Blog 7- The Crash of Carillion

I am still in shock form watching Channel 4’s How to lose 7 Billion Pounds; an insight into the years of problems that had been going on in Carillion leading up to their liquidation. I don’t understand how it had been possible for so much to be going for so long, and for no one to be doing anything about it. Even for the government to carry on awarding the company huge contracts, while there were so many warning signs of the business going downhill.

In the case of Carillion, it is not a question of legality but a question of ethics. The things that were going on in the business were not necessarily illegal but when looked at in terms of ethical conduct, I think were questionable.

For me, one of the worst aspects of the Carillion scandal was the shortfall in pension schemes. The company put 27,000 Carillion employees’ pension schemes at risk, there was a huge shortfall in the pension funds of hundreds of millions of pounds. Quite rightly the company’s pensions manager had tried to tell Richard Adam (Carillion’s finance director) that there was not enough money to cover pensions and even set up with a meeting the pensions regulator. Regulators are there to keep things fair and make sure everything is working as it should; even they did nothing, they made empty threats to Carillion, but nothing was done.  I feel the regulator really failed the employees of Carillion here- people working all their lives for a company and not being able to retire with anything. It is said the problem with regulators is that they are often playing catch-up; always responding to the last scandal, however, not being forward thinking to the next issue. I think this is apparent in this situation, I would imagine the regulators are looking back now, kicking themselves, but at the time didn’t see it. All the while that there was this huge pension deficit, Carillion were still paying out lavish dividends for shareholders.

This trend of paying out high dividends carried on all throughout the years of financial problems Carillion were having. The sole reason I would say they were doing this is for signalling. I can’t see any other explanation why they would carry on paying out large sums of money in dividend payments when they were in such a bad financial position. Right up until the business went down Carillion borrowed money to pay out record high dividends to keep shareholders happy and to make sure they people carried on investing in their shares. However, I think the main thing they were trying to do was stop anyone asking questions; if they kept paying these high dividends no one would be concerned and want to look at the accounts, which of course, were not right.

Another reason shareholders were given big dividends was to justify big bonuses for directors. Between Richard Howson- the Chief Executive- and Richard Adam, they took home pay packets of £2 million in 2014. Now, in terms of agency theory, I’m sure if the shareholders were aware of what was actually going on in the company, they would have very conflicted interests with the directors on whether they should be getting such big bonuses. However, because the shareholders were getting their dividends, they did not know about the financial difficulties, and, how would they?

Richard Adam was trying to create the illusion of financial success. When doing the finances, if the numbers were not what he wanted, he would tell managers to go back and do the numbers again. This could be an example of an ethical threat; possibly intimidation, managers feeling intimidated by Richard Adam to make the accounts look how he is telling them to. This could be how the accounts ended up so wrong. As at the end, when Carillion were forced into compulsory liquidation there was a ‘black hole’ in the accounts of over £1 billion and only had £29 million left in cash throughout the whole company. Described as ‘peanuts’- for a company like this- by the presenter of the documentary.

As well as the pension funds, another thing that I thought was sad was the small businesses that were run by Carillion who were hit hard by this scandal. Throughout the problems in the company, they would pay small businesses late, as well as not paying suppliers either. When the liquidation happened, the owners of these small businesses had to start letting their staff go, even after all the years of being messed about by Carillion- started having serious trouble in 2013 and this went on until their liquidation in 2018. What I find hard to understand is why no one was monitoring everything they were doing properly. I think thar what Carillion were doing in general, what they were doing to small businesses and to their employees’ pension schemes was all morally wrong. Carillion should have had systems and structures in place within the company to direct and control ethical decision making- corporate governance. Either they did not have anything like this or it was not working effectively.

There are some ethical decision-making tools, I think it would be interesting to see if Richard Howson and Richard Adam could truthfully say that they had gone through any of these when making their decisions. One tool is often referred to as ‘The Smell Test’. This is a decision-making tool with four simple questions to ask yourself before making a decision.

(1)    Is it legal? Well, Richard Adam forging the numbers in accounts was certainly not legal. However, some of the things Carillion were doing were actually legal, just wrong. So maybe some of the decisions they made would have passed this question.

  

     (2)  Does this action go against the grain of my moral principles? I suppose this depends on whose moral principles you are referring to, a lot of things, like the pension shortfall certainly go against my moral principles. However, I’m not sure if Richard Adam and Richard Howson even have moral principles by the things that were going on, so again maybe some of the decisions would have passed this stage too.

     (3)  Would you be comfortable if your reasoning and decision were to be publicised? Would you be comfortable if your loved ones were observing you? Could you explain the decisions to your loved ones? Surely most of the decisions they made must stop at this stage, there’s no way they could have explained what they were doing to pensioners and small businesses to the people they cared about.

   

          (4)  Would a person of high moral stature do this? Again, I don’t think someone of high moral stature would approve of what was going on in Carillion.

This is really a documentary that I think anyone should take time to watch. This blog could go on and on about the frightening facts that are highlighted in it, I have only touched on a few. I think watching this, as well as having the lectures on ethics this week, has really made me think about how I would act as a manager in the future.