Governance Watch - Issue 34

by Dina Medland in London

Carillion: The Fall Out

There’s a limit, surely, to how often you can plead an exception to the rule when assessing whether something is fit for purpose. When the ‘rule’: in this case, ‘best practice’ in the running a UK listed business adhering to highly esteemed standards of corporate governance, appears to have been ignored more than once within a few years, it’s time to re-think the components of that best practice.

This time, the company is Carillion plc. It collapsed (covered on my blog Board Talk) as a result of “recklessness, hubris and greed” among directors who put their own financial rewards ahead of all other concerns, according to a parliamentary report into the firm’s demise. The report spreads the blame across plc board members, the government, accountants and regulators.

It’s a sweeping scope of blame and conflict of interest is at the heart of broken corporate governance. It is everywhere, demonstrated recently in Aviva CEO Mark Wilson’s appointment to the board of BlackRock, the asset manager. A leading investor quoted in the Financial Times has been often re-quoted: “’I’m shocked…if one of the main parts of your business is asset management and you join the board of a rival asset manager, that is a massive conflict of interest.” 

Aviva has also been embroiled in the preference shares issue, which one reader of Insurance Business called “the biggest corporate fraud of the century” (now the subject of a review by the Financial Conduct Authority). It’s another example of how ‘stuff happens’ in boardrooms and decisions are made which unravel down the line as regulators scramble to keep up.

The parliamentary report into Carillion is, as The Guardian described it, ‘excoriating.’ It is also another opportunity for political theatre, and business on the defensive.

“The language of the report suggests committee members think business in general is greedy and reckless. This is irresponsible and wholly inaccurate” said a statement from Josh Hardie, CBI Deputy Director General.

“Carillion was a painful lesson for business and government on the dangers of short-termism in public service contracts. This failure should act as a catalyst for a level-headed discussion about how the public and private sectors work together to deliver value to society, as they so often do” he added. 

But to see the expression of public anger and dismay at Carillion’s collapse as equating with a lack of level-headedness looks like an error of judgment for a business lobbying group ultimately dependent on both the customers of business and its stakeholders. We should have learnt by now in the United Kingdom that it is dangerous to be overly dismissive of ‘high emotion’ instead of finding ways of understanding the root cause for it as a first step to a rational response.

Carillion is not an outlier as an example of how it can all go badly wrong in businesses looking for a quick return. If “greed and recklessness” are accompanied by the fullness of understanding that there are always extenuating circumstances for bad behaviour (the phrase ‘an honest mistake’ comes to mind) – then it takes on another hue altogether. 

It was not long ago that we had “greed and recklessness” from Philip Green and the sorry story of BHS, inspiring debate and legislation around private companies and standards of individual and collective behaviour. The language around the “unacceptable face of capitalism” has been around for a while.

But the reason the Carillion fall-out is huge is because the conversation is now all about the audit firms, covered previously on Governance Watch and repeatedly on Board Talk. A ‘radical idea’ - breaking up the Big Four accountancy firms, is back after a decade, which speaks volumes regarding the combination of innovation and corporate governance. 

When the firms themselves reveal they are armed with plans to break themselves up, it might be time to be deeply sceptical about what this will all achieve in reality. 

Because the problem with the corporate governance debate in the UK is that there is a disconnect between the increased focus on individual behaviour, and by extension corporate culture on the one hand, and the penalties for bad judgements on the other. There needs to be far more scrutiny too, of what auditors do for their fees.

Audit is also about the clarity in the numbers and “conflicting numbers, as much as conflicting interests, make spotting a collapse too difficult” writes  Lombard in the FT this week. “Numbers in company accounts for pensions, debt, cash conversion and dividend affordability can all be highly misleading — no matter how well or badly they are audited.”

The Financial Reporting Council in its latest thematic review focused on ‘audit culture.’ An investor quoted in the FRC report following a roundtable made an important point in suggesting that audit tender documents needed to focus much more on how the auditor would challenge management on behalf of the shareholders. "One investor commented that 'It was hard to envisage an audit tender document saying, ‘Hire us because we are the most awkward firm’, but that was the cultural change that needed to be achieved.'"

Corporate culture is a critical component in corporate governance, but the language around ‘culture’ has become a distraction from the need for specific innovation. Parliamentary hearings are useful things to determine how those at the top of businesses see themselves, and their accountability. As such, they have been very revealing about the thinking in boardrooms.

Read Patrick Hosking in The Times on developments at Aviva’s latest AGM. It is not the first time that “non-executive directors have been found wanting in holding the executives to account” he writes. Based on events at the meeting, Aviva chairman Sir Adrian Montague agreed that the remuneration committee would look not only at cutting the bonuses of the executives but also the fees of the non-executive directors, including himself. One to watch ?

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