Carillion collapse: The key takeaways from the MPs’ report
MPs’ report on Carillion collapse underlined the need for a groundbreaking cultural shift in construction. Mismanagement, heavy outsourcing and lack of brave decisions on behalf of the involved stakeholders (directors, government, auditors, regulators) are some of the key factors that led to the collapse of the second biggest UK contractor.
Carillion collapse in detail
Carillion collapse last January was one of one of the biggest shocks in Britain’s corporate history. Approximately 20,000 job positions were in danger not only in the UK but in Ireland, as well. On top of that, thousands of people in Carillion’s supply chain were also put at risk.
Carillion was responsible for a vast number of public services, such as the construction of two modern hospitals, large-scale rail and road projects, the cleaning of health and prison facilities, and even school meals. The completion of all these services came under serious threat, once Carillion entered into compulsory liquidation.
A few days ago, MPs released their final report into Carillion collapse. The report was put together by two committees, selected by the British Parliament, and it spread the responsibility among the directors of Carillion, its auditors, the government and the regulators.
The MPs’ report was completed in just four months and it was extremely critical against everyone involved in Carillion’s case. The harshest words were addressed to the company’s directors for their overly optimistic and careless management, while Carillion’s auditors were described as an overpaid ‘cosy club’. Lastly, the practices of the government and the other regulators were seen as highly ineffective.
In a nutshell, here are the main findings of the MPs’ report into Carillion collapse:
Carillion’s board appears to attract most of the severe criticism as, according to the report, its members are accused of focusing on increasing their profits and executive bonuses instead of putting their attention on collective needs such as the pension scheme which ‘was treated with contempt’.
Based on these observations, the MPs’ report encourages the British Insolvency Service to examine whether Carillion directors violated their duties as they are dictated by the Companies Act. In the meantime, the Insolvency Service works still actively in the mission of saving jobs related to the company’s collapse.
If this suggestion gets accepted, the directors are in serious danger of being disqualified from (company) directorship. There are three directors who are singled out by the report.
More analytically, it’s Richard Adam, Chief Financial Officer (2006-2017), who has a 30-year leading experience in companies such as Associated British Ports. MPs’ report describes Adam as ‘the architect of Carillion’s aggressive accounting policies’.
Second in the list is Richard Howson, Chief Executive (2012-2017) who, according to the report, was a ‘figurehead for the business’ and is characterised as ‘misguidedly self-assured’.
Lastly, Philip Green, chairman of Carillion, who among other was a corporate responsibility advisor for David Cameron. The report refers to Philip Green as ‘leader of the board he was both responsible and culpable’.
Auditors: ‘The Big Four’
Carillion auditors (KPMG, Deloitte, EY, and PwC) also receive harsh criticism by the MP’s report. As a matter of fact, the report strongly suggests that the Competition and Markets Authority should take action and examine whether the quartet should be dispersed. As reported by the MP committees, the Big Four had profits of £72 million in the course of the last ten years thanks to Carillion.
Furthermore, the report underlines that the State has ‘no confidence in their regulators’. As far as the auditors are concerned, they deny the accusations described above.
The Pension Regulator and the Financial Reporting Council who played the role of the regulator in Carillion’s case were described as ‘chronically passive’ and unable to make good use of their regulatory powers.
Regarding the FRC (Financial Reporting Council), the MPs’ report notices that they were unable to detect and warn the company about its problematic situation and practices before it’s too late. To the contrary, as the report underlines, they were very keen to place the blame on Carillion once the disaster had burst.
Concerning TPR (The Pension Regulator), despite its many ‘empty threats’ to Carillion during the years in order to improve pension contributions, it didn’t manage to actively put any of these warnings into proper action. In general, the MP’s report highlighted that TPR failed to fulfill any of its goals in terms of improving the company’s pension scheme.
All in all, both regulators faced the heavy disapproval of the MP committees which underlined the need for a groundbreaking cultural shift.
Last but not least, the UK government. According to the MPs’ report, it has played its own role in Carillion’s collapse.
On the one hand, the report makes clear that the blame is on Carillion’s directors and that the government made a solid effort to find a solution to this problematic situation. On the other hand, MPs notice that the government should have taken braver decisions in the past in order to limit corporate carelessness.
In addition, it appears that the push of the government for cost minimisation led to questionable decisions in terms of awarding contracts to Carillion, even though the company was already heading to collapse.
This approach of heavy outsourcing in combination with ineffective initiatives (eg. Prompt Payment Code), and the insufficient supervision of the government contractors proved to be decisive for Carillion’s disaster.
The next day
The collapse of the second biggest UK contractor brought on the surface some serious inefficiencies and problems that the building sector is currently battling against. In any case, though, many things are expected to change from now on based also on the report’s substantial feedback.
To be more specific, the MPs committees strongly suggest that auditors shouldn’t be so powerful and that the ‘Big Four’ should be referred to the Competition and Markets Authority with ultimate goal its dispersal.
A closer examination of the responsibility of Carillion’s directors under the Companies Act is another strong recommendation on behalf of the MP’s committees.
A significant paradigm shift is required by the UK government, as well.
“Government urgently needs to come to parliament with radical reforms to our creaking system of corporate accountability,”, underlines Frank Field, chairman of the work and pension committee.
As suggested in the report, the British government should put an end to outsourcing and bring under its supervision the ongoing contracts. In that manner, productivity will be the priority instead of profit.
Digital tools could hold the answer
Not long ago, Mark Farmer underlined the need for the UK building sector to become more digitised. In his very informative report ‘Modernise or Die’, he analysed with great detail why construction should invest in digital tools before it’s too late.
Despite Carillion collapse, there is still time for the industry to change things around and enter a more accountable and productive era. For this to happen, though, there is a strong need for the sector to take better care of its data and establish digital tools as the backbone of the construction process.
‘The use of digital tools is paramount to the future of the construction industry but the most important factor is the stronger ability to collaborate. Ιt’s vitally important for existing technology organisations to coordinate and work together with the new technology start-ups as its them who are seen as the disrupters due to the wider focus on gathering and sharing digital data across the teams’, underlined Jason Ruddle UK construction expert and MD at GenieBelt.
And he concluded:
‘We all want to see improved productivity and improved costs, but this will only come from collaboration between the different disciplines within the construction process. Whether it’s through BIM, Government legislation or technology breakthroughs, the construction industry must realise that unless we adopt new processes and agree to data sharing, the industry will be forever seen as being out of touch with driving demands for change’.
GenieBelt as part of the cultural shift
For the construction sector to achieve a significant change, it is indispensable to realise that a cultural shift needs to take place first. The industry needs to start thinking and working differently. Only then, we will be able to take the most out of the data and tools that we have at our disposal.
In GenieBelt, we are fully committed to delivering solid results which will allow this paradigm shift to happen. Data-driven collaboration between the numerous project stakeholders, effective decision-making and strong connection between the construction site and the office are some of the keys for a more digitised and productive building sector.
There is a lot of work ahead of us, but we are on a mission. Schedule a personalised demo and learn how we can help you!
Featured image source: TheGuardian.com