Lessons should be learnt from Carillion failure, says Airmic

With further investigations launched this week into governance and conduct at failed UK construction group Carillion, Airmic believes lessons can be learnt from the company's collapse. On Monday, the Financial Reporting Council (FRC), which sets UK corporate governance and accounting codes, became the latest regulator to launch an investigation into the company’s collapse. The FRC is looking into preparation of the group’s accounts and the work of its former auditor, KPMG. The Financial Conduct Authority is already looking into the company’s financial reporting in the lead-up to its insolvency. In addition, the UK’s Pensions Regulator is investigating Carillion, which continued to pay large dividends and executive payouts as its pension deficit grew. The company entered insolvency on 19 January, owing almost £1bn to banks and millions to suppliers. A letter published by the company’s pension trustees on Monday revealed that Carillion’s pension schemes may have a deficit of £990m, almost double the figure reported by the company. Two parliamentary committees – the Work and Pensions Committee, and the Department for Business, Energy and Industrial Strategy (DBEIS) Committee – have launched a joint investigation into Carillion and its directors, who are already under investigation by the Insolvency Service. Rachel Reeves MP, who heads the DBEIS committee, said: “In the wake of the BHS scandal, Carillion has the hallmarks of another corporate governance failure with directors asleep at the wheel while the business went off a cliff, in this case leaving jobs, pensions and public services under threat and a host of suppliers out of pocket.” Ms Reeves also questioned how “warning signs” were ignored by the company and regulators, as well as the actions of Carillion’s board and senior management. The committee will now examine the role of both directors and non-executive directors in the company’s collapse, she said. According to John Ludlow, chief executive of UK risk management association Airmic, there will be lessons to be learned from Carillion's collapse, especially for the UK government. Carillion not only built public sector projects like hospitals and schools, it also provided services, from running prisons to school meals. Carillion was, in effect, being used to outsource the management of sub-contractors, it was a span breaker between large government and small suppliers, explained Mr Ludlow. “This failure exposes a culture in government procurement of mega suppliers being valued as an easy choice in terms of achieving compliance and a low price, rather than emphasising the need for satisfactory outcomes,” Mr Ludlow told CRE. “Carillion was an easy deal for a cheap source of labour rather than a great prison, hospital or capital project manager. This was a failure of supply chain development and an inadequate review of a strategic supplier,” he said. The failure of Carillion has echoes of past corporate failures, as highlighted in Airmic’s groundbreaking 2011 research, Roads to Ruin, and its follow-up report Roads to Resilience. For example, "board risk blindness" was a common feature in many of the case studies from Roads to Ruin, explained Mr Ludlow. “While the full details of the causes of Carillion’s failure are yet to be revealed, one can imagine that a conglomerate structure with the number of projects being added each year, makes it difficult for the board – and non-executive directors in particular – to control the business, leaving room for a certain amount of ‘board risk blindness’ to creep in,” he said. “There is a lot to be said for the demise of the conglomerate and the rise of the single focus company with fewer and more aligned layers of management,” added Mr Ludlow. Other factors that may have played a role in Carillion’s collapse include the group’s structure, which may have made internal communication difficult. Cost pressure in an environment with such fine margins, as well as reward structures and contracts, may also encourage the wrong type of corporate culture. “Roads to Resilience emphasises the need for an effective risk radar, one example of which is the ability for top management to ask tough questions,” said Mr Ludlow. “Rising levels of debt and potential cashflow difficulties at Carillion were there for management to see for many months. If scenario tests were carried out against such a principal risk, why was there an apparent lack of desire to mitigate the risk?” he asked.

Lessons should be learnt from Carillion failure, says Airmic

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