packages of UK Companies need to remain competitive in order to attract the best people but is this reall true or simply an excuse?

  • Alex Peard

    I agree with the comment about the auditors they must have had concerns before signing off the 2016 accounts. Most culpable though are the non-executive directors. Can you believe that non-exec. Cochrane who stepped up to temporary CEO last summer was allowed to negotiate a deal which meant he kept getting his CEO’s salary (£750k pa) for many months even after a permanent CEO had started!

    The chairman of the remuneration committee is ‘Chief People Officer’ (head of HR I guess) at Tesco, can shareholders have any confidence in her after what she agreed to for Cochrane and the departed CEO/CFO at Carillion.

  • Will Richardson

    Its now up to £5 billion debt. This shows how even for a big company, private debt and pensions are unsustainable.

  • Michael Donovan

    The company accountants KMPG seem to have escaped any criticism. Is their responsibility simply to produce columns of figures? How could such huge debt not be commented on? I can see the directors relying on the accountants for warnings, the City relying on the directors, and the government relying on the City. Accountants take all kinds of exams and oaths to be honest, yet they continually fail those who rely on their findings. If we are holding directors and senior management responsible and putting them in the dock, the same should apply to accountants. A tough regime for accountants and directors does not necessarily mean a long time in jail, but super heavy fines, barring them from further practice, tagging them – rather than the £10k fine for a man who is earning £1m a year.