Carillion: Why Capitalism Is Out Of Control

What does the collapse of Carillion show us? That we have not learnt our lesson from the near-meltdown of the markets ten years ago. How many more corporate disasters do we have to endure, before regulators end reckless practices? In this post I explore what should happen next:

Carillion experienced financial difficulties in 2017. Then it went into compulsory liquidation on 15 January 2018, the most drastic procedure in UK insolvency law. Before it’s liquidation, it was the second largest construction company in the United Kingdom. It was listed on the London Stock Exchange, and had some 43,000 employees (around 20,000 of them in the United Kingdom).

In the United Kingdom, the insolvency has caused:

  • project shutdowns,
  • job losses (in Carillion – 1,536 UK redundancies up to 12 March 2018 – and its suppliers),
  • losses to joint venture partners and lenders, and
  • potential financial losses to Carillion’s 30,000 suppliers and 28,500 pensioners.

It has also led to parliamentary enquiries about the conduct of the firm’s directors and auditors. Plus questions about the UK Government’s relationships with major suppliers working on Private Finance Initiative (PFI) schemes. Not to mention other privatised provisions of public services.

A key safeguard against such calamities is meant to be the oversight exercised by non-executive directors. The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. Under the Act, non-executive directors are required to be mindful of the long-term interests of a firm and its employees.

Unfortunately the three non-execs on Carillion’s board didn’t seem to worry about some of the warning signs. For example, was it in the firm’s long-term interests to run up a pension-scheme deficit of more than £900m. Or in four years, Carillion paid out £17m more in dividends than it took in from its operations.

And what about the courts? Will they enforce their duty of care? If they do then we will see the company taking legal action against negligent directors. Initial signs are that promising:

The Financial Reporting Council’s conduct committee is understood to have agreed that there are sufficient grounds for a probe into the conduct of Richard Adam and Zafar Khan. An announcement is expected early next week. A spokesman for the FRC declined to comment.

Frank Field and Rachel Reeves, the MPs leading a joint select committee inquiry into Carillion’s failure, welcomed the regulator’s decision to investigate individual directors.

But the chance of a board bringing proceedings against one of its own is tiny. And this isn’t good enough. The law must change. An acceptance of what has happened, without active response or resistance must stop.

What do you think? Leave a comment below:

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Originally posted 2018-03-17 08:58:56.

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