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)