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Key learnings from Carillion’s collapse

Towards the end of last year, Thomson Reuters hosted a NEDonBoard expert panel event on the key learnings from the collapse of Carillion. The panel was chaired by Olivier Garrigue, experienced Chairman and CEO, and included the Reuters journalist, Kate Holton, and Giles Boothman, a partner and restructuring lawyer at Ashurst.

Lucinda Case, Managing Director of Thomson Reuters Legal UK & Ireland, and a trustee of the Council of the Royal Albert Hall, opened the event. In her experience as a trustee, Lucinda noted the difficulty sometimes in navigating extensive board information packages and striking the right balance between being challenging and getting involved in the details while allowing the executives to get on with their job.

Several red flags were not picked up by Carillion’s NEDs

Kate Holton listed five issues that should have triggered debate in Carillion’s boardroom:

  • The use of suppliers as a source of financing.
  • The increase in dividends distributed to shareholders when cashflows were down.
  • The low profitability of new contracts.
  • The breadth and complexity of Carillion’s operations.
  • Senior management’s high compensation.

There are circumstances in which directors may decide to approve dividend payments to maintain investor confidence, even if cashflows are decreasing. In Carillion’s case, the board of directors approved the payment of dividends while profit warnings were issued, cashflows were down and there was a lack of visibility over cash generation, given the tight margins at which new contracts were gained.

However, the question is: could any board oversee such a large and diversified business and take the appropriate decisions?

Directors may have lacked the skills required to address the challenges faced by Carillion

According to Giles Boothman, the skills required in the boardroom vary depending on the company’s stage of growth. The board collectively (not the shareholders) needs to acknowledge this. While some directors are suited to a high-growth environment or an IPO, others are better equipped to deal with the challenges that arise in more mature businesses. Giles Boothman further outlined the role of boards and chairs in identifying the skills needed in the boardroom, which should be in tune with the stage of the relevant business life cycle of the company. Boards need a blend of people and particularly directors who understand and can deal with cash-flow management.

Based on his extensive experience in dealing with boards at critical stages, Giles Boothman reported that, broadly speaking, there are often a lack of skills at board level. Carillion’s collapse has raised awareness of directors’ duties and liabilities, and highlighted the importance of training and professional development for non-executive directors (NEDs). There is no difference in liability between NEDs and other directors: they all have the same fiduciary duties to act in the best interest of stakeholders (which means shareholders in the good times but also creditors in the bad times). There is now a greater understanding that NEDs can suffer reputational damage due to their action or inaction, as well as facing potential liabilities.

Carillion’s NEDs followed the consensus, which raises awareness of the need for board diversity

In addition to lacking the right combination of skills, Giles Boothman suggested that Carillion’s board may have not asked the right questions about either the company’s:

  • Dividend distributions.
  • Acquisitions.
  • New contracts.
  • Accounting policies.

The Business, Energy and Industrial Strategy (BEIS) and Work and Pensions Committees report highlighted that although one of the NEDs questioned senior management, they were isolated and their questions did not result in meaningful debates or corrective actions. Carillion’s NEDs went with the consensus, did not challenge the information they received and failed to interrogate the executives or their advisers to form an independent view. Olivier Garrigue stated that NEDs must be inquisitive and seek access to all the information they need to inform decision making, even if this means engaging in discussions with divisional and operational managers. He also suggested that there was a lack of diversity at board level as NEDs often come from similar backgrounds and that diversity is not only a matter of gender or skin colour but is, more importantly, one of competence, communication and decision-making style.

Procurement’s role in Carillion’s failure

Olivier Garrigue mentioned that Carillion’s collapse highlighted weaknesses in a procurement process where short-termism typically prevails and the lowest bidders are usually awarded new contracts, which depresses margins and does not allow for much contingency.

According to Kate Holton, the UK government was one of Carillion’s largest clients and by pursuing its austerity agenda, the government contributed to a squeeze in margins that resulted in Carillion winning unprofitable multi-year contracts. The entire UK outsourcing sector is under pressure, with players such as Capita and Interserve having issued several profit warnings. Brexit may increase these challenges given that companies and the government may be even more reluctant to enter into such big procurement contracts. For further information, see Brexit: the legal implications.

Main factors in Carillion’s collapse

The panel concluded that no single factor contributed to the collapse of Carillion. The main factors that contributed to the company’s failure were the:

  • Many acquisitions that failed to be properly integrated.
  • Aggressive accounting policies that might have recognised revenues too early and spread costs over longer periods.
  • Decision to fund the business with too much debt instead of equity.
  • Cashflow issues and inability to deal with the group’s capital structure.
  • Dividend policies that were not aligned with the true financial state of the company (and, perhaps, compensation policies that where themselves not aligned with the company’s overall performance).

External stakeholders (such as the government, financial institutions and auditors supporting the company) also had an important and influential role to play in the run up to the collapse of Carillion. The case offers valuable lessons that should be taken into account in the new UK corporate governance reforms. For further information, see Corporate governance reform: toolkit.

This article was originally published on NEDonBoard. NEDonBoard is the professional body for non-executive directors and board members listed on

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