This morning saw the publication of a damning report from MPs looking at the why Carillion, the UK’s second biggest construction firm, collapsed in January.
The company’s rise and fall was as a result of “recklessness, hubris and greed”, according to the 107-page report.
MPs who led the report have called for an overhaul of corporate culture that led to Carillion’s downfall.
Five leaders were singled out for particular scrutiny: Carillion’s chief executive Richard Howson; finance directors Richard Adam and Zafar Khan; Carillion’s chairman Philip Green; and the man who was brought in as interim chief executive, Keith Cochrane.
Construction News has analysed the report and its verdict on five of the failed contractor’s key protagonists.
Richard Howson select committee 180206 1
Chief executive 2012-17
“He was the figurehead for a business model that was doomed to fail”
The report described Richard Howson as “the figurehead” for a doomed approach to business, adding that his “misguided self-assurance obscured an apparent lack of interest in, or understanding of, essential detail, or any recognition that Carillion was a business crying out for challenge and reform”.
“Mr Howson demonstrated little grasp of the unsustainability of Carillion’s business model or the basic failings of governance that lay at the root of its problems,” the report went on to say.
The report portrayed the former CEO as not only blind to the root of the company’s failures, but also oblivious to transformational change required to avert impending disaster. Mr Howson instead spent “most of his time chasing down the consequences of his company’s mistakes”.
MPs said that, while Mr Howson could be “a good cheerleader for the company”, as its leader he was either “unaware of the long-term problems facing the company” or “chose not to act on them at all”.
“Right to the end he remained confident he could have saved the company,” the report said. “Mr Howson should accept that, as the longstanding leader who took Carillion to the brink, he was part of the problem rather than part of the solution.”
Richard Adam Carillion select committee 180206
Finance director 2007-16
“The architect of Carillion’s aggressive accounting policies”
Richard Adam ran the rule over Carillion’s finances and accounting for nearly 10 years, as was labelled in the report as the main driver of the firm’s “aggressive accounting policies”
“He, more than anyone else, would have been aware of the unsustainability of the company’s approach,” the report said.
His decade in charge saw Mr Adam use what the report claimed were “accounting tricks” to prop up the company’s balance sheet.
He was described as a “dominant personality in Carillion’s finance department” who “exercised tight control over the entire function” and “had extensive influence through the group”.
His refusal to compromise with pension trustees was an example of this, according to the report. Minutes from a pension trust meeting from 2013 suggested Mr Adam felt contributing to a pension scheme was “a waste of money”.
As the pensions deficit increased, so did Carillion’s dividends – up 199 per cent across his 10 years at the firm.
After retiring in December 2016, the report suggested Mr Adam’s next moves “were of a man who knew exactly where the company was heading once it was no longer propped up by his accounting tricks”.
On 1 March 2017, the day Carillion’s 2016 accounts were signed and published, Mr Adam sold his entire existing shareholding for £534,000 at 212p per share. By mid-July these had dropped to 57p per share.
Philip Green Carillion select committee 180227 1
“As leader of the board he was both responsible and culpable”
Chairman Philip Green was presented in the report as Carillion’s “cheerleader in chief” who led a board that was unwilling to challenge the management’s actions.
This “unquestioning optimism” was maintained up until Carillion’s public decline with a “delusional, upbeat assessment of the company’s prospects just days before its first profit warning”.
Mr Green was hopeful for a “positive and upbeat announcement to the market”, two days before Carillion announced its writedown of £845m.
“It is difficult to believe the chairman of the company was not aware of the seriousness of its position, but equally difficult to comprehend his assessment if he was,” the report stated.
As others such as Mr Howson and Mr Khan departed, Mr Green remained at the top of the company “insisting he was the man to lead the turnaround”.
Days before Carillion’s liquidation he would write to the Cabinet Office to ask for £160m to save Carillion. Failure to do so would come at an “enormous cost to the taxpayer”, he wrote.
The report said: “In his last-minute ransom note, he clearly hoped that, faced with the imminent collapse of Carillion, government would conclude it was too big to fail. But the government was correct not to bail out Carillion.”
When sat in front of MPs in February, Mr Green said he took full and complete responsibility for the collapse, but clarified he did not accept culpability.
“As leader of the board he was both responsible and culpable,” the report concluded.
In a statement to CN, Mr Green said: ”The Board always sought to make decisions on the best available information and with the best professional advice; furthermore we always strived to act in the interests of the company and all its stakeholders.
”Whilst much of the commentary in today’s report fails to understand and accurately reflect the true, more complex picture of events, the committee has highlighted lessons which can be learnt by the board, the government and the wider industry.
“As the former Chairman, I’m grateful for the on-going hard work of Carillion staff who have been working hard to minimise disruption.”
Keith Cochrane Carillion select committee 180227 1
Interim chief executive Sept 2017-Jan 2018
“Unable to convince lenders of his ability to lead and rebuild the company”
Thrust into the role of interim chief executive after the July profit warning, Mr Cochrane was a critical figure in the attempts to save Carillion.
However, “Mr Cochrane was unable to convince investors of his ability to lead and rebuild the company”, the report said.
After took over a company that had made overly optimistic contract assumptions and had accessibility issues with regards to key contract data. These were “damning failures” for a major contracting company the report said.
In attempt to rescue the business, Mr Cochrane considered ways of generating cash through job cuts and the extension of payment terms to 126 days.
Investors and lenders were uninspired by his plans. “Mr Cochrane’s ‘limited and vague’ answers to ‘fairly fundamental questions’ about the company, reinforced their concerns and contributed to a continued sell-off of shares,” the report found.
A move by him to bring in former Wates boss Andrew Davies to turn the tide never materialised. “Action to appoint new leadership from outside Carillion came far too late to have any chance of saving the company,” the report said.
Zafar Khan_Carillion select committee 180206
Finance director January 2017 - September 2017
“Failed to get a grip on the aggressive accounting policies or make any progress in reducing debt”
“Mr Khan took on the role of finance director when Carillion was already deep in trouble, but he should not be absolved of responsibility,” the report concluded.
Chosen to replace Richard Adam in 2017, he lasted only nine months in the role. Philip Green would explain Mr Khan needed to be replaced because “he was not close enough to the underlying business unit numbers”.
The report agreed with Mr Green’s view, saying: “Mr Khan failed to get a grip on Carillion’s aggressive accounting policies or make any progress in reducing the company’s debt.”
It pointed to Mr Khan’s decision to sign off Carillion’s 2016 accounts in March 2017, just months before the profit warning. This, the report states, was evidence of his “extraordinarily optimistic view of the company’s health” held by Mr Khan.
“Although he may not have been the architect of those policies, his previous role as group financial controller hardly meant this was a man lacking in experience of how the company operated,” it added.