Accounting and Finance

House of CommonsBusiness, Energy and Industrial
Strategy and Work and Pensions
Committees
Carillion
Second Joint report from the Business, Energy
and Industrial Strategy and Work and Pensions
Committees of Session 2017–19
Tenth Report of the Business, Energy and
Industrial Strategy Committee of Session
2017–19
Twelfth Report of the Work and Pensions
Committee of Session 2017–19
Report, together with formal minutes relating
to the report
Ordered by the House of Commons
to be printed 9 May 2018
HC 769
Published on 16 May 2018
by authority of the House of Commons
Business, Energy and Industrial Strategy Committee
The Business, Energy and Industrial Strategy Committee is appointed by the
House of Commons to examine the expenditure, administration, and policy of the
Department for Business, Energy and Industrial Strategy.
Current membership
Rachel Reeves MP (Labour, Leeds West) (Chair)
Vernon Coaker MP (Labour, Gedling)
Drew Hendry MP (Scottish National Party, Inverness, Nairn, Badenoch and Strathspey)
Stephen Kerr MP (Conservative, Stirling)
Peter Kyle MP (Labour, Hove)
Mr Ian Liddell-Grainger MP (Conservative, Bridgwater and West Somerset)
Rachel Maclean MP (Conservative, Redditch)
Albert Owen MP (Labour, Ynys Môn)
Mark Pawsey MP (Conservative, Rugby)
Antoinette Sandbach MP (Conservative, Eddisbury)
Anna Turley MP (Labour (Co-op), Redcar)
Powers
The Committee is one of the departmental select committees, the powers of which
are set out in House of Commons Standing Orders, principally in SO No 152. These
are available on the internet via www.parliament.uk.
Publication
Committee reports are published on the Committee’s website at
www.parliament.uk/beis and in print by Order of the House.
Evidence relating to this report is published on the inquiry publications page of the
Committee’s website.
Committee staff
The current staff of the Committee are Chris Shaw (Clerk), Ben Sneddon (Second
Clerk), Jeanne Delebarre (Assistant Clerk), Ian Cruse, (Committee Specialist), Becky
Mawhood (Committee Specialist), James McQuade (Senior Committee Assistant),
Jonathan Olivier Wright (Committee Assistant) and Gary Calder (Media Officer).
Contacts
All correspondence should be addressed to the Clerk of the Business, Energy
and Industrial Strategy Committee, House of Commons, London SW1A 0AA. The
telephone number for general enquiries is 020 7219 5777; the Committee’s email
address is beiscom@parliament.uk.
Work and Pensions Committee
The Work and Pensions Committee is appointed by the House of Commons to
examine the expenditure, administration, and policy of the Department for Work
and Pensions and its associated public bodies.
Current membership
Rt Hon Frank Field MP (Labour, Birkenhead) (Chair)
Heidi Allen MP (Conservative, South Cambridgeshire)
Andrew Bowie MP (Conservative, West Aberdeenshire and Kincardine)
Jack Brereton MP (Conservative, Stoke-on-Trent South)
Alex Burghart MP (Conservative, Brentwood and Ongar)
Neil Coyle MP (Labour, Bermondsey and Old Southwark)
Emma Dent Coad MP (Labour, Kensington)
Ruth George MP (Labour, High Peak)
Steve McCabe MP (Labour, Birmingham, Selly Oak)
Nigel Mills MP (Conservative, Amber Valley)
Chris Stephens MP (Scottish National Party, Glasgow South West)
Powers
The Committee is one of the departmental select committees, the powers of which
are set out in House of Commons Standing Orders, principally in SO No 152. These
are available on the internet via www.parliament.uk.
Publication
Committee reports are published on the publications page of the Committee’s
website and in print by Order of the House.
Evidence relating to this report is published on the inquiry page of the
Committee’s website.
Committee staff
The current staff of the Committee are Adam Mellows-Facer (Clerk), Katy Stout
(Second Clerk), Libby McEnhill (Committee Specialist), Rod McInnes (Committee
Specialist), Tom Tyson (Committee Specialist), Jessica Bridges-Palmer (Senior Media
and Policy Officer), Esther Goosey (Senior Committee Assistant), Michelle Garratty
(Committee Assistant) and Ellen Watson (Assistant Policy Analyst).
Contacts
All correspondence should be addressed to the Clerk of the Work and Pensions
Committee, House of Commons, London SW1A 0AA. The telephone number
for general enquiries is 020 7219 8976; the Committee’s email address is
workpencom@parliament.uk.
Carillion
1
Contents
Summary3
Introduction7
1
Our inquiry
7
The company and timeline
8
Timeline of key events
8
Carillion plc
13
Business approach
13
Dash for cash
13
Dividends16
Pension schemes
19
Suppliers24
Corporate governance
26
Key board figures
27
Financial reports
2
36
Financial performance up to July 2017
36
July 2017 trading update
37
Aggressive accounting
39
Carillion’s finance directors
44
Conclusions on Carillion’s board
46
External checks and balances
48
Investors48
Auditors51
Advisors53
Pension trustees
56
The Pensions Regulator
57
Financial Reporting Council
60
Role of Government
62
Crown Representative
62
Government support
62
Insolvency Service
63
Corporate law
66
Wrongful trading
66
Directors’ duties
67
Winners and losers
68
2
Carillion
3
Lessons
69
Government responsibilities
69
Government relationships with strategic suppliers
69
Prompt Payment Code
70
Corporate Culture
70
Investors and stewardship
71
The Pensions Regulator
73
Financial Reporting Council
77
The Big Four
79
Conclusions85
Conclusions and recommendations
87
Formal minutes
97
Witnesses98
List of Reports from the Business, Energy and Industrial Strategy Committee
during the current Parliament
99
List of Reports from the Work and Pensions Committee during the current
Parliament100
Carillion
Summary
Carillion’s rise and spectacular fall was a story of recklessness, hubris and greed. Its
business model was a relentless dash for cash, driven by acquisitions, rising debt,
expansion into new markets and exploitation of suppliers. It presented accounts that
misrepresented the reality of the business, and increased its dividend every year, come
what may. Long term obligations, such as adequately funding its pension schemes, were
treated with contempt. Even as the company very publicly began to unravel, the board
was concerned with increasing and protecting generous executive bonuses. Carillion
was unsustainable. The mystery is not that it collapsed, but that it lasted so long.
Carillion and its collapse
Carillion was an important company. Its collapse will have significant and as yet
uncertain consequences, not least for public service provision:
•
It had around 43,000 employees, including 19,000 in the UK. Many more
people were employed in its extensive supply chains. So far, over 2,000 people
have lost their jobs.
•
Carillion left a pension liability of around £2.6 billion. The 27,000 members of
its defined benefit pension schemes will now be paid reduced pensions by the
Pension Protection Fund, which faces its largest ever hit.
•
It also owed around £2 billion to its 30,000 suppliers, sub-contractors and
other short-term creditors, of whom it was a notorious late payer. Like the
pension schemes, they will get little back from the liquidation.
•
Carillion was a major strategic supplier to the UK public sector, its work
spanning from building roads and hospitals to providing school meals and
defence accommodation. The Government has already committed £150
million of taxpayers’ money to keeping essential services running.
•
Carillion’s collapse was sudden and from a publicly-stated position of
strength. The company’s 2016 accounts, published on 1 March 2017, presented
a rosy picture. On the back of those results, it paid a record dividend of £79
million—£55 million of which was paid on 10 June 2017. It also awarded large
performance bonuses to senior executives. On 10 July 2017, just four months
after the accounts were published, the company announced a reduction of £845
million in the value of its contracts in a profit warning. This was increased to
£1,045 million in September 2017, the company’s previous seven years’ profits
combined. Carillion went into liquidation in January 2018 with liabilities of
nearly £7 billion and just £29 million in cash.
Carillion’s board
Carillion’s board are both responsible and culpable for the company’s failure. They
presented to us as self-pitying victims of a maelstrom of coincidental and unforeseeable
mishaps. Chiefly, they pointed to difficulties in a few key contracts in the Middle East.
3
4
Carillion
But the problems that caused the collapse of Carillion were long in the making, as too
was the rotten corporate culture that allowed them to occur. We are particularly critical
of three key figures:
•
Richard Adam was Carillion’s Finance Director for 10 years. He was the
architect of Carillion’s aggressive accounting policies and resolutely refused
to make adequate contributions to the company’s pension schemes, which he
considered a “waste of money”. His voluntary departure at the end of 2016 and
subsequent sale of all his shares were the actions of a man who knew where
the company was heading.
•
Richard Howson, Chief Executive from 2012 to 2017, was the figurehead for
a business that careered progressively out of control under his misguidedly
self-assured leadership.
•
Philip Green joined the board in 2011 and became Chairman in 2014. He was
an unquestioning optimist when his role was to challenge. Remarkably, to the
end he thought he was the man to head a “new leadership team”.
We recommend that the Insolvency Service, in its investigation into the conduct of
former directors of Carillion, includes careful consideration of potential breaches of
duties under the Companies Act, as part of their assessment of whether to take action
for those breaches or to recommend to the Secretary of State action for disqualification
as a director.
Checks and balances
A system of internal and external checks and balances are supposed to prevent board
failures of the degree evident in Carillion. These all failed:
•
The company’s non-executive directors failed to scrutinise or challenge
reckless executives.
•
Carillion’s accounts were systematically manipulated to make optimistic
assessments of revenue, in defiance of internal controls. Despite being
signatories of the Prompt Payment Code, Carillion treated suppliers with
contempt, enforcing standard payment terms of 120 days. Suppliers could
be paid earlier in return for a fee, a wheeze that Carillion used to effectively
borrow more, under the radar.
•
KMPG was paid £29 million to act as Carillion’s auditor for 19 years. It did
not once qualify its audit opinion, complacently signing off the directors’
increasingly fantastical figures. In failing to exercise professional scepticism
towards Carillion’s accounting judgements over the course of its tenure as
Carilion’s auditor, KPMG was complicit in them.
•
Carillion paid other big-name firms as badges of credibility in return for
lucrative fees. Deloitte, paid over £10 million by the company to act as its
internal auditor, failed in its risk management and financial controls role. EY
was paid £10.8 million for six months of failed turnaround advice.
Carillion
•
The company’s shareholders suffered from an absence of reliable information
and were ill-equipped to influence board decision-making. In the main, they
sold their shares instead.
•
The key regulators, the Financial Reporting Council (FRC) and the Pensions
Regulator (TPR), were united in their feebleness and timidity. The FRC
identified concerns in the Carillion accounts in 2015 but failed to follow them
up. TPR threatened on seven occasions to use a power to enforce pension
contributions that it has never used. These were empty threats; the Carillion
directors knew it and got their way.
•
The Government’s Crown Representative system provided little warning of
risks in a key strategic supplier. We recommend an immediate review of that
system.
•
It is far from apparent that the potential for legal action for wrongful trading
or failure to exercise directors’ duties acted as a restraint on the behaviour of
the board.
The lessons of Carillion
Most companies are not run with Carillion’s reckless short-termism, and most company
directors are far more concerned by the wider consequences of their actions than the
Carillion board. But that should not obscure the fact that Carillion became a giant
and unsustainable corporate time bomb in a regulatory and legal environment still in
existence today. The individuals who failed in their responsibilities, in running Carillion
and in challenging, advising or regulating it, were often acting entirely in line with their
personal incentives. Carillion could happen again, and soon.
The economic system is predicated on strong investor engagement, yet the mechanisms
and incentives to support engagement are weak. This makes regulators such as the FRC
and TPR more important. The Government has recognised the regulatory weaknesses
exposed by this and other corporate failures, but its responses have been cautious,
largely technical, and characterised by seemingly endless consultation. It has lacked
the decisiveness or bravery to pursue bold measures recommended by our select
committees that could make a significant difference. That must change. That does not
just mean giving the FRC and TPR greater powers. Chronically passive, they do not
seek to influence corporate decision-making with the realistic threat of intervention.
Action is part of their brief. They require cultural change as well.
There is a danger of a crisis of confidence in the audit profession. KPMG’s audits of
Carillion were not isolated failures, but symptomatic of a market which works for
the Big Four firms but fails the wider economy. There are conflicts of interest at every
turn. KPMG were Carillion’s external auditors, Deloitte were internal auditors and EY
were tasked with turning the company around. Though PwC had variously advised
the company, its pension schemes and the Government on Carillion contracts, it was
the least conflicted of the Four and could name its price as Special Manager of the
liquidation. Waiting for a more competitive market that promotes quality and trust
in audits has failed. It is time for a radically different approach. We recommend that
5
6
Carillion
the Government refers the statutory audit market to the Competition and Markets
Authority. The terms of reference of that review should explicitly include consideration
of both breaking up the Big Four into more audit firms, and detaching audit arms from
those providing other professional services.
Correcting the systemic flaws exposed by the Carillion case is a huge challenge. But
it can serve as an opportunity for the Government. It can grasp the initiative with
an ambitious and wide-ranging set of reforms that reset our systems of corporate
accountability in the long-term public interest. It would have our support in doing so.
Carillion
7
Introduction
Our inquiry
1. Companies collapse. It is a standard part of the business life cycle. The demise of
a major company does not in itself warrant a parliamentary inquiry. Carillion, a major
UK multinational construction and facilities management company which entered
compulsory liquidation in January 2018, was, however, a very unusual case:
•
Carillion’s collapse was sudden and from a publicly-stated position of strength.
It went into liquidation in January 2018 with liabilities of nearly £7 billion and
just £29 million in cash. Yet it had paid a record dividend of £79 million and
large bonuses to senior executives for performance in 2016.
•
The company’s 2016 accounts, published in March 2017, were certified true and
fair by its auditor, KPMG. In July 2017, the company issued a profit warning
which announced a reduction of £845 million in the value of its contracts.
This was increased to £1,045 million in September 2017, the exact value of the
previous seven years’ profits combined.
•
Carillion left a pensions liability of around £2.6 billion and its schemes are set to
be the largest ever hit on the Pension Protection Fund (PPF), which is partfunded
by a levy on other pension schemes.
•
Carillion also owed around £2 billion to its 30,000 suppliers, sub-contractors
and other short-term creditors, of whom it was a notorious late payer. Like the
pension schemes, they will get little back from the liquidation.
•
Carillion was a major strategic supplier to the UK public sector and had around
450 construction and service contracts across government.
•
The Government has committed an initial £150 million of public funds to ensure
continuity of public services provided by Carillion.
Carillion was no ordinary company, and no ordinary collapse.
2. We chose to work together on Carillion, as our predecessor Committees did on BHS,
because it is impossible to consider the management of the pension schemes without
considering that of their sponsor company. Our inquiry did not consider Government
decisions to award major contracts to Carillion. Those matters will be considered by the
National Audit Office, the Public Accounts Committee and the Public Administration
and Constitutional Affairs Committee in subsequent reports. We have also taken steps
to ensure that we have not interfered with official investigations being undertaken by the
Insolvency Service (IS), Financial Reporting Council (FRC), Financial Conduct Authority
(FCA) and the Pensions Regulator (TPR). Our inquiry enabled the reasons for the collapse
of Carillion, and its lessons for Government policy, to be considered in public. This report
sets out our findings from that work. It is split into two parts. First, we consider the business
and the reasons for its failure, together with the failure of various checks and balances on
corporate conduct. Second, we consider the wider policy implications of the case.
8
Carillion
3. Over the course of the inquiry, we took evidence from Carillion’s regulators, its
investors, its advisors, its pension trustees, and from Carillion’s directors during its final
years. We also heard from the Secretary of State for Work and Pensions and the Secretary of
State for Business, Energy and Industrial Strategy to examine the Government’s long-term
response to the collapse of the company. In addition to oral evidence and correspondence
with Carillion’s stakeholders, we sought and received minutes and papers of Carillion’s
board and its committees from the Official Receiver, many of which we have published
as part of the inquiry. We are grateful to the Official Receiver and his staff for their work
in providing these documents to aid our scrutiny. Similarly, the pension scheme trustees
were particularly forthcoming in response to our requests for documents. Our work was
aided by Gabriel Moss QC and Hannah Thornley, both of South Square Chambers, and
Professor Prem Sikka, who have acted as our Specialist Advisers. We are very grateful for
their work.
The company and timeline
4. Before its collapse, Carillion was the second largest construction company in the
UK. It had around 43,000 employees, including 19,000 in the UK. Many more people
were employed in its extensive supply chains. It had pension obligations to around 27,000
members of its defined benefit (DB) pension schemes. Carillion’s work spanned the public
and private sector and extended beyond the UK, with notable contracts in the Middle
East and Canada. Its work for the UK government accounted for 38% of its reported 2016
revenues and spanned from building roads and hospitals to providing school meals and
defence accommodation.1
Timeline of key events
Date
Event
February 2006
Acquisition of Mowlem for £350 million.2
April 2007
Richard Adam appointed to board as Finance Director.3
February 2008
Acquisition of Alfred McAlpine for £565 million.4
December 2008
Pension valuation.
December 2009
Richard Howson appointed to board as Executive Director.5
March 2010
2008 pension valuation 15-month deadline.
September 2010
Richard Howson appointed Chief Operating Officer, remaining on
the board.6
October 2010
2008 pension valuation agreed.
April 2011
Acquisition of Eaga for £298 million.7
June 2011
Philip Green appointed to board as Senior Non-Executive Director.8
December 2011
Pension valuation.
January 2012
Richard Howson appointed Chief Executive.9
March 2013
2011 pension valuation 15-month deadline.
December 2013
Pension valuation.10
Alison Horner appointed to board as Non-Executive Director.11
May 2014
1
Philip Green appointed Chairman.12
Department for Work and Pensions and the Insolvency Service, Carillion declares insolvency: information for
employees, creditors and suppliers, published 15 January 2018, updated 16 January 2018
Carillion
Date
Event
June 2014
2011 pension valuation agreed.13
December 2014
2013 pension valuation agreed.14
July 2015
Keith Cochrane appointed to board as Senior Independent NonExecutive Director.15
December 2016
Richard Adam retired as Finance Director.16
2017
1 January
Zafar Khan appointed to board as Finance Director.17
1 March
2016 Annual Report and Accounts signed and published.18
Richard Adam sold entire existing shareholding for £534,000.19
~End March–15
April
Emma Mercer returned to UK as Finance Director of Construction
Services and brought to the attention of Richard Howson and Zafar
Khan “some issues with which she was not comfortable”.20
8 May
Richard Adam’s long-term incentive plan awards for 2014 vested.
He sold the total amount for £242,000.21
May
The board conducted a review of accounting treatment for
receivables following Ms Mercer’s concerns. This was reviewed by
KPMG. The review concluded that assets had been misclassified but
there had been no misstatement of revenue. Acted as a trigger for
wider review of contract positions.
7 June
The board held a “lessons learned” exercise which considered
cultural, managerial and operational shortcomings.22
8 June
The board considered a presentation on a possible equity issue.23
9 June
Final dividend for 2016 paid worth £55 million.
4–5 July
The Chairman, and board the following day, were informed that
their brokers were not able to underwrite the proposed equity
issue and were advised that a trading update should be made on
10 July. Philip Green remained hopeful for a “positive and upbeat”
announcement to the market.24
9 July
Richard Howson stepped down as Chief Executive. Replaced by
Keith Cochrane as Interim Chief Executive.
The board agrees a contract provision of £845 million to be
included in their interim 2017 financial results.25
10 July
Carillion announced the £845m contract provision and
comprehensive review of the Group’s business and capital
structure.26
12 July
Carillion’s share value fell 70% from 10 July.27
14 July
EY appointed to support its strategic review with a focus on cost
reduction and cash collection. HSBC appointed as new broker.28
August
The board identified a need to put in place further short term
committed bank facilities.29
3 September
Zafar Khan “spooked” the board with a financial update.30
11 September
Zafar Khan sacked as Finance Director and Emma Mercer appointed
as his replacement. New non-executive directors appointed and
Transformation Officer seconded in from EY.31
29 September
Half-year results included a further £200m profit write down.32
24 October
Deferral of pension deficit contributions agreed, releasing £100
million unsecured and £40 million secured new bank finance.33
9
10
Carillion
Date
Event
17 November
Third profit warning issued, alongside announcement that the
company was heading towards a breach of its debt covenants.34
First week of
December
Changed assumptions in weekly cashflow materially reduced the
company’s short-term cashflow forecasts.35
11 December
Kiltearn Partners, the largest shareholder in Carillion, halved its
stake.36
22 December
Cashflow forecast delivered to finance creditors showed the
company would have less than £20 million of available cash in
March 2018. As a result, it was unable to make further drawings
under its £100 million unsecured facility without further waivers
being granted by each of them.37
Late December
New lenders informed the company that a further waiver would
not be given unless an approach was made by the company to
Government.38
31 December
The company submitted a formal request for support to
Government.39
2018
3 January
FCA notified Carillion that it had commenced an investigation into
the timeliness of announcements made by the company between 7
December 2016 and 10 July 2017.40
4 January
The Company met Government officials to discuss status of
restructuring efforts and the need for short and long-term
funding.41
9 January
The Company met with HMRC to explore the possibility of deferred
payment to in respect of tax liabilities, which were otherwise due
in January, February, March and April 2018. The outcome was
inconclusive.42
12 January
Carillion paid £6.4 million to a series of advisors and lawyers,
including KPMG (£78,000), FTI Consulting (£1m), EY (£2.5m),
Slaughter and May (£1.2m).43
13 January
The company sent a letter to Cabinet Office making a final request
of £160 million, including an immediate £10 million.44
14 January
Cabinet Office informed the company that it would not be willing
to provide such support to the company.
The board concluded that the company was insolvent.45
15 January
Directors presented a petition to the Court for the compulsory
winding up of the company on the grounds it was unable to pay its
debts.46 Accepted by the Courts and Official Receiver appointed as
liquidator, with PwC appointed as Special Managers to assist with
the liquidation.
Government announced they were making £150 million available
to support the liquidation and laying a contingent liability to
indemnify the Official Receiver.47
16 January
Greg Clark MP, Business Secretary, wrote to the Insolvency
Service and the Official Receiver asking them to fast-track their
investigation into the causes of Carillion’s failure and the conduct
of the directors.48
18 January
TPR announced they were launching an anti-avoidance
investigation into Carillion’s funding of their pension schemes.49
Carillion
Date
Event
24 January
Work and Pensions and Business, Energy and Industrial Strategy
Committees launched a joint inquiry into the management and
governance of Carillion, its sponsorship of its pension schemes
and wider implications for company and pension scheme law,
regulation and policy.
29 January
FRC announced investigations into the 2014, 2015 and 2016 KPMG
audits of Carillion.50
19 March
FRC announced investigation into the preparation and approval of
Carillion’s financial statements by Richard Adam and Zafar Khan.51
2
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7
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10
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41
42
Carillion plc, Annual Report and Accounts 2006, p 74
Companies House, Carillion plc Officers, accessed 1 May 2018
Carillion plc, Annual Report and Accounts 2008, p 101
Companies House, Carillion plc Officers, accessed 1 May 2018
Carillion plc, Annual Report and Accounts 2010, p 37
Carillion plc, Annual Report and Accounts 2011, p 93
Companies House, Carillion plc Officers, accessed 1 May 2018
Carillion plc, Annual Report and Accounts 2012, p 40
Brought forward from December 2014 and based on same assumptions used for previous valuation.
Companies House, Carillion plc Officers, accessed 1 May 2018
Carillion plc, Annual Report and Accounts 2014
Mercer, Carillion (DB) pension trustee limited scheme funding report actuarial valuations as at 31 December
2013, p 1
As above.
Companies House, Carillion plc Officers, accessed 1 May 2018
As above.
As above.
Carillion plc, Annual Report and Accounts 2016
Letter from Richard Adam to the Chairs, 20 February 2018
Carillion plc, Minutes of a meeting of the Board of Directors, 9 May 2017
Letter from Richard Adam to the Chairs, 20 February 2018
Lessons learned Board pack and minutes, 7 June 2017
Carillion plc, Minutes of a meeting of the Board of Directors, 8 June 2017
Carillion plc, Minutes of a meeting of the Board of Directors, 5 July 2017
Carillion plc, Minutes of a meeting of the Board of Directors, 9 July 2017
Carillion plc, H1 2017 Trading Update, 10 July 2017, accessed 1 May 2018
London Stock Exchange, Carillion share price, accessed 1 May 2018
High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit: KC1 First witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published)
As above.
Q314; Letter from Philip Green to the Chairs, 20 February 2018
London Stock Exchange, Carillion plc Directorate Change, 11 September 2017
Carillion plc, Financial results for the six months ended 30 June 2017, 29 September 2017
High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit: KC1 First witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published)
Update on discussions with stakeholders, trading and financial covenants deferral, 17 November 2017
High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit: KC1 First Witness Statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published)
London Stock Exchange, Carillion plc Notification of major holdings, 11 December 2017
High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit: KC1 First witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published)
As above.
As above
London Stock Exchange, Carillon plc Regulatory investigation announcement, 3 January 2018
High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit: KC1 First witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published)
As above
11
12
Carillion
43 .
Business, Energy and Industrial Strategy Committee and Work and Pensions Committee, Carillion paid out £6.4
million to advisors before £10 million taxpayer bailout, 12 March 2018
Summary of short term funding proposal, and status update, 13 January 2018 and letter from Carillion to
Cabinet Office, 13 January 2018
High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit: KC1 First witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published)
As above
. HMT, Central Government supply estimates 2017-18, Supplementary estimates, February 2018
The collapse of Carillion, Briefing Paper 8206, House of Commons Library, March 2018
Letter from The Pensions Regulator to the Chair regarding Carillion, 12 February 2018
Financial Reporting Council, Investigation into the audit of the financial statements of Carillion plc, 29 January
2018
Financial Reporting Council, Investigation into the preparation and approval of the financial statements of
Carillion plc, 19 March 2018
44
45
46
47
48
49
50
51
Carillion
13
1 Carillion plc
Business approach
Dash for cash
Acquisitions
5. Carillion demerged from Tarmac in 1999. Highly ambitious, it grew quickly and
expanded beyond its roots in the construction sector into facilities management. Much
of this growth was driven by acquisitions. By purchasing rivals such as Mowlem and
Alfred McAlpine, Carillion removed competitors for major contracts. Already the second
biggest construction firm in the UK,52 Carillion attempted to become the biggest in 2014
by merging with the only larger firm, Balfour Beatty.53 This move was, however, rejected
after the Balfour Beatty board dismissed Carillion’s claims that the merger would generate
cost-savings of £175 million a year in “synergies”, the benefits of working together.54
6. Given Carillion’s record in achieving cost savings through mergers and acquisitions,
Balfour Beatty was right to be sceptical. For example, in 2011, Carillion purchased Eaga, a
supplier of heating and renewable energy services.55 Prior to the purchase, Eaga had made
accumulated profits of £31 million.56 Five consecutive years of losses followed, totalling
£260 million at the end of 2016.57 The disastrous purchase cost Carillion £298 million.58 This
came at a time Carillion was refusing to commit further funds to addressing a pension
deficit of £605 million. That problem itself was largely attributable to acquisitions: when
Carillion bought Mowlem for £350 million in 2006 and Alfred McAlpine for £565 million
in 2008 it also bought responsibility for their pension scheme deficits.59 It was storing up
problems for the future.
7. Carillion’s spending spree also enabled one of the more questionable accounting
practices which featured in its eventual demise. Carillion purchased Mowlem, Alfred
McAlpine and Eaga for substantially more than their tangible net assets. The difference
between the net assets and the amount paid is accounted as “goodwill”. Goodwill is the
intangible assets of the company being purchased. These might include the skills and
experience of the workforce, the company brand, and synergies with the purchasing
company. The value of the goodwill recorded on Carillion’s balance sheet for each of
those purchases was higher than the purchase prices themselves. Carillion acquired £431
million of goodwill from Mowlem, £615 million from Alfred McAlpine and £329 million
from Eaga.60 As those figures are simply the arithmetic difference between the purchase
price and the net tangible assets of the company, their accuracy as an assessment of the
52
53
54
55
56
57
58
59
60
The Construction Index, Top 100 construction companies 2014, accessed 1 May 2018
Carillion retained its position as the second largest UK construction firm between 2009 and 2017, behind Balfour
Beatty in each year.
“Balfour Beatty: five reasons why the Carillion merger won’t work”, Daily Telegraph, 15 August 2014
Eaga was renamed Carillion Energy Services.
Carillion Energy Services Ltd, Directors’ report and financial statements for the period ended 31 December 2012,
p9
Carillion Energy Services Ltd, Annual report and financial statements, 2011–2016
Carillion plc, Annual Report and Accounts 2011, p 92
Carillion plc, Annual Report and Accounts 2006, p 74; Carillion plc, Annual Report and Accounts 2008, p 101
Carillion plc, Annual Report and Accounts 2006, p 74; Carillion plc, Annual Report and Accounts 2008, p 101;
Carillion plc, Annual Report and Accounts 2011, p 92
14
Carillion
intangible assets purchased is entirely dependent on the appropriateness of the price
paid. As we consider later in this report, these large and uncertain intangible assets also
continued to prop up Carillion’s balance sheet for the remainder of its existence.
Debt
8. Carillion rejected opportunities to inject equity into the growing company and instead
funded its spending spree through debt. Borrowing increased substantially between 2006
and 2008 as Mowlem and Alfred McAlpine were bought.61 It then almost trebled between
2010 and 2012 to help fund the Eaga purchase. The accumulation of debt, and inability
to reduce it, caused concerns among Carillion’s investors. Standard Life Investments
began selling its shares in the company from December 2015 onwards,62 citing a high
debt burden that was unlikely to reduce in the near term due to acquisitions and a high
dividend pay-out.63 As we discuss later in this chapter, in early 2015 UBS claimed total
debt was higher than Carillion were publicly stating, triggering a big increase in investors
short selling, or betting against, Carillion’s shares.64
Figure 1: Carillion’s total borrowing
£m
1,100
1,000
900
800
700
600
500
400
300
200
100
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
interim
Source: Carillion plc Annual Report and Accounts 2005–2017
9. Carillion’s growing net debt appeared to be of little concern to the board until the
company was in dire straits. Keith Cochrane, non-executive director from July 2015 until
becoming interim Chief Executive in July 2017, described net debt and the pension deficit
as “lesser concerns” in 2015.65 Looking back, however, company directors acknowledged
61
62
63
64
65
Mowlem cost £350 million – Carillion plc, Annual Report and Accounts 2006, p 74 and Alfred McAlpine £565
million, Carillion plc, Annual Report and Accounts 2008, p 101
Standard Life Investments merged with Aberdeen Asset Management in August 2017 to form Standard Life
Aberdeen
Letter from Standard Life Aberdeen to the Chairs, 2 February 2018
Carillion plc, Minutes of a meeting of the Board of Directors, 2 April 2015
Q233 [Keith Cochrane]
Carillion
15
that their position was unsustainable. Philip Green, non-executive director from June
2011 and Chairman since May 2014,66 told us that he regretted the board “did not reduce
net debt sooner” and conceded that they were too slow to explore the opportunity of
raising equity rather than relying on debt.67
Expansion
10. While Carillion’s acquisitions had enabled it to purchase rivals for its home turf,
in Mowlem and Alfred McAlpine, and expand into the new market of energy efficiency
services, in the case of Eaga, they had not delivered the returns the company had projected.
Richard Howson, Chief Executive from January 2012 to July 2017, explained that the
company turned its attention to bidding aggressively on contracts to generate cash:
We did not have any money to buy competitors, as we had done in the past.
We had to win our work organically. We had to bid and we had to win […]68
Expansion into new markets was a key part of Carillion’s strategy, and led to ventures into
Canada, the Caribbean and the Middle East as it sought opportunities for growth.
11. Carillion’s forays overseas were largely disastrous. The most notorious example was a
2011 contract with Msheireb Properties, a Qatari company, to build residential, hotel and
office buildings in Doha. The project was due to complete in 2014, but remains unfinished.69
We heard claim and counter-claim from Carillion’s directors and Msheireb Properties,
who each said the other owed them £200 million.70 Regardless of the true picture—and
we are baffled that neither the internal nor external auditors could tell us—it is abundantly
clear that the contract was not well-managed by Carillion. A July 2017 Carillion board
“lessons learned” pack conceded as much, citing the company’s weak supply chain, poor
planning and failure to understand the design requirements up front.71 Carillion also had
difficulty adapting to local business practices. Richard Howson, who after being sacked as
Chief Executive in July 2017 was retained in a new role to maintain morale and negotiate
payment in key failing contracts,72 explained, “working in the Middle East is very different
to working anywhere else in the world”.73
12. Carillion’s directors attempted to ascribe the company’s collapse to unforeseeable
failings in a few rogue contracts. But, responding to difficulties in UK construction,
Carillion knowingly entered risky new markets.74 A 2009 board strategy paper rated the
Dubai market outlook as 3/10,75 but Carillion’s 2010 annual report said it would “target
new work selectively” in the City.76 With reference to Carillion’s problems with Msheireb,
Richard Howson told us “we only won, thankfully, one construction project in Qatar”.77
66
67
68
69
70
71
72
73
74
75
76
77
Philip Green is not to be confused with Sir Philip Green of Arcadia and, previously, BHS.
Letter from Philip Green to the Chairs, 21 February 2018
Q606 [Richard Howson]
Letter from Msheireb Properties to the Chairs, 27 February 2018
Q482 [Richard Howson]; Letter from Msheireb Properties to the Chairs, 27 February 2018
Carillion plc, Minutes of a meeting of the Board of Directors, 7 June 2017 (not published)
Letter from Richard Howson to the Chairs, 21 February 2018
Q428 [Richard Howson]
Q526 [Richard Howson]
Carillion plc, November Board meeting Board Strategy Session, November 2009
Carillion plc, Annual Report and Accounts 2010, p 10
Q526 [Richard Howson]
16
Carillion
Yet Carillion bid for 13 construction contracts in that country between 2010 and 2014.78
The overriding impression is that Carillion’s overseas contract problems lay not in a few
rogue deals, but in a deliberate, naïve and hubristic strategy.
13. The July 2017 lessons learned pack highlighted the breadth of problems in Carillion’s
contract management.79 Andrew Dougal, Chair of the audit committee, noted there
appeared to be a “push for cash at period end”, which would reflect well in published
results, and “inadequate reviews on operational contracts”.80 As a large company and
competitive bidder, Carillion was well-placed to win contracts. Its failings in subsequently
managing them to generate profit was masked for a long time by a continuing stream of
new work and, as considered later in this chapter, accounting practices that precluded an
accurate assessment of the state of contracts.
14. Carillion’s business model was an unsustainable dash for cash. The mystery is
not that it collapsed, but how it kept going for so long. Carillion’s acquisitions lacked
a coherent strategy beyond removing competitors from the market, yet failed to
generate higher margins. Purchases were funded through rising debt and stored up
pensions problems for the future. Similarly, expansions into overseas markets were
driven by optimism rather than any strategic expertise. Carillion’s directors blamed a
few rogue contracts in alien business environments, such as with Msheireb Properties
in Qatar, for the company’s demise. But if they had had their way, they would have won
13 contracts in that country. The truth is that, in acquisitions, debt and international
expansion, Carillion became increasingly reckless in the pursuit of growth. In doing
so, it had scant regard for long-term sustainability or the impact on employees,
pensioners and suppliers.
Dividends
15. Carillion’s final annual report, Making tomorrow a better place, published in March
2017, noted proudly “the board has increased the dividend in each of the 16 years since
the formation of the Company in 1999”.81 This progressive dividend policy was intended
to “increase the full-year dividend broadly in line with the growth in underlying earnings
per share”.82 The board, most of whom were shareholders themselves,83 were expected to
take into account factors including:
•
the level of available distributable reserves;
•
future cash commitments and investment needs to sustain the long-term growth
prospects of the business; and
•
net profits, to provide “dividend cover”,
when determining dividend payments.84
78
79
80
81
82
83
84
Letter from Richard Howson to the Chairs, 21 February 2018
Carillion plc, Meeting of the Board of Directors, 7 June 2017 (not published)
As above.
Carillion plc, Annual Report and Accounts 2016, p 43
Carillion plc, Annual Report and Accounts 2016, p 7
In the Annual Report and Accounts 2016, p 71, Philip Green, Richard Howson, Zafar Khan, Richard Adam,
Andrew Dougal and Alison Horner are listed as shareholders. Keith Cochrane and Ceri Powell are not.
Carillion plc, Annual Report and Accounts 2016, p 43
Carillion
17
16. In reality, Carillion’s dividend payments bore little relation to its volatile corporate
performance. In the years preceding its collapse, Carillion’s profits did not grow at a steady
rate, and its cash from operations varied significantly. In 2012 and 2013, the company had
an overall cash outflow as its construction volumes decreased.85 But in these years the
board decided not only to continue to pay dividends, but to increase them, even though
they did not have the cash-flow to cover them.86
Figure 2: Carillion’s dividend payments
£m
175
150
Profit
125
Cash from
operations
100
75
Dividends
50
25
0
-25
-50
-75
2011
2012
2013
2014
2015
2016
Source: Carillion plc annual reports and accounts 2011–2016
17. Remarkably, the policy continued right up until dividends were suspended entirely
as part of the July 2017 profit warning.87 The final dividend for 2016, of £55 million, was
paid just one month before on 9 June 2017.88 Former members of Carillion’s board told
us that there was a “wide ranging discussion”89 and “lengthy debate” in January and
February 2017 on whether to confirm that dividend.90 January 2017 board minutes show
that Zafar Khan, then Finance Director, proposed withholding it to conserve cash and
reduce debt. However, he faced opposition from Andrew Dougal, the Chair of the audit
committee,91 and Keith Cochrane, then the Senior Independent Non-Executive Director
and later interim Chief Executive. Both men expressed concerns about the message
holding dividends would have sent to the market. Mr Cochrane suggested “it may be
appropriate to send a message to the market about debt reduction at the right time”.92 He
85
86
87
88
89
90
91
92
Q603 [Richard Adam]
Q602 [Richard Adam]
Carillion plc, H1 2017 Trading Update, 10 July 2017
This payment was the final dividend payment for 2016, announced in May and paid on 9 June 2017. Stockopedia,
Carillion, accessed 1 May 2018
Q383 [Keith Cochrane]
Q292 [Zafar Khan]
Mr Dougal held 5,000 shares in the company. Carillion plc, Annual Report and Accounts 2016, p 71
Carillion plc, Minutes of a meeting of the Board of Directors, 26 January 2017
18
Carillion
told us that “management were committed to reducing average net debt after paying the
dividend”.93 It is clear, however, that all other considerations, including addressing the
company’s ballooning debt burden, were over-ridden. The minutes of the February 2017
board meeting provide no detail of any further discussion of the dividend, but simply
confirm that the board recommended a dividend of 18.45p per share.94 The right time to
“send a message to the market” did not appear to come until the board issued its profit
warning just over four months later.
18. Richard Adam, Finance Director from April 2007 to December 2016, told us that
Carillion’s objective in dividend payments was “balancing the needs of many stakeholders”,
including pensioners, staff and shareholders.95 We saw little evidence of balance when
it came to pensioners’ needs. Over the six years from 2011–2016, the company paid out
£441 million in dividends compared to £246 million in pension scheme deficit recovery
payments.96 Despite dividend payments being nearly twice the value of pension payments,
Keith Cochrane denied that dividends were given priority.97 When offered the analogy of
a mother offering one child twice as much pocket money as the other, he merely noted
that was an “interesting perspective”.98 Richard Adam’s defence was that from 2012–2016,
dividends increased by only 12% whereas pension payments increased by 50%.99 He
omitted to mention that, across his ten year stint as Finance Director, deficit recovery
payments increased by 1% whereas dividends increased by 199%.100 Setting aside selective
choosing of dates, there is a simpler point: funding pension schemes is an obligation.101
Paying out dividends is not. We are pleased that the Business Secretary has confirmed
that his Department’s review into insolvency and corporate governance will include
considering “whether companies ought to provide for company pension liabilities, before
distributing profits” through dividends.102
19. Nor was it clear that shareholders agreed that Carillion achieved Richard Adam’s
balance. Some investors, such as BlackRock, invested passively in Carillion because it was
included in tracking indices. For them, the suspension of dividends, as with significant
falls in the share prices, could lead to a company being removed from indices and trigger
an automatic obligation to sell shares.103 Active investors took a more nuanced view.
Standard Life Aberdeen told us that while “the dividend payment is an important part
of the return to shareholders from the earnings” it was not in the investor’s interests to
encourage the payment of “unsustainable dividends.”104 In December 2015, Standard Life
Investments (as it then was) took the decision to begin divesting from Carillion in part
because they realised Carillion’s insistence on high dividends meant it was neglecting
93
94
95
96
97
98
99
100
101
102
103
104
Q383 [Keith Cochrane]
Carillion plc, Minutes of a meeting of the Board of Directors, 28 February 2017
Q604 [Richard Adam]
Analysis of Carillion plc’s Annual Report and Accounts cashflow statements 2011–2016
Q388 [Keith Cochrane]
Q390 [Keith Cochrane]
Q605 [Richard Adam]
Analysis of Carillion plc’s annual report and accounts cashflow statements 2007–2016
Pensions are deferred pay and pension deficits are responsibilities of the employer. See TPR, Annual funding
statement for defined benefit pension scheme, April 2018, p 11.
Letter from the Secretary of State for Business, Energy and Industrial Strategy to the Chairs, 30 April 2018
Letter from BlackRock to the Chairs, 8 February 2018, Q1118 [Amra Balic]
Q1115 [Euan Stirling]
Carillion
19
rising debt levels.105 Murdo Murchison, Chief Executive of Kiltearn Partners, another
active investor, said dividend payments that were “not sustainable” was a factor in his
company choosing to divest Carillion shares:
In our analysis we baked in a dividend cut. When the market is telling you a
dividend is not sustainable the market is usually right and, again, it is quite
interesting in this context as to why the management were so optimistic
about the business they were prepared to take a different view.106
Ultimately, any investors who held on to their shares found them worthless.
20. Mr Murchison said that, while dividends should be “a residual”, payable once liabilities
had been met, there was a problem with “corporate cultures where a lot of management
teams believe dividends are their priority”.107 Carillion’s board was a classic such case,
showing:
desire to present to investors a company that was very cash generative and
capable of paying out high sustainable dividends. They took a lot of pride in
their dividend paying track record.108
Such an approach was inconsistent with the long-term sustainability of the company.
21. The perception of Carillion as a healthy and successful company was in no small
part due to its directors’ determination to increase the dividend paid each year,
come what may. Amid a jutting mountain range of volatile financial performance
charts, dividend payments stand out as a generous, reliable and steady incline. In
the company’s final years, 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. Active
investors have expressed surprise and disappointment that Carillion’s directors chose
short-term gains over the long-term sustainability of the company. We too can find no
justification for this reckless approach.
Pension schemes
Pension obligations
22. Carillion operated two main defined benefit (DB) pension schemes for its employees,
the Carillion Staff and Carillion ‘B’ schemes.109 In April 2009, Carillion closed the schemes
to further accruals and from that point employees could instead join a defined contribution
plan.110 Carillion still retained its obligation to honour DB pension entitlements
accumulated before that date. The schemes had combined deficits, the difference between
their assets and liabilities, of £48 million in 2008, £165 million in 2011 and £86 million in
2013.111
105
106
107
108
109
110
111
Letter from Standard Life to the Chairs, 2 February 2018
Q1116 [Murdo Murchison]
Q1115 [Murdo Murchison]
As above.
The Carillion ‘B’ scheme was only available to executive directors and other senior employees.
Carillion plc, Annual Report and Accounts 2009, p 102
Analysis of scheme annual report and accounts.
20
Carillion
23. Those deficits, while undesirable, were not unusually high by DB standards and may
well have been manageable. Through its acquisitions policy, however, Carillion took on
responsibility for several additional DB schemes in deficit. When the company entered
liquidation in 2018, it had responsibility for funding 13 UK DB pension schemes.112 All but
two of those are likely to enter the Pension Protection Fund (PPF), which pays reduced
benefits to members of schemes that are unable to meet pension promises owing to the
insolvency of the sponsoring employer.113 The PPF, which is part-funded by a levy on other
pension schemes, will take on responsibility for both the assets of the schemes and the
liability of paying the reduced pensions. The PPF estimates the aggregate deficit for PPF
purposes will be around £800 million, making it the largest ever hit on its resources.114
Box 1: The Pension Protection Fund (PPF)
The PPF protects the pensions of members of DB pension schemes. If the sponsoring
employer of a scheme becomes insolvent, and the schemes cannot afford to pay
pensions at least equal to PPF compensation, the PPF compensates them financially
for the money they have lost. PPF benefits are generally lower than in the failed
scheme: if someone had already reached pension age when the company went bust,
they would be paid their full pension, but will usually have lower annual indexation.
Schemes members yet to reach pension age face a 10% haircut to their pensions as
well. There is also a cap on annual compensation.
As well as taking on liabilities for paying reduced pensions, the PPF takes on the
assets of the failed schemes. To fund pension payments, it invests those assets, seeks
to recover money and other assets from the insolvent sponsors, and charges a levy on
pension schemes eligible for the PPF. The levy is risk-based and acts as an insurance
premium. In March 2017, the schemes insured by the PPF had a combined deficit on
a PPF basis of £295 billion.
In 2018–19, the PPF expects to collect £550 million of levy in total across all eligible
schemes. The hit from the Carillion schemes will be larger than that. However, the
PPF has a reserve of £6.1 billion, making it “well-placed” to absorb the Carillion
schemes. The PPF projects a 93% probability of being fully-funded by 2030.115
24. The most significant of the additional schemes acquired were sponsored by Mowlem
and Alfred McAlpine. Mowlem was purchased in 2006, when it had a year-end pension
deficit of £33 million.116 Alfred McAlpine was purchased in 2008, when it had a year-end
deficit of £123 million.117 By the end of 2011, the combined deficit on these two schemes had
grown to £424 million.118 On 6 April 2011, a single trustee board, Carillion (DB) Pension
Trustee Ltd, was formed to act for the two main Carillion schemes, Alfred McAlpine,
112
113
114
115
116
117
118
Carillion Group Section; Permarock Products Pension Scheme; Carillion “B” Pension Scheme; The Carillion Staff
Pension Scheme; Alfred McAlpine Pension Plan; Mowlem Staff Pension and Life Assurance Scheme; Planned
Maintenance Engineering Limited Staff Pension And Assurance Scheme; Bower Group Retirement Benefits
Scheme; The Carillion Public Sector Scheme; The Mowlem (1993) Pension Scheme; Prudential Platinum Carillion
Integrated Services Limited Section; Carillion Rail (Centrac) Section; Carillion Rail (GTRM) Section. Carillion also
had DB pension obligations in Canada following acquisitions there.
Letter from PPF to the Chair, 20 February 2018
Letter from PPF to the Chair, 3 April 2018
Letter from PPF to Chairs, 20 February 2018 and PPF Annual Report and Accounts 2016–17
Mowlem Staff Pension and Life Assurance Scheme, Report and financial accounts 2007, p 8
Alfred McAlpine Pension Plan, Actuarial Valuation as at 31 December 2008, p 2
Mercer, Carillion (DB) pension trustee limited scheme funding report actuarial valuations as at 31 December
2013, p 3
Carillion
21
Mowlem and two additional schemes: Bower and the Planned Maintenance Engineering
Staff schemes.119 These schemes together accounted for the large majority of both the
total Carillion deficit and total pension membership.120 We focus in this report on those
schemes and the negotiations between Carillion and Carillion (DB) Pension Trustee Ltd
(the Trustee).
Scheme funding
25. DB pension schemes are subject to a statutory funding objective of having sufficient
and appropriate assets to make provision for their liabilities.121 Actuarial valuations must
be carried out at least once every three years to assess whether this statutory funding
objective is met.122 If it is not, the Trustee and sponsor company are required to agree a
recovery plan for how and when the scheme will be returned to full funding, including
deficit recovery payments to be made by the sponsor.123 The agreed valuation and recovery
plan, schedule of contributions and valuation must be submitted to The Pensions Regulator
(TPR) within 15 months of the valuation.124
26. The main Carillion schemes had combined deficits of:
•
£327 million on 31 December 2008;
•
£617 million on 31 December 2011; and
•
£439 million on 31 December 2013.125
27. Carillion and the Trustee therefore needed to agree three recovery plans over the
past decade. The 31 December 2016 valuation was, Keith Cochrane told us, “somewhat
overtaken by events”126 as the company unravelled, but the Trustee expected the total
deficit to be around £990 million.127
28. The 2008 valuation was a warning of things to come. Carillion and the Trustee
failed to agree a valuation within 15 months, mainly because of a disagreement over the
assumptions used to calculate the deficit. Carillion pushed for more optimistic assumptions
of future investment returns than the Trustee considered prudent.128 Additionally, while
the Trustee believed that contributions of £35 million per annum were both necessary
and affordable as a minimum, Carillion said they could not afford contributions above
£23 million.129 Carillion also wanted the recovery plan to be 15 years, which the Trustee
noted “exceeds the 10 year maximum which the Regulator suggests is appropriate”.130 The
119
120
121
122
123
124
125
126
127
128
129
130
Letter from Carillion (DB) Pension Trustee Ltd to the Chair, 26 January 2018
Trustee data shows that at the end of 2013, total membership across these schemes was 20,587. Carillion plc
Annual Report and Accounts 2013 show that total membership across all schemes was 28,785 at the end of 2013.
Pensions Act 2004, section 222
Pensions Act 2004, section 224
Pensions Act 2004, section 226
The Pensions Regulator, Code of practice no.3 Funding defined benefits, July 2014, p44
Analysis of scheme valuation reports. The Bower pension scheme operated on a different valuation cycle and is
therefore not included here.
Q362 [Keith Cochrane]
Letter from Carillion (DB) Trustee Limited to the Chair, 26 January 2018
Letter from Robin Herzberg to the Pensions Regulator, 25 March 2010
As above.
As above.
22
Carillion
valuation and recovery plans were eventually agreed in October 2010, seven months late,
with payments averaging £26 million over a 16 year period.131 The company largely got
its way.
29. The 2011 valuation reached an impasse on the same issues:
•
The Trustee calculated the deficit at £770 million and requested annual deficit
recovery payments of £65 million for 14 years to address it.132
•
Carillion, using more optimistic assumptions, said the deficit was £620 million.
They presented annual deficit recovery contributions of £33.4 million for 15
years as a take it or leave it offer.133
30. The Trustee’s position was supported by independent covenant advice from their
advisors, Gazelle Corporate Finance. Based on the financial reports available to it,
Gazelle said Carillion could increase annual contributions to above £64 million without
a significant impact on available cashflow.134 It also noted Carillion had “historically
prioritised other demands on capital ahead of deficit reduction in order to grow earnings
and support the share price”.135 Despite the continued increases in dividends every year,
the company had refused requests from the Trustee to establish a formal link between the
level of dividends and pension contributions.136
31. Richard Adam, as Finance Director, argued the company could not afford such high
contributions. Gazelle was sceptical of this: his pessimistic corporate projections presented
to the Trustee were certainly at odds with the upbeat assessments offered to the City to
attract investment.137 In retrospect, the gloomy outlook may have been more accurate. But
if that was so, Carillion should not have been paying such generous dividends. Gazelle
concluded that Richard Adam had an “aversion to pension scheme deficit repair funding”.138
The scheme actuary, Edwin Topper from Mercer, said Carillion’s “primary objective was
to minimise the cash payments to the schemes”.139 Robin Ellison, Chair of the Trustee,
observed at the time that Richard Adam viewed funding pension schemes as a “waste of
money”.140
32. Despite TPR writing to both sides in June 2013 to indicate contributions in the range
of £33 million – £39 million would not be “acceptable based on the evidence we have
seen” – Carillion refused to increase its offer.141 In early 2014, however, a compromise was
reached based on a new valuation date of 31 January 2013. Improved market conditions
between those two dates had reduced the deficit to £605 million. The Trustee reluctantly
131
132
133
134
135
136
137
138
139
140
141
The recovery plans across the five different schemes were all 16 years in length, with the exception of Alfred
McAlpine, which was 14 years in length. The Alfred McAlpine Pension Plan Annual report for the year ended 31
December 2010, p 28
Letter from the Trustee to the Pensions Regulator, 9 April 2013
As above.
Letter from Gazelle Director to Carillion Trustees, 23 February 2012
As above.
Carillion single Trustee – meeting between Trustee representatives and the Pensions Regulator regarding failure
to agree the 2011 valuation, 29 April 2013
Letter from the Trustee to the Pensions Regulator, 9 April 2013
Letter from Simon Willes, Gazelle Executive Chairman, to the Chair, 29 March 2018
Mercer, Meeting note with Carillion single trustee schemes and TPR, 19 December 2012
Sacker and Partners LLP, Carillion single Trustee – meeting between Trustee representatives and the Pensions
Regulator regarding failure to agree the 2011 valuation, 29 April 2013
Letter from TPR to Robin Ellison and Janet Dawson, 27 June 2013
Carillion
23
accepted initial annual contributions of £33 million, in line with Carillion’s original offer
and £30 million less than the Trustee originally requested. While recovery contributions
were scheduled to rise to £42 million from 2022, there would be new negotiations in the
meantime.142 The Carillion group would also only guarantee payments due up to end of
2017.143 Beyond then, schemes would only have recourse to individual sponsor companies
within the group. It was also agreed that the next valuation, based on the position at 31
December 2013, would be based on the same assumptions and would not consider the
total level of contributions.144 It is difficult to interpret this result as anything other than
a victory for Carillion in its objective of minimising its contributions to the scheme. We
consider the role of TPR in this outcome later in this report.
33. Following the July 2017 profit warning, Carillion was desperate to cut costs. The
pension schemes were one of their main targets. The Trustee agreed to defer pension
contributions worth £25.3 million due between September 2017 and April 2018, on the
basis that the sponsor would otherwise have been insolvent.145 Carillion also sought to
offload its pension schemes into the PPF in a bespoke deal, though it had far from sufficient
funding to produce a proposal that would have been attractive to the Trustee, TPR or the
PPF.146
34. Though most of them were shareholders, Carillion’s former directors were not members
of the DB pension schemes. Instead, they received generous employer contributions to a
defined contribution scheme. For example, Richard Howson and Richard Adam received
employer contributions of £231,000 and £163,000 respectively for their work in 2016.147 The
performance indicators used to determine bonus payments did not include managing
the risk of pension deficits. The directors rejected accusations, however, that they did
not care about funding the pension schemes. They repeatedly referred to meeting their
pension obligations, meaning fulfilling the deficit recovery plan, without any regard to
the lopsided negotiation that led to its agreement.148 The company ultimately reneged on
that agreement, asking the Trustee to forgo payments due in a desperate effort to save the
company. Fundamentally, those directors did not meet their obligations. TPR makes clear
that “pensions are deferred pay and pension deficits are responsibilities of the employer”.149
Carillion failed in its obligations to honour its pension promises and to take adequate
steps to address its pension deficits.
35. Honouring pension obligations over decades to come was of little interest to a
myopic board who thought of little beyond their next market statement. Their cashchasing acquisitions policy meant they acquired pension scheme deficits alongside
companies. Their proposals for funding those deficits were consistently and resolutely
derisory as they blamed financial constraints unrecognisable from their optimistic
market announcements. Meeting the pension promises they had made to their rank
142
143
144
145
146
147
148
149
Mercer, Carillion (DB) pension trustee limited scheme funding report actuarial valuations as at 31 December
2013, p 5
Gazelle, Carillion plc Paper for the trustee board, 7 February 2012, p 3
Mercer, Carillion (DB) pension trustee limited scheme funding report actuarial valuations as at 31 December
2013, p 1. Consequently, there was no great scope for disagreement over this valuation and it was agreed in
December 2014.
Letter from Carillion (DB) Trustee Limited to the Chair, 26 January 2018
High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit: KC1 First witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published); Q757 [Mike Birch]
Carillion plc, 2016 Annual Report and Accounts, p 66
For example, Q381, Q384 [Keith Cochrane], Q571 [Philip Green]
The Pensions Regulator, Annual funding statement for defined benefit pension scheme, April 2018, p 11
24
Carillion
and file staff was far down their list of priorities. This outlook was epitomised by
Richard Adam who, as Finance Director, considered funding the pension schemes a
“waste of money”.
Suppliers
36. Carillion relied on an extensive network of suppliers to deliver materials, services
and support across its work.150 At the point of the company’s collapse, the construction
trade body Build UK estimated that Carillion’s supply chain spanned 30,000 companies.151
These businesses included direct subcontractors, indirect subcontractors, and suppliers
who may have been unaware that they formed part of Carillion’s supply chain until the
insolvency prevented them from receiving payments owed. The Federation of Small
Business (FSB) said that small suppliers had been placed in a “perilous” situation.152 The
jeopardy suppliers faced at the hands of Carillion was not, however, limited to the point
when the company ceased trading. We heard that the company had long been abusing
its dominant market position by making small suppliers wait for payment.153 Suppliers
told us that Carillion subjected them to extended delays across reporting periods and was
notable for quibbling with invoices to avoid prompt payment.154
37. Carillion signed the Government’s Prompt Payment Code in 2013.155 Signatories are
expected to pay suppliers on time, give clear guidance to suppliers and encourage good
practice. They should pay 95% of invoices within 60 days unless there are exceptional
circumstances,156 undertake to work towards 30 day payment terms, and avoid practices
that adversely affect the supply chain.157
38. Despite signing the Code, Carillion had a reputation as a notorious late payer.158 In
2016, the FSB protested to the company on behalf of suppliers waiting up to 126 days to
receive the payments they were owed.159 The Rt Hon Greg Clark MP, Secretary of State
for Business, Energy and Industrial Strategy, said that “it is obvious that those payment
terms were too long”.160 Carillion’s former directors were, however, either unaware of the
use of this business practice, or unwilling to admit to it. Richard Adam, Richard Howson
and Philip Green all claimed not to recognise cases of people waiting 120 to 126 days for
payment.161 Emma Mercer, Carillion’s final Finance Director, told us of “a few outliers”
of “about five per cent” of the supply chain were paid over 120 days and “less than ten per
cent” waited 60 days.162
150
151
152
153
154
155
156
157
158
159
160
161
162
The Construction Index, Top 100 construction companies 2017, accessed 22 April 2018
BuildUK, Mitigating Impact of Carillion’s Liquidation, accessed 22 April 2018
Letter from FSB to the Chairs, 31 January 2018
Letter from FSB to the Chairs, 31 January 2018
Letter from Vaughan Engineering Ltd to the Chair, 30 March 2018; we also received confidential information
from other Carillion suppliers on payment delays.
Letter from FSB to the Chairs, 31 January 2018
The Government and Chartered Institute of Credit Management do not set criteria for exceptional circumstance,
but suggest the example of instances where a company is able to demonstrate that they apply different terms
to the benefit of their smaller suppliers.
Department for Business, Energy and Industrial Strategy and Chartered Institute of Credit Management, Prompt
Payment Code, accessed 24 April 2018
Letter from FSB to the Chairs, 31 January 2018
As above.
Q1236 [Greg Clark]
Q546 [Richard Howson]; Q547 [Richard Adam]; Q548 [Philip Green]
Qq356–8 [Emma Mercer]
Carillion
25
39. Emma Mercer’s evidence exhibited greater frankness than Carillion’s other former
directors. While she accepted that suppliers were asked to sign up to 120 day payment
terms, she explained that the company offered an early payment facility (EPF) option.163
She called this practice “supply chain factoring”, which is also known as “reverse factoring”
or “supply chain financing”. In such an arrangement, suppliers can receive payments from
a bank ahead of standard timescales, at a discounted rate. Supply chain financing has won
support from industry bodies, including the FSB, and Government. In 2012, the then
Prime Minister announced the Supply Chain Finance Scheme as an “innovative way for
large companies to help their supply chain access credit, improve cash-flow and at a much
lower cost”.164 Carillion was a founding participant in this well-intentioned initiative.
40. Carillion’s use of supply chain finance was unusual in both the harshness of the
alternative standard payment terms and the extent to which the company relied on it.
Shortly after the launch of the Supply Chain Finance Scheme, Carillion changed its
standard payment terms to 120 days.165 Suppliers could sell their invoices at a discount to
Carillion’s bank to receive their payment after 45 days. Carillion, however, would not be
expected to reimburse the bank until the standard payment terms had expired, providing
them with a generous repayment period. Emma Mercer told us that this was a deliberate
strategy: Carillion explicitly used its EPF to avoid “damaging our working capital” and
because it was vulnerable to its own customers not paying within 45 days.166 This only
serves to highlight the fragility of Carillion’s business model.
Box 2: Vaughan Engineering
The collapse of Carillion will inevitably have a ripple effect through the UK
construction industry and the wider economy. One of the first companies to be hit
was Vaughan Engineering Ltd, which filed for administration on 28 March 2018.167
The company employed around 200 people and provided mechanical and electrical
building services on large commercial building projects. They had worked extensively
with Carillion over the past decade.168
Vaughan Engineering described Carillion’s collapse as the principal factor in their
own downfall, though they also cited contract disputes with other contractors and
inadequate Government support following Carillion’s insolvency.169 Their complaints
against Carillion echo those of other suppliers who had to deal with them: standard
payment terms of 120 days that could only be circumvented by use of the early
payment facility, delays in the certification of payments and unsubstantiated counter
claims. The company believe they were owed £830,000 by Carillion, which left them
unable to cover their liabilities.170
41. At the point the company collapsed, Carillion had access to credit of up to £500
million for the “early” payment of suppliers, and was drawing around £350 million.171 That
Carillion was using supply chain financing to prop itself up would be of grave concern to
163
164
165
166
167
168
169
170
171
Qq352–3 [Emma Mercer]
‘Prime Minister announces Supply Chain Finance Scheme‘ Prime Minister’s Office, 23 October 2012
Carillion was still expected to pay within 30 days on its public sector contracts.
Qq354–5 [Emma Mercer]
BBC News, Former Carillion sub-contractor in administration, accessed 27 April 2018
Letter from Vaughan Engineering Ltd to the Chair, 30 March 2018
As above.
As above.
Carillion plc, Group short term cash flow forecast, 22 December 2017 (not published)
26
Carillion
investors. But S&P Global, a credit ratings agency, told us that “the lack of transparency
concerning Carillion’s reverse factoring practices likely obscured its weak balance sheet
and cash flow position.”172 The accounting impact of this approach is considered later
in this report. In the dying days of the company, Carillion considered a proposal by
its restructuring consultants, EY, to extend standard payment terms to 126 days as an
untapped “cash generative opportunity”.173
42. Carillion relied on its suppliers to provide materials, services and support across
its contracts, but treated them with contempt. Late payments, the routine quibbling of
invoices, and extended delays across reporting periods were company policy. Carillion
was a signatory of the Government’s Prompt Payment Code, but its standard payment
terms were an extraordinary 120 days. Suppliers could be paid in 45 days, but had to
take a cut for the privilege. This arrangement opened a line of credit for Carillion,
which it used systematically to shore up its fragile balance sheet, without a care for the
balance sheets of its suppliers.
43. We welcome that as part of Carillion’s insolvency, the Official Receiver has sought to
improve payment terms for goods and services provided during and for the benefit of the
liquidation. They have reduced terms to “there or thereabouts, within 30 days of invoice
rather than the 120 days that [we] have heard”.174This does not, however, benefit those
suppliers who remain unpaid for goods and services before the collapse of the company.
The vast majority of those were uninsured and have joined the long list of creditors unlikely
to see anything they were owed.175
Corporate governance
44. Corporate governance is the process by which a company is directed and controlled.176
Its purpose is “to facilitate effective, entrepreneurial and prudent management that can
deliver the long-term success of the company”.177 The UK Corporate Governance Code,
held by the Financial Reporting Council (FRC), states that the “underlying principles of
good governance [are] accountability, transparency, probity and a focus on the sustainable
success of an entity over the longer term”.178 Philip Green told us that Carillion’s board
upheld these standards, describing a culture of “honesty, openness, transparency and
challenging management robustly, but in a supportive way”.179
45. The documents we saw, however, showed a very different picture:
•
172
173
174
175
176
177
178
179
180
A June 2017 lessons learned exercise following an accounting review found
the need for a “cultural audit” and “review of values”, which should make
changes “where necessary such that staff fully understand that behaving with
transparency, honest[y] and integrity is as important as achieving, improving
and delivering”.180
Letter from S&P Global to the Chairs, 23 March 2018
Carillion plc, Weekly reporting pack for week ending 26 November Actuals, 8 December 2017 (not published)
Q1380 [David Kelly]
“Most UK suppliers uninsured against Carillion’s collapse”, Daily Telegraph, 25 January 2018
Institute of Chartered Accountants of England and Wales, What Is Corporate Governance?, accessed 1 May 2018
Financial Reporting Council, UK Corporate Governance Code, para 1
As above, para 4
Q418 [Philip Green]
Carillion plc, Lessons Learned Board Pack, June 2017, p 66
Carillion
27
•
EY, appointed on 14 July to support a strategic review of the company, quickly
identified a “lack of accountability […] professionalisation and expertise”, an
“inward looking culture” and a “culture of non-compliance”.181
•
Minutes from a Carillion board discussion of strategy in August 2017 identify
“a culture of making the numbers” (hitting targets at all costs) and “wilful
blindness” among long-serving staff as to what was occurring in the business.
The board concluded that the culture of the organisation required “radical
change”.182
•
Carillion’s January 2018 turnaround business plan stated that the group had
“become too complex with an overly short-term focus, weak operational risk
management and too many distractions outside of our ‘core’”.183
46. Carillion’s management lacked basic financial information to do their job. A January
2018 review by FTI Consulting for Carillion’s lenders found the “presentation and
availability of robust historical financial information”, such as cash flows and profitability,
to be “extremely weak”.184 This accorded with a presentation by Keith Cochrane to the
board on 22 August 2017 which identified “continued challenges in quality, accessibility
and integrity of data, particularly profitability at contract level”.185 For a major contracting
company, these are damning failings.
47. Such problems were not restricted to financial information. When it collapsed in
January 2018, the total group structure consisted of 326 companies, 199 based in the
UK,186 of which 27 are now in compulsory liquidation.187 Sarah Albon, Chief Executive
of the Insolvency Service, told us that the company’s “incredibly poor standards” made
it difficult to identify information that should have been “absolutely, straightforwardly
available”, such as a list of directors.188 Responsibility for ensuring the company is run
professionally is the responsibility of the board. Stephen Haddrill, Chief Executive of
the FRC, said “there must be enormous cause for concern about how the company was
governed”.189
48. Corporate culture does not emerge overnight. 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.
Key board figures
49. Carillion was governed by a seven-member board, comprising the company’s Chief
Executive, Finance Director and five non-executive directors.190 Immediately prior to
the company’s profit warning in July 2017, the members were Richard Howson (Chief
181
182
183
184
185
186
187
188
189
190
Carillion plc, EY presentation to Board, 22 August 2017
Carillion plc, Minutes of a meeting of the Board of Directors, 22 August 2017
Carillion plc , Group Business Plan, January 2018, p 6
Carillion plc, FTI Consulting, Independent Business Review, Januaury 2018
Carillion plc, Strategy Proposition Board Presentation, 22 August 2017
Q17 [Sarah Albon]
PwC, Carillion Group website, accessed 23 April 2018
Q110 [Sarah Albon]
Q17 [Stephen Haddrill]
Carillion plc, 2016 Annual Report and Accounts, pp 50–51
28
Carillion
Executive), Zafar Khan (Finance Director), Philip Green (non-executive Chairman), and
Keith Cochrane, Andrew Dougal, Alison Horner and Baroness Morgan of Huyton as
non-executive directors. By the collapse of the company Mr Howson and Mr Khan were
no longer in post, replaced by Keith Cochrane and Emma Mercer respectively.191 Over the
course of the inquiry, we have sought evidence from and about Carillion’s board and their
central role in the collapse of the company.
Richard Howson
50. Richard Howson joined the Carillion board in December 2009 and was Chief
Executive from 1 January 2012 until his sacking as the company issued its profit warning
on 10 July 2017. He stayed on in a lesser role before leaving in September 2017, though he
continued to receive his full, contractual salary until the company entered liquidation.192
Mr Howson had been at the company since its formation in 1999, and the 2016 annual
report highlighted his “detailed knowledge of key business units”.193 In evidence to us,
however, he sought to distance himself from problems in the company that were “from
the long term and from a long time ago”.194 He joined the board after the acquisitions of
Mowlem and Alfred McAlpine (but before Eaga) and stressed that he had moved from
a role responsible for Middle East construction when Carillion signed its contract with
Msheireb.195
51. Mr Howson demonstrated little grasp of the unsustainability of Carillion’s business
model or the basic failings of governance that lay at the root of its problems. He opened
his evidence by stating that “but for a few very challenging contracts, predominantly in
the Oman and one in Qatar, I believe Carillion would have survived”.196 He even seemed
surprised to have been removed as Chief Executive following the profit warning, arguing
“the business was in a sustainable position” based on support it was receiving from banks.197
In his world, Carillion was a healthy business that fell victim to a series of unforeseeable
events over which it had no control.
52. In fact, Mr Howson had a responsibility to ensure he was well informed about
performance and risk, and to act on areas of weakness. Rather than make the fundamental
changes needed, however, he spent much of his time chasing down the consequences of
the company’s mistakes. As Chief Executive, he told us “probably 60% of my time was
either on cash calls or, a lot of time, out and about around contracts collecting”.198 He said
he “felt like a bailiff” as he visited Qatar ten times a year for six years, “just to try to collect
cash” from a single contract.199 He was retained after his sacking with responsibilities for
collecting cash on key contracts and boosting morale in the UK construction business.200
We do not doubt that Mr Howson could be an effective cheerleader: he clearly had great
191
192
193
194
195
196
197
198
199
200
Companies House, Carillion plc Officers, accessed 1 May 2018
Carillion plc, Remuneration Committee Minutes, 7 September 2017
Carillion plc, Annual Report and Accounts 2016, pp 50–51; Carillion plc, Annual Report and Accounts 2016, p 50
Q609 [Richard Howson]
Q425 [Richard Howson]
Q413 [Richard Howson]
Q475 [Richard Howson]
Q534 [Richard Howson]
Q426 [Richard Howson]
Letter from Richard Howson to the Chairs, 21 February 2018
Carillion
29
affection for what he told us was “a great business”.201 However, as the leader of the
company, he was either unaware of the significant, long-term problems it was facing, or
chose not to act on them.
53. Richard Howson, Carillion’s Chief Executive from 2012 until July 2017, was the
figurehead for a business model that was doomed to fail. As the leader of the company,
he may have been confident of his abilities and of the success of the company, but under
him it careered progressively out of control. His misguided self-assurance obscured an
apparent lack of interest in, or understanding of, essential detail, or any recognition
that Carillion was a business crying out for challenge and reform. Right to the end, he
remained confident that he could have saved the company had the board not finally
decided to remove him. Instead, Mr Howson should accept that, as the longstanding
leader who took Carillion to the brink, he was part of the problem rather than part of
the solution.
Keith Cochrane
54. Keith Cochrane was appointed to the Carillion board as Senior Independent
Non-Executive Director (NED) on 2 July 2016.202 He came with extensive board-level
experience, yet quickly succumbed to the dysfunctionality prevalent on the board.203 He,
and the board, were aware of concerns from shareholders about the company’s net debt
and its pensions deficit. The board minutes, however, show little sign of these positions
being properly challenged and there was no general change of approach until the profit
warning.204 Mr Cochrane said that he sought to challenge executives, “in an appropriate
manner”,205 but also believed there was “no basis” in 2016 for “not accepting the view that
management put forward”.206 In evidence to us, Mr Cochrane asked himself “should the
board have been asking further, more probing questions?” but, even aware of the fate of
the company and with hindsight, he could only respond “perhaps.”207
55. When Richard Howson was sacked as Chief Executive in July 2017, the board on
which Mr Cochrane already served asked him to step into the role on an interim basis. He
began to recognise some problems the company faced, extending the size of the provision
made in the profit warning, and admitting—to the board at least—that the company had
cultural problems. Mr Cochrane told us that Carillion was “a business worth fighting for”,208
but in giving investors “limited and vague” answers to “fairly fundamental questions”
about the company, he reinforced their concerns and contributed to a continued sell-off of
shares.209 In October 2017, Carillion appointed a permanent successor as Chief Executive
from outside the company. His start date was brought forward to 22 January 2018 “to
ensure the long-term sustainability of UK industry”. By then, the company was already in
liquidation.210
201
202
203
204
205
206
207
208
209
210
Q413 [Richard Howson]
Carillion plc, Annual Report and Accounts 2016, p 54
Carillion plc, Annual Report and Accounts 2016, p 50. He held executive roles at The Weir Group, Stagecoach plc
and Scottish Power plc, and continued to be lead non-executive director for the Scotland Office and Office of
the Advocate General.
Qq229 – 237 [Keith Cochrane]; Carillion plc, Minutes of a meeting of the Board of Directors, 26 January 2017
Q244 [Keith Cochrane]
Q242 [Keith Cochrane]
Q242 [Keith Cochrane]
Letter from Kiltearn Partners to the Chairs, 2 February 2018
As above.
“Carillion brings start date forward for new CEO”, Financial Times, 20 December 2017
30
Carillion
56. Keith Cochrane was an inside appointment as interim Chief Executive, having
served as a non-executive on the board that exhibited little challenge or insight. He
was unable to convince investors of his ability to lead and rebuild the company. Action
to appoint new leadership from outside Carillion came far too late to have any chance
of saving the company.
Non-executive directors
57. Carillion’s five NEDs had the same legal duties, responsibilities and potential liabilities
under the Companies Act 2006 as their executive counterparts.211 The distinction is that
NEDs are responsible for constructively challenging the executives responsible for the
day-to-day running of a company, and develop proposals for strategy. The Corporate
Governance Code states:
Non-executive directors should scrutinise the performance of management
in meeting agreed goals and objectives and monitor the reporting of
performance. They should satisfy themselves on the integrity of financial
information and that financial controls and systems of risk management
are robust and defensible.212
58. The Carillion NEDs who gave evidence to us told us they performed well in this role.
Alison Horner, a NED from December 2013 until the company’s collapse, said “we were
there to provide oversight and challenge, and we were able to do that effectively”.213 Philip
Green, a NED since June 2011 and non-executive Chairman since May 2014, agreed, saying
“we challenged; we probed; we asked”.214 When we asked him for a concrete example of
this challenge, he cited the company’s level of debt in 2016 and 2017, stating “the board
consistently challenged management on debt, and management then developed a so-called
self-help plan to reduce debt”.215 Yet debt rose from £689 million to £961 million over that
period.216 Mr Green also pointed to board scrutiny of how executives were managing
large, failing contracts:
Some people challenged by sending questions in advance by email; some
people challenged in the meeting. I would say that it was a board that
constructively challenged management.217
However, Mr Green later cited those same contracts as a “very significant factor” in
the company’s collapse.218 Murdo Murchison, of former Carillion shareholder Kiltearn
Partners, doubted whether the non-executive directors had been able “to exercise any
effective check on the executive management team. It appears that they were hoodwinked
as much as anybody else”.219
211
212
213
214
215
216
217
218
219
The five NEDs in place at the end of 2016 were: Philip Green, Andrew Dougal, Alison Horner, Ceri Powell and
Keith Cochrane. As Chairman, Philip Green was paid £215,000 per year. All the others were paid £61,000.
Carillion plc, Annual Report and Accounts 2016, p 66
Financial Reporting Council, UK Corporate Governance Code, para A.4
Q417 [Alison Horner]
Q423 [Philip Green]
Q420 [Philip Green]
The collapse of Carillion, Briefing Paper 8206, House of Commons Library, March 2018
Q423 [Philip Green]
Q537 [Philip Green]
Q1036 [Murdo Murchison]
Carillion
31
59. Non-executives are there to scrutinise executive management. They have a
particularly vital role in challenging risk management and strategy and should act
as a bulwark against reckless executives. Carillion’s NEDs were, however, unable to
provide any remotely convincing evidence of their effective impact.
Philip Green
60. Philip Green joined the Carillion board as Senior Independent NED in June 2011 and
became Chairman in May 2014. He was an experienced member of corporate boards.220
He also had experience of failing companies: he was Managing Director of Coloroll before
it went into receivership in June 1990, following which, in 1994, the Pensions Ombudsman
made a finding of breach of trust and maladministration against him.221 In 2011 he was
appointed as a corporate responsibility adviser to the then Prime Minister, a role he left
in 2016.222
61. The UK Corporate Governance Code says that a company’s Chairman is “responsible
for leadership of the board and ensuring its effectiveness on all aspects of its role”.223 In
this position, Philip Green oversaw low levels of investment, declining cash flow, rising
debt and a growing pension deficit. Yet his board agreed year-on-year dividend increases
and a rise in remuneration for his executive board colleagues from £1.8 million to £3.0
million.224 Mr Green was still at the helm when the company crashed in January 2018.
62. Mr Green appears to have interpreted his role as Chairman as that of cheerleader-inchief. His statement in the 2016 Annual Report and Accounts, signed on 1 March 2017,
just four months before the profit warning, concluded:
Given the size and quality of our order book and pipeline of contract
opportunities, our customer-focused culture and integrated business model,
we have a good platform from which to develop the business in 2017.225
Even more remarkably, on Wednesday 5 July 2017, a few days before the Monday 10 July
profit warning, Carillion board minutes recorded:
In conclusion, the Chairman noted that work continued toward a positive
and upbeat announcement for Monday, focusing on the strength of the
business as a compelling and attractive proposition [ … ]226
The Monday announcement comprised a £845 million write-down. It is difficult to believe
the Chairman of the company was not aware of the seriousness of its position, but equally
difficult to comprehend his assessment if he was.
220
221
222
223
224
225
226
At the time of his appointment as Carillion’s Chairman he was also Chairman of BakerCorp and Chairman
Designate of Williams and Glyn Bank Limited and had previously been Chairman of Clarkson plc.
‘Carillion boss Philip Green has previously been found guilty of a breach of trust over pensions’, City A.M., 16
January 2018
City A.M., Carillion chairman Philip Green was a number 10 adviser , City A.M., 15 January 2018
Financial Reporting Council, UK Corporate Governance Code, para A.3
2014–2016. Executive directors were Richard Howson and Richard Adam. Total remuneration includes salary/
fees, benefits, bonus, long-term incentives and pension.
Carillion plc, Annual Report and Accounts 2016, p 7
Carillion plc, Minutes of a meeting of the Board of Directors, 5 July 2017
32
Carillion
63. In his evidence to us, Philip Green accepted, as Chairman, “full and complete”
responsibility for the collapse of the company.227 He clarified, however, that he did “not
necessarily” accept culpability,228 and that it was not for him to say who was culpable.229
His company, however, assigned culpability in sacking Richard Howson, Zafar Khan, and
“several other members of senior management”.230 Subsequent market announcements
and the group’s January 2018 business plan referred optimistically to the “new leadership
team”, a “refreshed” executive team and a “bolstered” board. Indeed, in a letter to the
Cabinet Office on 13 January 2018, Mr Green reassured the Government that “the previous
senior management team have all exited the business”.231 He, however, was to remain at
the head of the proposed new board.232
64. Philip Green was Carillion’s Chairman from 2014 until its liquidation. He
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. While the company’s senior executives were fired, Mr Green continued
to insist that he was the man to lead a turnaround of the company as head of a “new
leadership team”. Mr Green told us he accepted responsibility for the consequences of
Carillion’s collapse, but that it was not for him to assign culpability. As leader of the
board he was both responsible and culpable.
Remuneration committee
65. Carillion’s board and its remuneration committee (RemCo) attempted to present
its remuneration policy as unremarkable. RemCo Chair, Alison Horner, told us that its
policy was for executive pay to be “mid-table”, the industry median.233 Benchmarking
analysis commissioned from Deloitte by the RemCo in 2015 showed Carillion paid
relatively low total Chief Executive remuneration.234 As a result of this benchmarking,
Richard Howson’s basic salary was increased by 8% in 2015 and 9% in 2016.235 His total
remuneration jumped from what he recalled to us as “something like £1.1 million or
£1.2 million” to £1.5 million in 2016.236 Philip Green was awarded a 10% increase in his
fees as Chairman in 2016, from £193,000 to £215,000, again based on benchmarking.237
Carillion’s wider comparable workforce received just a 2% pay rise in 2016.238
66. Remuneration based on industry medians generates a ratchet effect: by raising
their pay to the median, companies increase the median itself. This method of reward
can also detach pay from the performance of both the individual and the company. The
generous increases paid to Mr Howson, Mr Green and other senior staff in 2015 and
227
228
229
230
231
232
233
234
235
236
237
238
Q470 [Philip Green]
As above.
Letter from Philip Green to the Chairs, 20 February 2018
High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit KC1:
First Witness Statement of Keith Robertson Cochrane, dated: 15 January 2018 (Not published)
Letter from Philip Green to John Manzoni, 13 January 2018
Alison Horner, NED and Chair of the Remuneration Committee, was the only other proposed board member
whose appointment pre-dated the July 2017 profit warning.
Q618 [Alison Horner]
Carillion plc, Review of Current Incentive Plans, 7 October 2015
Q618 [Alison Horner]
Qq 613–4 [Richard Howson] Qq 613–4 [Alison Howson]
Qq 637–8 [Alison Horner]
Carillion plc, Annual Report and Accounts 2016, p 73
Carillion
33
2016 came despite declines in the company’s share price.239 Remuneration for Carillion’s
senior leaders included the potential for an annual bonus of up to 100% of basic pay, split
evenly between financial and other objectives.240 In 2016, Mr Howson received a bonus of
£245,000 (37% of his salary) despite meeting none of his financial performance targets.241
Murdo Murchison of Kiltearn Partners described this as a “complete disconnect” between
financial performance and pay. He said the policy gave the board “a great deal of freedom
to pay what they want to pay” to directors who failed to meet “fairly easy” financial targets.242
67. The RemCo told Carillion’s shareholders in December 2016 that it intended to increase
the maximum bonus available to 150% of salary, to “attract and retain Executive Directors
of the calibre required”.243 Investors such as BlackRock protested in private about these
changes,244 and the RemCo was forced to abandon its plans in March 2017.245 Nonetheless,
at Carillion’s 2017 Annual General Meeting, around 20% of investors voted against the
motion to approve the board’s remuneration report. Kiltearn noted the continued growth
of Richard Howson’s pay as a cause.246 In the RemCo and board papers we have seen,
there is no evidence that the sizeable opposition to the remuneration policy prompted any
reassessment of their general approach.
68. This was evidenced by the RemCo’s remarkable decisions at the time crisis publicly
struck the company. Amra Balic, Managing Director at BlackRock, told us that, at the
time of the 10 July 2017 profit warning, Carillion’s board was “thinking again how to
remunerate executives rather than what was going on with the business”.247 RemCo papers
from 9 July 2017, the day before …