Carillion failings can be traced back to trouble at the top

Many of the biggest governance failings at Carillion could be the result of a flawed leadership

flawed leadership

The collapse of outsourcing giant Carillion has become a symbol of corporate failure – allegedly a result of poorly negotiated contracts, an over-reliance on external consultants and other factors.

Many experts are arguing that at the heart of one of the UK’s worst business disasters in years were major flaws in the development and management of an effective board. The recent joint report from the Business, Energy and Industrial Strategy (BEIS) and Work and Pensions committees concluded as much: ‘The chronic lack of accountability and professionalism now evident in Carillion’s governance were failures years in the making. The board was either negligently ignorant of the rotten culture at Carillion or complicit in it.’

“The most common reason for corporate failure is a lack of scrutiny by the board of the CEO’s activities and decisions”

Frank Field MP, who chairs the work and pensions committee, labelled it: ‘A board of directors too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners.’

Lack of scrutiny

His view is partially held by independent observers of the collapse. Dr Nikolaos Antypas, lecturer in finance and corporate governance at the Brunel Business School, argues that Carillion’s collapse reveals a failure to create a boardroom environment in which executive decision-making was carefully scrutinised.

‘The chair and the non-executive directors (NEDs) were either incapable of performing their duty adequately … or wilfully ignoring this predicament under the illusion they were protecting their own professional future,’ he says.

He adds it would be rather puzzling to even consider that experienced directors would not question the company’s remarkable performance, despite the ‘well-known tools of manipulation, such as shady methods of reporting realised revenues.’

‘Claiming ignorance or misinformation by auditors are not valid excuses, it is just a labelling choice between “malicious”and “inept”,’ he says.

Peter Swabey, policy and research director at The Chartered Governance Institute UK & Ireland disagrees: ‘I do not think we can overlook the possibility that the directors simply made a poor judgement, possibly based on poor advice – that is the Occam’s Razor solution as opposed to the conspiracy theory approach.

‘Directors need very strong grounds to ignore the advice of independent advisors, such as the auditors. To describe such reliance as “inept” rather misses the point.’

Dr Antypas adds that a further look into Carillion’s shareholdings and compensation packages might be suggestive about the origins of their performance. On this point, the joint committee inquiry said: ‘Directors rewarded themselves and other shareholders by choosing to pay out more in dividends than the company generated in cash, despite increased borrowing, low levels of investment and a growing pension deficit.’

However, Swabey counters with the point that ‘directors do not reward themselves and NEDs will rarely, if ever, benefit from dividend distributions.’ Although he concedes there are questions to be asked about the level of payments made.

Truth to power

Carillion is not the only firm to suffer from a lack of challenge in the boardroom. Andrew Kakabadse, professor of governance and leadership at Henley Business School, says the most common reason for corporate failure is a lack of scrutiny by the board of a CEO’s activities and decisions.

‘The most common reason for such a lack of governance is a weak chair, who cannot exert influence over the CEO and that the chair has not created a culture of challenge and independence at board level,’ he says.

“The most common reason for corporate failure is a lack of scrutiny by the board” 

The committees’ inquiry argues this was the case with Carillion. ‘[Philip Green, Carillion’s chair] interpreted his role as to be an unquestioning optimist, an outlook he maintained in a delusional, upbeat assessment of the company’s prospects only days before it began its public decline ... As leader of the board, he was both responsible and culpable.’

Peter Williams, chairman of online fashion group and formerly of Asos, says: ‘An effective board is about fostering the right environment, a role in which the chairman is crucial. I have been in one or two boardroom situations where the chairman has been in cahoots with the CEO, where they have worked together in a previous situation or spent too long on the board together. In that case, the chairman is not really managing the situation.

‘The chairman will want to support the CEO, but needs to be diligent to make sure the CEO does not go off-piste, go unchallenged on important decisions or run through the board meeting too quickly. It is very important for the chairman to stand up to the CEO in these situations.’

Committed to the role

Elsewhere on the board, NEDs have a responsibility for monitoring a company and steering the management team in the right direction. The Carillion inquiry reiterated that NEDs have a vital role ‘to act as a bulwark against reckless executives’. Yet the inquiry goes on to condemn Carillion’s NEDs, as they were ‘unable to provide any remotely convincing evidence of their effective impact’.

But a common stumbling block in the performance of this role is, as Dr Antypas explains, ‘the issue of time’. ‘It is rather serious. When a self-serving executive wants to hide a pernicious act, their success is almost guaranteed when their monitoring directors have their time segmented among too many institutions or projects, even if they have full understanding of the organisation,’ he says. ‘This is a vicious circle of success: accomplished professionals keep getting busier and if their success is reaffirmed, they get even busier, eventually risking failure in tasks they used to excel at.’

Similar to the issue with a weak chair, Professor Kakabadse adds: ‘Often NEDs are deeply aware of the questions they should ask and challenges they should make, but do not have the courage or the resilience to pursue an unpopular course of direction, namely challenge the CEO.’

This may well be down to the NEDs understanding of the business, or lack thereof. Professor Kakabadse explains a deep appreciation of the market in which the firm operates and a sensitive understanding of the capabilities of the company to realise competitive advantage, or not, is essential to asking pertinent questions.

‘The other qualities good NEDs must have is the ability to scrutinise evidence, the resilience to constantly face up to pressure, the maturity to handle complex issues without engaging others and the humility to know when not to ask or to call in for help,’ says Professor Kakabadse.

Outside interference

An over-reliance on external parties, including consultants and auditors could have contributed to problems in the Carillion boardroom. ‘Along with boards that do not challenge, and with management teams that allow themselves to be dominated by the CEO, external parties seem to be extensively used in order to slant evidence in the CEO’s favour,’ says Professor Kakabadse.

‘There is always a reliance on the auditor to uncover any concern over the performance of the company and hence having that sense of independence with auditors is vital. When they get too close to the top management, they may not make evident those issues that require attention. Overall, Carillion seems to have fallen into the classic traps of weak chair, a board that lacked independence and resilience, and a culture of no challenge.’

In Swabey’s view, ‘this is why it is an essential part of the NED role to satisfy themselves that the auditor is properly independent of management’.

“Waiting for a more competitive market that promotes quality and trust in audits has failed. It is time for a radically different approach”

Brunel’s Dr Antypas says Deloitte and KPMG failed an array of Carillion’s stakeholders, ranging from shareholders and debt-providers to suppliers and clients, but adds there seems to be no better alternative than having a few international, powerful auditors. ‘Hiring employees to perform the tasks of internal auditors or consultants is usually a rather costly endeavour that could harm return on capital employed and competitiveness, a hit few officials or investors would welcome at the outset of Brexit,’ he says.

‘In a perfect world, all executive directors and NEDs would be perfectly apt in accounting, strategy planning and risk management, but we are not in that perfect world. The tough-to-love industries of auditing and consulting are in desperate need of regulatory assist to overhaul, but their service, even flawed, is a perfect example of the benefits of specialisation and outsourcing, both foundational pillars of a healthy and progressive market.’

Dr Antypas’ comments echo the joint committee inquiry, which concluded: ‘KPMG’s long and complacent tenure auditing Carillion was not an isolated failure. It was symptomatic of a market which works for the members of the oligopoly but fails the wider economy. Waiting for a more competitive market that promotes quality and trust in audits has failed. It is time for a radically different approach.’

Lawrie Holmes is a financial journalist and contributor to Governance and Compliance

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