Self-interest, hubris, incompetence and greed

The Times - 16 May 2018
Same old story. Same old greed. Today our select committees publish our joint report into the collapse of Carillion. It is the culmination of months of public hearings and consideration of mountains of minutes and company papers. That evidence pointed overwhelmingly to our damning assessment of the conduct of Carillion’s directors.

The recklessness, hubris, incompetence and greed with which they operated was extraordinary in a large public company and strategic supplier to government. But what was more extraordinary was that they could get away with behaving in that way. We were alarmed to find the most predictable failings in a sequence of checks and balances.

Each of these players was acting in their own perceived self-interest, not that of the company. This leads to the inescapable conclusion that Carillion could happen again, and soon.

Non-executive directors failing to restrain gung-ho executives is hardly unique to Carillion. Nor is a finance director, paid by short-term results, willing to stretch the limits of permissive accountancy rules to present company books in the rosiest possible light.

KPMG waved through those books as the auditor. Of course it did: to challenge would have been to compromise a 19-year sinecure. And there was little prospect of the Financial Reporting Council — fearful of being accused of being anti-business or outgunned by sharper lawyers — policing the definition of true and fair accounting. The Pensions Regulator was similarly sheepish, terrified of enforcing adequate pension contributions from a company utterly contemptuous of its obligations as it distributed ever-greater dividends and bonuses.

Our economic system is to a large extent predicated on shareholders intervening to ensure that the companies they own are properly run. But our biggest PLCs are largely ownerless, their shares held passively in tracker funds. Active investors relied on Carillion accounts that read like mystery novels. Those who had a clue that all was not well understandably chose to sell up rather than try to exercise influence in vain.

And then there were the advisers: Deloitte, EY, City brokers and lawyers aplenty. They lent their names to Carillion’s spiralling descent in return for generous fees that rolled in until the very end. PWC, merely the least conflicted of the Big Four companies, landed a lucrative role conducting the liquidation, on rates of over £1,000 per hour underwritten by the taxpayer, without any competition. Examine any corporate corpse and the same names are there, fat on the proceeds, while the ordinary people that are the lifeblood of our economy are let down.

Urgent action is required to address the skewed incentives that leave our system vulnerable to these spectacular but avoidable collapses. We need regulators with the powers, and the backbone, to intervene, punish and deter; directors who fear their bonuses being taken back; and auditors held accountable for complacent rubber-stamping.

The government does not believe that intervention in the economy is necessarily a bad thing. Yet it is over two years since BHS collapsed. The joint findings of our committees then were lauded by reputable businesses and across political divides, but the government has since been trapped in a cycle of tentative consultation at odds with its rhetoric. The Carillion case reaffirms the urgent need for a radical reform programme to reset our systems of corporate accountability. Bills to establish frameworks for corporate governance and pensions that ordinary workers can rely on; a complete change of culture at our regulators; genuine accountability for individual directors; and an audit market competition investigation armed with a sledgehammer. Anything less and the government could reasonably be held responsible for that next disastrous collapse.

Frank Field is chairman of the Commons work and pensions committee; Rachel Reeves is chairwoman of the Commons business, energy and industrial strategy committee