Carillion shines spotlight on corporate governance as investigation is announced

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Experts ask where HR and effective RemCo oversight was at Carillion, as an investigation into bosses' behaviour is announced

The government has ordered a fast-track investigation into the conduct of directors at construction giant Carillion, which went into compulsory liquidation on Monday 15 January.

It has warned directors that they would be hit with “severe penalties” if found guilty of misconduct in securing some £4 million in handouts last year.

The bonuses were branded “exorbitant” in the House of Commons, and the directors’ apparent bid to protect these as “shameful”.

Much of the criticism centred on Richard Howson, Carillion’s former chief executive who stepped down last year after a shock profit warning. Howson earned £1.5 million in 2016, including £591,000 in bonuses. He continued to work for the firm until last Autumn and is due to stay on the payroll – receiving his £660,000 salary and £28,000 benefits – until October.

Howson’s replacement interim chief executive Keith Cochrane is also set to receive his £750,000 base salary until July. The former finance director Zafar Khan, who stepped down last September, is also due be paid until July.

Speaking yesterday, the Institute of Directors' corporate governance head Roger Barker said that the situation highlights a failure in corporate governance. “Today's outcome suggests that effective governance was lacking at Carillion, and we must now consider if the board and shareholders have exercised appropriate oversight prior to the collapse,” he said.

He signalled, along with others, the potential need for stronger governmental oversight of corporate governance. “Going forward, it may be necessary for government to consider how it can better monitor the robustness of governance at key contractors,” he said.

However, speaking to HR magazine, Martin Tiplady, MD of Chameleon People Solutions and former HR director of the Metropolitan Police Service, said he didn’t believe more regulation was the solution.

“I was stunned [by the behaviour of Carillion bosses],” he said. “In one sense, am I surprised that there had been three profit warnings? No, because... if you get one it’s almost certain you’ll get a second. But what did [the directors] do in that 18 months? They secured their own bonuses.

“But I think most companies actually act properly, most people are actually decent, and most people take governance very seriously because they know it will be their failing if they don’t,” he added.

Better enforcement of existing regulation is preferable to more layers, said Tiplady, therefore welcoming the government’s investigation.

Stephen Perkins, professorial research fellow at The Global Policy Institute, also welcomed the investigation. “Suitably focused, the proposed investigation might flush out the substance of the... problems,” he told HR magazine.

He agreed with Tiplady that the situation at Carillion demonstrates the importance of robust corporate governance in ensuring the success of a business, and in avoiding ‘gaming’ of the numbers.

“A financial analyst speaking anonymously to the FT referred to the company having used ‘an old accounting trick’ whereby financing cash flow and operating cash flow are muddled up ‘to disguise a problem',” he said.

“Questions arise first as to where those accountable for assuring corporate governance were in monitoring the dynamics of performance outcomes corporately, and in overseeing actions individual executives were taking. And secondly, how well were stakeholders served by an overwhelming stress on ‘the numbers’?

“Rather than erecting a shield of limitation based on what can be quantified, would more insightful value have been derived from the exercise of independent judgement by the board and its remuneration committee?”

Tiplady added that the situation begs the question of where HR was in the run-up to the firm’s collapse. HR can play a key role as “the voice of reason” in such instances, he said.

“I’m not saying they’d not been there asking the questions. HR could have been [doing so] long before now, but I doubt it,” he said.

He added that the HR function at Carillion now has an important role in supporting staff as far as possible and communicating the situation as it emerges.

“It’s a huge challenge for HR – all the TUPE stuff that might apply. That’s second/third generation TUPE,” he said. “On one level HR has a workforce now entirely demotivated and anxious about where tomorrow’s pay is coming from… quite apart from the fact they [in HR] are as affected by this as the people they’re supporting.”

Carillion employed 43,000 people worldwide, 20,000 in the UK, and had 450 contracts with the UK government. The government has said that staff and contractors working on public sector service contracts will continue to be paid. But there is concern for an estimated 30,000 smaller firms working on projects in the private sector.

Last August the government published a corporate governance whitepaper, which included proposals to force all listed companies to reveal the pay ratio between bosses and workers, to publish the names of listed companies where a fifth of shareholders were opposed to executive pay packages, and new measures to ensure the voice of employees is heard in the boardroom.

In December the Financial Reporting Council (FRC) launched a consultation on revising the UK’s corporate governance code. Proposals include widening remuneration committees’ remits so they oversee pay and incentives across the wider workforce, and that executives be required to hold on to bonuses paid as shares for at least five years.

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