How the board could have saved Carillion

The parliamentary enquiry into the collapse of Carillion had an immense side-benefit, in that, in my view, it showed how sluggish and misguided the company’s board of directors were in the crucial days after the profits warning of July 2017.

From examining the evidence for my book on crises and restructuring, I believe that the compulsory liquidation six months later, on 15th January 2018, could have been avoided.

The picture that emerged from the enquiry was astonishing. I believe the board got most of the big calls wrong in the three months after the first profits warning and, as a result, they wasted the "runway" they had available.

Unless a company has a strong balance sheet or can look to its corporate parent, when a financial crisis has been triggered directors have to up their game. They have to strengthen their collective capabilities, appoint situationally experienced leadership, make strategic restructuring decisions, develop reliable survival tools, and start a dialogue with financial stakeholders, all at great speed.

Critically important is getting the priority and sequence of the strategic objectives right: first stability, then balance sheet fix, then transformation, all while managing liquidity robustly throughout.

In light of that, in my view, Carillion is a case study in what not to do.

After the first profits warning the board didn’t meet for four weeks, while the executive management focused on transformation for the first two months.

When the reality of the liquidity crisis emerged, they spent the third month scrambling to raise additional headroom.

Then they started a three-month business planning process to support a balance sheet fix, which could have been started in July. In the fourth and fifth months, at the request of the lenders, they appointed a non-executive director with restructuring experience and a new firm of advisers to assist with liquidity.

I believe the board’s market announcements show that the liquidity analysis they relied on was persistently flawed. In July they projected that December net borrowing would not have increased, but in the outturn it was half a billion pounds higher.

In September they said the additional headroom secured would be sufficient for at least 12 months, but by January significant additional funding was needed – which the lenders’ adviser calculated to be a further half a billion pounds.

Gazelle, adviser to the pension trustee, told the parliamentary inquiry that it held weekly monitoring calls with the company in the early stages and said, "Time was wasted pursuing the existing management’s view that they could recover the situation".

I take no pleasure in drawing attention to the Carillion board’s shortcomings in managing the financial crisis, and a distinction must be drawn between the shortcomings and the alleged conduct issues prior to the first profits warning that the parliamentary inquiry was interested in.

One of my motivations for writing the book is empathy with directors who are hired for their expertise in widget making but suddenly find themselves expected to stay in post to manage a complex financial crisis.

Even experienced crisis managers face many pitfalls, obstacles and bear traps. Politicians and regulators could act to reduce or remove these and investors, lenders and business leaders could direct or encourage changes in behaviour.

  • Alan Gullan is a Chartered Accountant (South Africa), independent restructuring professional, and non-executive and independent director. His book, Guide to Managing Financial Crises & Restructurings in the UK, is available on Amazon.

Image: From left, former Carillion executives Richard Adam, Richard Howson and Philip Green, giving evidence to the joint Work and Pensions-Business, Energy, and Industrial Strategy committee into Carillion’s collapse, February 2018 (Parliament TV)

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  1. Not to just criticise just for the sake of criticism but this article is not relevant to Carillion but more of a general comment about boards.

    Carillion went bust because they were using other people’s money and losing it. The business could not recovery that money or borrow it so they became insolvent. The finance directors and commercial directors were principally to blame but the other directors should have had the courage to intervene.

    Cast adrift by the politicians and the financial institutions they were impossible to save. I believe that most everybody would be better off if they had been saved but hey ho!

  2. the directors were more interested in themselves rather than the company they made almost no content with the staff for years a lot of staff could have helped them to manage the prodlem and the company would have survived but not as they wanted at the top.

  3. Was this a case of Members of Board of Directors not having relevant expertise in the construction disciplines or little if any interest in the operations or having blind trust in Management/Consultants or could have been in collusion and holding the positions just for the high fees/perks or may have been appointed due to their status or relationships to those in positions of power?

    May be it is appropriate that appointed Board Directors be held financially responsible and thus liable in cases such as in the case of CARILLION.

    Others who should also be considered for investigations should include Internal/Statutory Auditors as they could/should have observed the weaknesses and the ‘Red Flags’ and highlighted and if they had not discharged their responsibilities/functions effectively due to lack of expertise or directions from the ‘BOD’ then there may be something radically wrong with their appointment which needs to be reviewed.

  4. Comment Mr. Singh’s comment on the construction experience of Board members is very valid.

    I wonder how much consideration is given, throughout the ‘reporting chain’ from job surveyors and accountants right up to board level of the use of the figures being transferred. The monthly cost/value reports on site progress are crucial to the figures eventually received by the Board to be used in projecting the expected year’s outcome figures.The CVR’s need to represent both equivalent time figures (eg. materials ordered but not on site are a cost re accounts but not yet included in an interim valuation) and the value of variations included (eg. what is going to be claimed in the final account or what is expected to be achieved).

    If there is misunderstanding at grassroots level, it can be easy for incorrect use
    of figures to reach right up to Board level. Regular checking of performance outcomes is vital to ensure overoptimistic reporting does not happen repeatedly, along with good training of personnel at all levels.

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