A damning report by MPs has condemned not only the directors of Carillion, but also key regulators and the company’s auditors, who did little to prevent the collapse of the company in January.
In its 100-page report, the Business, Energy and Industrial Strategy Committee and the Work and Pensions Committee concluded that “Carillion’s rise and spectacular fall was a story of recklessness, hubris and greed”.
The report is particularly critical of the board’s directors who had continued its drive towards acquisitions and a “dash for cash” and had “mispresented” the reality of the business to its shareholders.
It adds: “Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses.”
The report also criticises the accountancy firms that took generous fees from the company while it spiralled into debt, questioning, in particular, KPMG’s “independence and objectivity” in light of the fact it had been Carillion’s auditor since the firm was set up in 1999.
Carillion had around 43,000 employees, including 19,000 in the UK. Many more people were employed in its extensive supply chains. So far, more than 2,000 people have lost their jobs.
The firm left a pension liability of around £2.6 billion. The 27,000 members of its defined benefit pension schemes will now be paid reduced pensions by the Pension Protection Fund (PPF), the lifeboat for failed pension schemes, which faces its largest ever hit.
Pension scheme considered ‘waste of money’
Richard Adam, Carillion’s finance director for 10 years, was singled out for his lack of action on pensions.
“He was the architect of Carillion’s aggressive accounting policies and resolutely refused to make adequate contributions to the company’s pension schemes, which he considered a ‘waste of money’. His voluntary departure at the end of 2016 and subsequent sale of all his shares were the actions of a man who knew where the company was heading,” the report says.
Although most of Carillion’s directors were shareholders, they were not members of the company’s defined benefit pension schemes.
Instead, they received generous employer contributions to a separate defined contribution scheme. For example, Richard Howson, Carillion’s former chief executive, and Mr Adam received employer contributions of £231,000 and £163,000 respectively for their work in 2016.
The report adds: “Honouring pension obligations over decades to come was of little interest to a myopic board who thought of little beyond their next market statement. “Meeting the pension promises they had made to their rank and file staff was far down their list of priorities. This outlook was epitomised by Richard Adam who, as finance director, considered funding the pension schemes a ‘waste of money’.”
Pensions Regulator under attack
The Pension Protection Fund expects to take on 11 of Carillion’s 13 UK pension schemes, meaning the members of those schemes will receive lower pensions than they were promised.
Even paying out lower benefits, the schemes will have a funding shortfall of around £800 million, which will be absorbed by the PPF and its pension scheme levy-payers. Lesley Titcomb, chief executive, for The Pensions Regulator, responded vigorously to criticisms of the organisation, pointing out that it had already made changes to protect members of pension schemes.
She says: “We are now a very different organisation; we are clearer about what we expect, quicker to intervene and tougher on those who do not act in the interest of members. We have reinforced our regulatory teams on the frontline and are embedding a new regulatory culture.”
Pensions expert, Nathan Long, senior pension analyst at financial provider Hargreaves Lansdown, comments: “Stopping short of a recommendation to disband the regulator, findings that a ‘tentative and apologetic’ approach is ingrained at the regulator, and with doubts about the current leadership, suggest that the intense scrutiny will continue at least a little while longer.”
On the wider picture, Russ Mould, AJ Bell investment director, adds: “The report offers a clear analysis of what caused the company to collapse and offers a potent-looking list of potential responses, including a break-up of the big auditing firms, an overhaul of the UK’s corporate governance regime and how management teams are paid and reform of key regulators.
“The problem is that we have been here before. The debate over how companies are run and for whose benefit still rages on, with investors seemingly no better protected now than in the early 1990s, given that a FTSE 250 firm has just been able to go broke in plain sight.”