“No contractor should be a plc.”
This is what I was told last week by someone who works in the financial sector and has clients in the construction industry.
We were, of course, talking about Carillion, but it was suggested that all contractors face the same fundamental challenge when their stocks are traded publicly.
The rationale is that contracting is a lumpy business, in a cashflow and workload sense, and the nature of public listing means a company must deliver regular updates and trading statements throughout the year.
These two factors don’t really square.
The need for regular updates, it was suggested, incentivised contractors to chase contracts, regardless of margin, so that they could keep the future order book fat and wave it in front of investors like some sort of holiday brochure to a sunny destination, distracting them from any potential gloom the company faced at that moment in time.
All companies, public or private, naturally want to present their best side to world, but listed companies have the added pressure of the stock price. A constantly moving, publicly known value of the company.
In the case of Carillion, it seems that this pressure led to what a House of Commons briefing paper called “aggressive accounting”, where the company booked profit when a contract started, rather than when they were actually realised.
This allowed the company to state boosted profit and keep the shareholders happy with higher dividends.
In turn, the board got to keep their jobs and bonuses were awarded.
But it was not an accurate picture of the company’s health, and the same report showed that while Carillion paid off £376m in dividends between 2012 and 2016, its cash from operations was just £159m.
This was never a sustainable situation, but the company was either unable or unwilling to confront its growing problems until they were too big to remedy.
There are questions for the auditor to answer in all this; mainly, how did Carillion manage to keep a billion pounds worth of problems off its books for so long?
But what if the company had confronted its problem contracts sooner? How many CEOs would have come and gone as quarter after quarter it reported continuing problems in Liverpool, the Midlands, Aberdeen, the Middle East, etc…?
What if it hadn’t practised its “aggressive accountancy” and instead booked profit later and slashed dividends? How would its share price have fared against the gossip and the short-selling and the battered expectations?
Carillion’s failure to deliver its investors to the sunny uplands using its fat order book and aggressive accounting, along with the scrutiny the auditing process will face, will surely mean any other plc contractor tempted to massage reality to keep the dividends up will have a harder time of it.
Those who are traded publicly, and enjoy the extra capital that it brings, might have to be more willing to accept they need to get bad news out early and deal with problems publicly, no matter their size.
Will the market accept that though? I’m not so sure.