The Carillion collapse was a failure of governance at every level

 
Estelle Clark
BRITAIN-ECONOMY-CONSTRUCTION-POLITICS-BANKRUPTCY-CARILLION
Carillion should have put up a distress signal, but instead nobody did anything (Source: Getty)

When an organisation collapses, it is natural to focus on the role of the executive team and, if the collapse is related to the company’s finances, the financial auditors.

However, it has become increasingly clear, thanks in large part to the work of the Parliamentary Select Committee, that Carillion was a governance failure, for which the entire board, including the non-executive directors, must provide answers.

Specifically, there is mounting evidence that the board, both executive and non-executive, did not understand the nature of the contracts the company was signing up to, specifically the potential profit margins and their achievability.

Read more: Learn from the massive mistakes made by Carillion's bosses

My suspicion is that quality professionals of sufficient seniority, with both risk management and assurance capability, were not involved in the contracts until the contracts were presented to them as a fait accompli. In circumstances where they are aware and the margin is found to be unachievable, quality professionals either have the opportunity to red-flag potential problems or to suggest operational changes that could make the margins achievable.

Critically, it is the job of the board to understand how the organisation is going to operationalise contracts at the required margin. This requires boards to have a much deeper conversation with the body of an organisation to ensure that there is sufficient confidence that it can deliver – with enough leeway built in should anything go wrong.

With Carillion, I very much doubt if those conversations took place and contracts were taken on that could not be delivered profitably. It can only be that the board did not know how they were going to be delivered and that the entire company was too pre-occupied with winning business with insufficient focus on operational achievability.

The non-executive directors also have questions to answer in relation to the months preceding the collapse.

Specifically, in the long run-up to receivership, was there any pressure brought to bear for a market announcement to be made in order to facilitate an orderly solution rather than a chaotic collapse?

An orderly solution would have been better for investors, customers, including the government, which is now left with at least two half-built hospitals amongst other projects, employees, communities and suppliers. What’s more, it might have encouraged a third party to come in with a cash injection that could, ultimately, have saved the business.

Instead, these opportunities were squandered. It was the executive who had least to benefit from this course of action, and my suspicion is that the non-executive directors were either too weak or unaware of the perilous financial situation the company was in.

This is a clear dereliction of responsibility. The non-executive directors were there to ask the difficult questions and – if they find that, as a result of asking the difficult questions, there is something they don’t like – they need to ensure that the record shows there were decisions made that they did not stand behind.

It must be remembered that this is an organisation which grew by bailing out other companies in the construction industry. Carillion should have put up a distress signal, but instead nobody did anything. We need to know why.

Read more: After Carillion, breaking up the Big Four is not the answer

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