Interview by Lexis PSL UK on Carillion : ‘A story of recklessness, hubris and greed’: committees' verdict on Carillion

This article was first published by LexisNexis News on 16 May 2018

A damning 100-page report, jointly published by the Work and Pensions and Business, Energy & Industrial Strategy (BEIS) committees, has accused Carillion’s board of ‘recklessness, hubris and greed’, holding them ultimately ‘responsible and culpable’ for thefirm’s failure. Sarah Schütte, of Schutte Consulting Limited—a bespoke legal consultancy firm for the construction industry—warns that Carillion’s demise highlights the ‘desperate need for a big shake up in the way in which contracts are awarded’ in the public sector, while Gayle Monk, senior associate at Anthony Collins, warns of the dangers of ‘tick box’ thinking in the procurement process.

The report was commissioned in the wake of Carillion’s catastrophic demise earlier this year,leaving an estimated 2,000 people jobless and a pension liability of ￡2.6bn. The firm also owed around ￡2bn to its 30,000 suppliers, sub-contractors and other short-term creditors.

The report also notes that Carillion’s collapse has ‘uncertain consequences’ for public serviceprovision. The government has already committed ￡150m of taxpayers’ money to keeping essential services running. The firm’s collapse has left a ‘trail of chaos felt at all levels of society’, according to Schütte.

The report, jointly published by the Work and Pensions and Business, Energy & Industrial Strategy(BEIS) committees, has been highly critical of the both board and the failed system of ‘checks and balances’ which contributed to Carillion’s collapse. It produced the following findings:

1. Directors

Singled out were the former directors, Richard Adam, Richard Howson and Philip Green, who were accused of fostering a business model based on a ‘relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers’.

It recommends that, during its forthcoming investigation, the Insolvency Service closely examines whether the directors breached their duties under the Companies Act 2006. If so, the report urges that the directors be recommended to the Secretary of State for Business for disqualification from company directorship. It has also accused the company’s non-executive directors of failing to scrutinise or challenge the executives.

Noting the report’s suggestion that the directors seemed unaware of their statutory duties, Roger Barker, head of corporate governance at the Institute of Directors, has highlighted the ‘need for the professional development of directors in large companies: all too often the directors of large listed companies feel they are the “finished article” in terms of knowledge and expertise.’

2. Government

The government ‘lacked the decisiveness or bravery’ to challenge the culture of corporate recklessness. In particular, the government’s Crown Representative System has been criticised for failing to warn of the risks and has recommended that there be an immediate review of the system. It also noted that the government’s ‘drive for cost savings can itself come at a price: the cheapest bid is not always the best’.

Monk warns that ‘it is vital that public sector purchasers, including local authorities, heed the warnings from the Carillion catastrophe when it comes to their procurement processes and decision-making’.

3. Regulators

It claims that the Financial Reporting Council and the Pensions Regulator were ‘united in their feebleness and timidity’. Both were aware of concerns and yet only issued ‘empty threats’. It concludes that ‘we have no confidence in our regulators’.

4. Auditors

It describes the ‘Big Four’—KPMG, PwC, EY and Deloitte— as a ‘cosy club incapable of providing the degree of independent challenge needed’. Claiming it is time for a ‘radically different approach’, it suggests that they be referred to the Competition Markets Authority, which should consider whether they ought to be broken up forcibly.

Schütte acknowledges that although Carillion ‘pulled the wool over the public officials who held the purse strings’, they were undeniably ‘aided and abetted by auditors, accountants and lawyers, who individually and collectively drove Carillion’s business insolvency risk to the highest levels’.

5. ‘Carillion could happen again, and soon’

The report ultimately warns, ‘Carillion could happen again, and soon’.

To avoid this, Schütte claims that there needs to be a ‘big shake up in the way in which contracts are awarded’ in order to readdress the ‘procurement process and the criteria which are applied (often clumsily) to find the best value bidder for the public sector’.

Monk further notes that under the Public Contracts Regulations 2015, SI 2015/102, there is no scope to ask for ‘additional’ information which may enhance the economic and financial assessment of a company during the procurement process. Monk argues that this has ‘actually hamstrung public purchasers in their ability to carry out proper financial due diligence over potential contractors’, highlighting that it is ‘these regulations that the government followed to assess Carillion’s financial strength to deliver public contracts just before its collapse, and that Kensington and Chelsea used to assess the competency of Grenfell Tower's contractors’.

Ultimately, to avoid a repeating Carillion’s mistakes, Monk argues that ‘economic and financial assessment cannot be a mere “tick box” exercise as part of the procurement process–the financial standing of each tenderer must be fully understood before decisions are made as to whether or not any party should be invited to tender’.