Carillion is one of the biggest corporate collapses the UK has seen. It has created grave knock-on effects amongst employees, investors and those reliant on the services the group provides.
As the media dust settles, the real recriminations are only just beginning: politicians debating the merits of the public-private partnership (PPP) and private finance initiative (PFI) model; questions over whether the company should have been given extra contracts in the autumn when the warning signs were there; and debates over whether executive bonuses should be subject to a clawback.
While Carillion is the name of the moment, others have gone before in similar circumstances. Surely now is the time to ask some deeper questions if we’re to avoid witnessing future repetitions?
For us, the biggest question mark hangs over those at the top: what was going on with the firm’s leadership as it reeled towards its collapse? As enquiries deepen, it’s likely that three main areas will come under scrutiny:
- Leadership openness and honesty
Whatever the economics of the collapse prove to be, most employees and stakeholders felt that the executive leadership at Carillion lacked open and honest communication about the state of the company or its likely demise. The genuine shock in the voices of most Carillion employees on the day that the firm collapsed was a great illustration of this.
There’s a deeper lesson for leaders in tough times here: even when things are bad, being transparent and managing people’s expectations is always the right thing to do.
- The need for greater board accountability
The Carillion story is a case in point for the need to tighten up UK corporate governance, forcing company directors to be much more transparent about how they are acting on behalf of all stakeholders. For example, Board directors need to do much more to enable those stakeholders to be able to trust the content of company reports – especially their statements around company viability (an assessment of the firm’s solvency and liquidity).
The final Carillion annual report suggested that the directors believed the firm would be able to continue operating and to meet its liabilities over a three-year period. How wrong that proved to be…
- Executive compensation
Carillion’s collapse suggests that the approach to executive compensation needs urgent review. The interests of company executives were simply not aligned with those of long-term investors, or with the wellbeing of thousands of employees.
A better, more secure approach would require long-term incentives to be paid in shares, with longer holding periods post-exit and with much stronger claw-back provisions in the event of things going wrong.
Of course, it’s always easy to ask why something happened after the event, to point the finger of blame and see where others have gone wrong. But it’s critical that we do, and that we put better approaches in place to protect the interests of the hundreds or thousands of employees who inevitably bear the brunt of such significant corporate disasters.
Dr Andy Brown
CEO & Practice Head: ENGAGE Leadership