Corporate Governance and Ethical Failures: The Case of Carillion Plc

This essay critically analyzes the corporate governance failures of Carillion Plc, a multinational construction services company in the UK. The analysis explores the ethical and financial mismanagement that led to the company's collapse, examining the roles of the board, shareholders, and auditors. The essay applies agency and stakeholder theories to understand the failures, highlighting issues such as over-optimistic reporting, reverse factoring, and the disregard for ethical conduct. It details how the board prioritized their rewards, failed to maintain transparency, and neglected risk management, leading to the company's demise. The analysis emphasizes the importance of ethical behavior, accountability, and adherence to corporate governance codes in preventing such failures, offering valuable lessons for businesses and stakeholders.

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

the times of loss paid a huge amount of dividend to its shareholders and represented its annual
report showing that everything is going as expected, which was all false. In addition to this, it is
important to note that the big 4 firms were also involved in this collapse in some way. Deloitte
was engaged for some time as the internal auditor of the company along with its rival KPMG
which was appointed as its external auditor (VERSCHOOR, 2018). Besides this, EY was also
being involved in respect of providing advice to the company and restructuring the company as
per the committees. PwC was offering advice pertaining to the pension schemes along with govt.
on Carillion contract. The company paid dividend to its shareholders so that they can retain them
and avoid any situation of chaos but on the side, it treated its suppliers badly. It was a routine for
the company like paying late, quibbling of invoices and apart from this, delays in the reporting
period was all became the policy of the company. The arrangement made in regard to the
payment to suppliers opened a line of credit for the company which was systematically utilized
by the company in order to fragile its balance sheet irrespective of its supplier’s balance sheet.
Ethics are the moral principles which is being govern by the person’s behaviour within
the business. Under this, it is expected to cover thebroad social scope which is more than
economics. On reading out the Carillion’s 2016 report, there was no sign of the company in
difficult situation and were communicating their shareholders and investors about their ability to
minimize its cost along with improving efficiency which has resulted into increase in strong
profit margins.
The figure below depicts how quickly the organization went from the strong and healthy
statement in 2016 to the 3 warnings pertaining to profits in the year 2017 leading to liquidation
in 2018.

Figure 1: Timeline of Carillion from 2016 to 2018. (Source:
https://www.ft.com/content/748bbcf4-f9fc-11e7-a492-2c9be7f3120a)
On evaluating and analysing what went wrong, as per the standards and Poor, the reason
was over-optimistic reporting, reverse factoring rampant plundering of thepension funds through
which the company kept the market into dark. The reverse factoring refers to revealing the true
financial of the company, the bank received discount in respect to paying the Carillion suppliers
early which was kept hidden from thebalance sheet.
Carillion showed an absence of transparency to their partners and figured out how to
cover up nearly £500m of obligation along these lines. UK corporate administration code sets out
disclosure contrasts among guideline and code, the code albeit deliberate on a go along or clarify
basis, which means the listed organizations have an obligation to disclose to the market if they

are not following and in addition to this, it is also sets out that the directors ought to affirm that
they have completed a robust evaluation of the key risks confronting the organization – including
those that would undermine its plan of action, future execution, liquidity and solvency and that
Directors ought to state about those risks and clarify how they are being overseen or relieved
(Xiong, 2020). Unmistakably this didn't happen, and inside a half year when the organization
was in a difficult situation, with £845m esteem decrease in contracts, a fall in income and capital,
and a suspended profit.
The BOD failed to follow ethical code of conduct which some or the other way led to
the fall out of the company. The Board of Carillion changed the organization strategy in 2017 to
ensure their rewards, which means if the organization entered liquidation, they would in any case
be paid (Nordberg, 2020). The planned way this happened was unethical and egoistic in securing
their own advantage, Howson gathered £591,000 reward the time of 3 profit warnings and, on
liquidation in January 2018 he kept on being paid a compensation of £660,000, similarly as did
other board members. The compensation advisory group ought to have scrutinized the thought
processes of this adjustment in policy that repudiated the code, there was no such sensitivity
appeared to the large numbers who got jobless in Carillion's liquidation or those whose pension
was pillaged because of board failures.
The pension fund deficiency expanded from £249 million in the year 2010 to £805
million in the year 2016, practically similar sum as dividends paid to investors in that period. The
Pension trustees had long hard fights with Carillion board in attempting to execute increments to
the fund. It was alluded to the Pensions Regulator, (TPR) as no recuperation plan was set up that
was suggested by trustees, they undermined segment 231 powers to authorize this, it was
accounted for in the House of Commons government report that the key controllers, the FRC and
the TPR were weak in giving empty threats. There has been a lot of conversation over facing
intense meeting room characters, for example, Robert Maxwell or Enron's KenntheLay, even
Carillion's CFO and senior informant Emma Mercer discovered she 'was not tuned in to' by
board members.
Carillion were bidding for contracts no matter what, Howson said, “they needed to bid
and they needed to win”, realizing that the fact that the aggressive bidding was producing money
instead of benefit which depicts the reckless conduct, no perspective of the potential outcomes of
such activities, showing absence of good thinking. The profits were exaggerated, fixes to one

hospital bringing about 12.7% losses were superseded by senior administration and was recorded
as 4.9% (£53 million) profit, there were 18 other similar agreements, also £294 million “traded
not certified” work not recorded accurately to increase the profit.
The Non-Executive Directors (NED) neglected to investigate or challenge reckless
practices, they failed in maintaining the code in guaranteeing and maintaining integrity of
monetary data and the risk management. The Tyson report (2003) had featured the requirement
for more thorough and more straightforward search measures for NEDs, obviously this wasn't
the situation with Philip Green, the dog that didn't bark alongside numerous others (Crilly, 2019).
The auditors were reprimanded for being absolutely smug, neglecting to practice appropriate
judgment over Carillion's records (The governance lessons of Carillion's collapse. 2018). KPMG
got £29million in more than 19 years, rotation of auditors has been a debated subject, with an
origination that time breeds commonality and isn't valuable to the independence required. The
review board ought to have been predominant in addressing auditor independence. In addition to
this, Deloitte also failed in their job of risk handling and interior controls while gathering £10 mn
as fees, the government report suggested reference of the statutory audit market to the
Competition and Markets as the trust and quality pertaining to audit had failed.
Carillion board sacrificed partners; the workers, pension holders and creditors and in
focusing on investor short-term interests. The BOD failed in its roles and duties, the association
was liquidated, investors got nothing. The Government inquiry stated that the board had
illustrated, carelessness, ravenousness and exploitations.
Untrustworthy and unethical behaviour within the company contrarily affects the
welfare of the society and questions the role among the ethics and administration however there
is an obligation and an ethical commitment to take care of the organization interests, which is a
duty of a good stewardship. Results inside Carillion being; firemen notified to dish out school
suppers to 18,000 schoolchildren in the event that Carillion's cooking staff didn't appear (they
did). The Government provided £150 mn to keep administrations running (The Collapse of
Carillion - a Failure of Ethical Standards? 2018). The societal impact of ineffective decision
making, puts costs to the detriment of people in general, the Government taking care of the
expenses of incomplete structures, thousands jobless, and the PPF who had endured its greatest
shot securing Carillion's pensions, and the loan providers (creditors) does not see any return of
over £2 billion owed. A consequentialist ethical system set up would have been deterrent, there

is no expectation for associations to show genuine philanthropy, however thought of results,
ought to have been an underlying economic thought. Honesty and integrity is considered to be
the same thing from thecorporate governance perspective but morality is crucial when one has
the responsibility of others. The board of Carillion plc failed in completing their obligation
towards its stakeholders and trust is important pertaining to business ethics which can be possible
through maintenance of transparency and disclosure. The board needed to be transparent in
regard to hiding of debt obligation and exaggerating benefits illustrating ignorance of the
outcomes, having an organization statement of purpose to say they are the 'confided in
accomplice' would be ludicrous if the results weren't so serious.
It can be inferred from the above that the Carillion collapse was the outcome of number
of mistakes in respect to the ethical and corporate governance which all together resulted into
damaging the firm. The company paid the dividend and the bonuses which were being paid to
the top executives and shareholders at a rate which was not affordable by the company. The
board were planned in changing policy around compensation showing adjusted interests
connected to reward might be inconvenient to moral authority (Sikka and et.al., 2018). An
absence of freedom appeared by those there to secure, for example, the NED's and auditors to the
point that the public authority advisory group need to see the changes and a complete negligence
of the suppliers. The board guaranteed they were remunerated for the failure in accepting
compensation and rewards long after the breakdown of the organization and showed no capable
authority towards representatives. Audit is the main part of corporate governance and absence of
effective audit results into affecting the trust in the process. The collapse of Carillion Plc has led
to creation of alert to FRC to respond quickly to the investigation pertaining to audit.

REFERENCES
Books and Journals
Bhaskar, K. and Flower, J., 2019. Financial failures and scandals: From Enron to Carillion.
Routledge.
Conway, L. and Mor, F., 2018. The collapse of Carillion. House of Commons Briefing Paper,
(08206). p.18.
Crilly, D. O. N. A. L., 2019. Behavioral stakeholder theory. The Cambridge Handbook of
Stakeholder Theory. p.250.
Gallagher, A., Crinson, K. and Seeley, R., 2018. Politicization of Corporate Failure. American
Bankruptcy Institute Journal. 37(9). pp.26-59.
Nordberg, D., 2020. Successes in Corporate Governance—Or Failures?. In The Cadbury Code
and Recurrent Crisis (pp. 1-14). Palgrave Macmillan, Cham.
Sikka, P., and et.al., 2018. Reforming the auditing industry. Report commissioned by the Shadow
Chancellor of the Exchequer, John McDonnell MP.
Sweet, R., 2018. Carillion’s “accounting tricks”: MPs’ damning verdict. Construction Research
and Innovation. 9(2). pp.48-50.
VERSCHOOR, C. C., 2018. CARILLION FAILURE RAISES QUESTIONS ABOUT
CONSULTING SERVICES. Strategic Finance.
Xiong, X. S., 2020. Time to Revisit Capital Maintenance on Profits Distribution: Lesson from
Carillion and Beyond. European Business Law Review. 31(2).
Online
The Collapse of Carillion - a Failure of Ethical Standards? 2018. [Online]. Available Through:<
https://cspl.blog.gov.uk/2018/02/01/the-collapse-of-carillion-a-failure-of-ethical-
standards/>.
The governance lessons of Carillion's collapse. 2018. [Online]. Available Through:<
https://www.accaglobal.com/uk/en/member/member/accounting-business/2018/04/
corporate/carillions-collapse.html>.

APPENDIX
Figure 2: (Source:
https://www.annualreports.com/HostedData/AnnualReports/PDF/LSE_CLLN_2016.pdf)