Failing Governance Impacting Our World
Recently, in my role as a visiting professor I delivered a lecture to students on corporate governance and the role of the audit function. Our discussions were dominated by a recent case of corporate failure that is prominent in current affairs. The particular case demonstrated so many aspects of the exact thing you wouldn’t want to happen on your watch if you were an auditor or a non-executive board member and provided great material for applying the key principles of good governance.
This and other recent cases raised questions like:
Who was to blame? We live in a world where someone must be held to account when things go wrong.
Was it the board of directors? As is commonly known, the buck stops at the top. So is it the board or the CEO that should take responsibility?
Are you wondering which case this applies to? Given there have been so many, it may be hard to tell in the current climate where it seems that governance failure is all around us. Was it Oxfam who were made aware of abuse allegations from those they were sent to serve and members of their own staff which included accusations of bullying, harassment, intimidation and failure to protect staff as well as sexual misconduct?
Or was the topic of discussion Manchester City Football Club or any of the other football clubs where former coach Barry Bennell perpetrated sexual assaults on vulnerable children over whom he was placed as a person of trust? Considering he has now been found guilty of multiple sexual assaults, including indecent assault and other serious sexual offences on boys aged eight to fifteen, was this the topic of our debate?
Did the debate focus on the RBS Small Business Scandal where the poor treatment of nearly 6,000 struggling small businesses in the aftermath of the 2008 banking crash by the Global Restructuring Group was revealed in a confidential report? No, this was not the one.
The topic of discussion was the spectacular wind-up of Carillion that has dominated headlines for all of the wrong reasons over the last few weeks. Carillion – a company with revenues of £5 billion and a £2 billion valuation on the stock market which had made bullish statements about the company’s future and then shortly after one of the largest profits warnings of its kind collapsed.
Carillion had 20,000 UK employees and was a main government contractor, responsible for delivering contracts across the public sector that impact some of the main infrastructure in the UK including the Ministry of Defence, HS2, prisons, schools, hospitals and other construction, maintenance and cleaning contracts. There were another 19,000 employees in the Gulf region. Reports of badly priced contracts, badly managed risks and too much debt have appeared. With hindsight, many of the decisions of the directors will come under scrutiny as the inquiry into the collapse deepens. With a £580 million pension deficit and a £1 billion loss according to its half-year results, it is clear that the dividend policies, executive bonuses and remuneration packages will warrant further investigation.
Brief consideration of this scandal as offered in this blog could not do justice to outlining the complexity of the collapse or take into account how and why the failure occurred. However, as preliminary deliberation, I offer a few points to be taken into account when examining some of the factors that occur in a case like this. To do this, we will take a look at the roles of a number of those involved in the corporate governance function. Each one has the responsibility to play an integral part in the jigsaw of good governance and trying to identify or blame one entity without seeing the interrelationship of all the parties would be overly simplistic.
The CEO and executive directors – the directors are responsible for reporting on the health of the company but we now know that the annual reports were worthless as a guide to its true financial health where there were unsustainably high levels of debt. Blaming the demise on the late-payments on a Middle East contract, which in any case were disputed and flatly disagreed with by the firms auditor whose senior partner is reported to have said: “ I can’t see how that was the cause in itself at all”;
The chairman and the non-executive directors – the fact that it has been difficult to even get basic information about the number of and terms of the directors and gain a reasonable understanding of the business fundamentals, whilst investors who took a close look at the business were fleeing, leads us to serious concerns about their oversight and corporate governance;
The external auditors – are responsible for providing an opinion on the truth and fairness of the financial statements produced by the executive directors. The auditors assert that they conducted their work: “appropriately and responsibly”, so how do we rely on external assurance, particularly in regard to their last audit of the 2016 accounts when the company was famously signed off as a “going-concern” only to announce an £845 million contract write down and profit warning months later, before crashing into liquidation on 15 January 2018;
The internal auditors – were responsible for giving assurance to the board and executive around key areas of the business such as internal controls, review of contracts and a series of individual projects as recorded each year in the annual Internal Audit plans whose scope was approved by the Audit Committee;
The pensions regulator – responsible for upholding scrutiny and oversight of the pension funds, could they have done more? Giving evidence to the parliamentary inquiry into Carillion, Lesley Titcomb, Chief Executive of the Pensions Regulator said that with hindsight the regulator would have used its powers more quickly to ensure the company increased its payments into the pension scheme;
The Financial Reporting Council – who regulate auditors, accountants and actuaries are the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. Did they exercise their direct statutory powers in relation to audit regulation as well as some of the statutory power delegated to it by the Secretary of State?;
The Government – responsible for the numerous contracts that they continued to give Carillion even after the profit warnings were issued. Do they need to do more about their role in corporate governance infrastructure in the UK. The Work and Pensions and BEIS Committees have launched a new joint inquiry into the management and governance at Carillion, its sponsorship of its pension funds, and the implications for company and pension scheme law, regulation and policy. This inquiry will build on the Work & Pensions Committee’s inquiry into defined benefit pension schemes and the BEIS Committee’s work on corporate governance.
Unfortunately, Carillion is not the first and most certainly won’t be the last high profile corporate failure. It remains to be seen what lessons can be learned from the study of its demise. It is my hope that these points will also remind you of your own responsibility in undertaking your governance role in whatever capacity this may be. A wise man once said before you look at the stick in my eye perhaps you should remove the plank in your own.
Before we look to point the finger when thinking about Carillion and other corporate failures, let’s ensure that we undertake our role within the governance architecture to the best of our ability always considering the ethical, commercial and moral impact of our choices.
Until next time…