Corporate Governance: Analyzing the Failure of Carillion Plc

Corporate Governance

TABLE OF CONTENTS
REFERENCES..............................................................................................................................10
APPENDIX....................................................................................................................................11

There are various corporate failures which surprised everyone globally but along with
that highlighted the loopholes into the system. The major reason behind the events of corporate
failure is due to the corporate and ethical governance weaknesses. This essay critically analyses
the Carillion Plc as an example of failings which went from showing just £5.2bn revenue, and
£146.7m profit before tax, offering dividend to its shareholders with an order book of £16 billion
and £41.6 billion in pipeline in 2016. This essay provides an insight into the definition of ethics
and corporate governance followed by the theoretically understanding and analysing the failing
at the board level within an organization. For doing this, different theories have been put in place
for effectively understanding the failure.
Analysing the Carillion Plc failure
Carillion was the multinational organization into construction services in UK. Prior to its
demise, the company was having the liability of nearly £7 bn having 43000 individuals working
and the 28000 pension scheme members. The failure of the company resulted into delays and
cancellation of the projects in addition to the loss of jobs of its employees, pensioners, partner
etc. This case was an unsustainable dash for cash. Carillion's acquisition has lacking the coherent
strategy in terms of removing competitors from the market but it also failed to achieve or
generate the desired margins (Bhaskar and Flower, 2019). The purchases were funded by debts
which was rising which resulted into the creation of problem for the pension in the future. Even
though the company was facing the financial problem then too it worked on expanding into new
market along with exploiting its suppliers. The company wrong fully presented its accounts,
hiding the reality and increasing the dividends every year. The company mainly relied upon its
suppliers in respect to providing materials and support but then it treated them as contempt.
In between the year 2012 and 2017, the company paid out nearly £330 mn more in
respect to dividends in comparison to what it made through its business activities and the in
2009-18, the company owed a debt increased from £242 mn to approximately £1.3 bn. The most
surprising thing was that despite poor performance and weak financial situation, the board of the
company made a payment in millions pertaining to bonuses to its top executives in addition to
the salaries which was criticized by the shareholders (Sweet, 2018). The main reason behind the
collapse of Carillion is the lack of accountability and professionalism and inability to comply
with the governance and ethical code of conduct. The key participant into this collapse are the

board members, shareholders and the Big 4 firms which resulted into failure of the company to
meet with its ethical and corporate governance requirement.
Critical analysis from ethical and corporate governance perspective
In order to critically evaluate the case, from the perspective of corporate governance,
agency theory and the shareholder theory is being utilized. The agency theory basically defines
the relationship between the shareholders (principals) and the directors of the company (agents).
As per this theory, the agents are hired by the principals for the purpose of running the business.
The shareholders delegates the work pertaining to managing and running of business to its
directors along with the expectation that they will act in the betterment and interest of the
principal. But in contrast, there are chances that the agent might not act for the interest of the
principal. There are chances that there occurs a conflict of interest among the directors and
shareholders (Conway and Mor, 2018). Under the case of Carillion Plc made a joint venture
which it has achieved its financial close at £1.7 billion which is basically a public private
partnership. The JV was with the hospital infrastructure based out in Ontario, Canada. This
partnership was initially objected by the debt holders which was because of the reason that the
company already had a huge amount of financial crisis in the past 3 years. In addition to this, the
company merged with the GT rail maintenance in 2001 and also took-over the citex management
in 2002. It was also being observed that the company was operating in an aggressive way after its
demerger from its parent company in the year 2009. In addition to this, Carillion Plc also
acquired in the year 2008, company named Alfred McAlpine for amount of £572 million.
Therefore, the outcome of it can be seen that the Carillion Plc acquired a good market position
but has also impacted its performance during the time of financial downturn (Gallagher, Crinson
and Seeley, 2018). The directors provide bonuses to it top executives apart from the salary
despite knowing that the financial position of the company is not goods. Thus, it failed to comply
with the corporate governance pertaining to the betterment of the company and it shareholders.
Therefore, based upon this theory, it can be said that the managers in Carillion Plc were
interested in the remuneration and the benefits. Self-interest was the major factor and egoism key
concept underpinning this, which is the most prominent factor of ethical egoism.
The stakeholder theory incorporates the accountability of the management towards its
shareholders. Its shareholders involve the suppliers, employees, trade associations, government
and business partners. Pertaining to the Carillion Plc, it can be stated that the company even in