UK members of parliament investigating the collapse of Carillion today vowed to "get to the bottom of who knew what and when" after discovering that investors were dumping their shares as early as 2015, despite the company’s optimistic reports.
In typically strong language, the MPs said those reports were "worthless" and that investors who bothered to look in any detail were "fleeing for the hills" before Carillion’s shock profit warning in July 2017.
Standard Life Aberdeen started selling up in December 2015 over concerns about financial management and corporate governance, and had sold everything by the fateful July announcement.
Those who looked closest ran fastest– Frank Field MP
Investor Brewin Dolphin began cutting its shareholding gradually during 2017 and sped up its divestment after the 10 July profit warning.
Not so lucky, Kiltearn Partners began selling its shares only after the warning, in August, because it had come to the conclusion that Carillion’s position was hopeless. It had sold all Carillion shares by 4 January 2018, just 11 days before Carillion entered compulsory liquidation.
But Kiltearn’s chief executive told MPs his company would have considered suing to recover clients’ losses if Carillion hadn’t gone bust.
‘Worthless as a guide’
The investors’ revelations to MPs drew more ire from the chairs of the two committees investigating the collapse, who took aim again at Carillion’s auditor, KPMG.
"There is a disconnect here," said Frank Field MP, chair of the Work and Pensions Committee. "On one hand, the Carillion directors told us all was sunny until a bolt of Qatari lightning hit them out of the blue. Their stewardship had, they proudly told us, been adjudged ‘best in class’ by their friends at KPMG."
"On the other hand," Field continued, "investors were fleeing for the hills, and it appears those who looked closest ran fastest. We will be taking evidence from the auditors and the investors – as well as demanding more company papers – to get to the bottom of who knew what and, most importantly, when."
Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (BEIS) Committee, said KPMG signed off accounts that bore "little relation to reality.
"Investors spotted that Carillion was heading for disaster and fled," she said. "The company had unsustainably high levels of debt, weak cash-generation and was saddled with a widening pensions deficit. It’s a tragedy for those who have lost their jobs and the suppliers left struggling for survival that Carillion directors ignored these issues.
"Carillion’s annual reports were worthless as a guide to the true financial health of the company. The fact that it was impossible to get a true sense of the assets, liabilities and cash generation of the business raises serious questions about Carillion’s corporate governance. KMPG will have to explain why they signed-off on accounts which appeared to bear so little relation to reality."
At the end of January Field and Reeves wrote to major shareholders in Carillion, asking for details about their interaction with Carillion’s board and the timing and motivation of their share selloffs.
The committees published those responses today, saying they show a variety of perceptions about Carillion among institutional investors, and "very different levels of engagement with the board".
Kiltearn Partners – who held 10% of Carillion’s shares in February and May 2017 – said there are "clear grounds for an investigation" into whether Carillion’s management knew, or should have known, about the need for an £845m provision earlier than July 2017.
Kiltearn’s chief executive Murdoch Murchison said that if Carillion had not gone into liquidation, they would have "considered participation in civil legal action against Carillion with a view to recovering" clients’ losses.
In May 2017, Kiltearn rejected Carillion’s Remuneration Report over concerns about the level of remuneration awarded to then-chief executive Richard Howson "relative to the company’s level of net income".
Murchison wrote that after the provision Carillion had become "impossible to value as it was not clear what future cash flows would be as there was no concrete information on critical factors".
Carillion’s published information, including historic annual reports, could "no longer be considered reliable and consequently no effective assessment of its finances could be made", Murchison said.
Kiltearn began selling shares on 3 August 2017.
Murchison stated that during a meeting with Carillion on 13 October, interim chief executive Keith Cochrane could only provide "limited and vague" responses to "fundamental" questions. Consequently, Kiltearn sold all shares by 4 January 2018.
‘No inclination to drive the management to change’
Standard Life Aberdeen spotted trouble earlier, beginning a process of divestment in December 2015 due to concerns about financial management, strategy and corporate governance, which they raised with the board in regular meetings from then until they sold up completely in July 2017.
The company told MPs they "felt that the management was not giving sufficient weight to the probability that trading may deteriorate further or to the downside risk from this scenario given the high level of debt. The board showed no inclination to drive the management to change."
Another investor, Brewin Dolphin, gradually reduced its shareholding during 2017, but accelerated after the July 10 profit warning.
Canadian investment manager Letko Brosseau told MPs it still had faith in Carillion after July 2017, but that it took four attempts to arrange a meeting with Carillion’s new, at the time, chief financial officer, Zafar Khan. They finally lost faith after the November 2017 profit warning and breach of covenants and sold all shares within a few days.
Image: Rachel Reeves MP, chair of the Business, Energy and Industrial Strategy (BEIS) committee, at the first hearing into Carillion on 6 February 2018 (From televised proceedings)