Carillion PLC: A case of failed corporate governance, awry risk management and obfuscated construction contracts

Abstract

At year-end 2016, Carillion Plc was, per its annual shareholders report, “one of the UK’s leading integrated support services companies, with a substantial portfolio of Public Private Partnership projects, extensive construction capabilities and a sector-leading ability to deliver sustainable solutions.” The company had projects ongoing in the UK, Canada and the Middle East with revenues to the tune of £5.2 billion, net assets of £729 million, a market capitalization of just over £2 billion, and a workforce of around 43,000 employees, including 19,000 in the UK.

Carillion had the distinction of having clocked double-digit growth figures since 2010, in substantial part through acquisitions since 2010, generating revenue through 3 lines of business: support services, project finance, and construction services.

The company’s 2016 accounts, published on 1 March 2017, presented a promising business outlook. On the back of those results, it paid a record dividend of £79 million on 10 June 2017, and awarded hefty performance bonuses to senior executives. On 10 July 2017, just four months after the accounts were published, the company announced a reduction of £845 million in the value of its contracts via a profit warning. This subsequently was increased to £1,045 million in September 2017, equivalent to the company’s previous seven years’ profits combined. Carillion’s collapse was sudden and from a publicly-stated position of strength, Carillion plunged into compulsory liquidation in January 2018 with liabilities of nearly £7 billion and just £29 million in cash!

Carillion’s insolvency remains a major scandal in the UK, if not the largest. In addition to wiping out its shareholder’s capital, the company’s demise left in its wake: unfunded pension liabilities of £2.6 billion, with respect to 27,000 recipients, the largest hit ever to the UK’s Pension Benefit Guaranty Corporation; 30,000 unpaid subcontractors who are owed £2 billion; and uncertainty with regard to 450 service contracts between Carillion and various UK governments, with an initial estimated cost of just under £150 million to ensure continuity of services.

Prima facie, the collapse of Carillion can be attributed to a range of factors, some as naïve as defunct corporate reporting to as sinister as mismanagement of pensions and conflicted financial audits. This paper intends to investigate and quantify each of these areas in turn, in a bid to apply these and other financial indicators to other contractors in the UK to pre-empt Carillions in the making. The report also intends to suggest best practices for corporate governance, workplace rights and the outsourcing of public services and contracts, apart from analyzing the UK government’s handling of the liquidation process.