Following from last week's damning report into disgraced construction giant Carillion, John Lehal explains how auditing and company management needs to change.

Companies fail. Consumer habits change, market conditions vary, sleeping companies fail to innovate and industries are revolutionised.

But when the collapse of a major business impacts on communities and public services, we have to learn the lessons for industry, the state and regulators.

There is no point in being in politics to idly stand-by, visionary action is needed to ensure we adapt to prevent a repeat. The Business and Work & Pensions Select Committees report into Carillion is precisely that – a milestone we have to understand, learn from and act on.

As the scathing report says, “Carillion became increasingly reckless in the pursuit of growth. In doing so, it had scant regard for the long-term sustainability or the impact on employees, pensioners and suppliers.”

What we saw at Carillion was a hopelessly ineffective management team and board who received bumper payouts while the company faltered. There is little evidence of challenge from independent directors who allowed managers to make acquisitions that burnt cash; agreed to dividends instead of ensuring the business was sustainable; and built a company on what has ended up being £7bn of debt. They allowed the company to store up problems for tomorrow and failed to close a £2.5bn pensions deficit. It smacks of a rotten corporate culture overseen by people who should be behind bars.

Not only did the very people responsible for such large-scale mismanagement get rewarded for failure with handsome salary increases and bonus pots, but they are still at large, able to wreak havoc on other companies. Over four months since its collapse, not a single director has faced criminal sanction for their failure of effective stewardship of Carillion. Directors must be responsible and accountable, and legislation on the wilful and reckless neglect of duties must be updated and enforced.

If any evidence were needed for the case for employee representatives on company boards, Carillion is it. Well-trained workers operating in a culture of challenge would not have allowed a company to only invest £85m in back-loaded pensions payments. They would not have had a blind spot to a vulnerable debt-to-equity ratio of 5.3. And they would have asked questions about the misclassification on the balance sheet of £472m from the company’s Early Payment Facility, which enabled directors to deceive lenders and shareholders.

It doesn’t need another lengthy corporate governance review or consultation that finds a solution to suit everyone – we urgently need the Prime Minister to follow through on her Conservative leadership pitch to ensure boards have employee representatives.

But visionary solutions oblige us to have to go much further – suppliers and consumers must also have a seat around board tables, setting a strategic direction for the business that is in everyone’s interests, not just in the narrow shareholder and executive interest. At the same time, the cosy racket between companies and their comfortable auditors needs urgent reform – a five-year term-limit in a larger market of providers is essential.

The trustees overseeing Carillion’s pension fund lacked the ability to put their members’ interests ahead of shareholders who continued to receive dividends while the gulf in the pensions deficit widened.

Although The Pensions Regulator negotiated a clawback in the deficit, the company Finance Director saw it as a “waste of money” so did what suited them rather than the cleaners and construction workers whose lives depended on the fund. The Pensions Regulator can no longer just make empty threats, the lesson has been learned – funding pension fund deficits must come ahead of shareholder dividends.

Likewise the Financial Reporting Council refrained from taking any legal action against the failing directors, didn’t follow-up evident concerns about the company, and allowed a culture of passive self-reporting rather than challenge and scrutiny.

An effective regulator acting in the publics’ interests would have heard the alarm bells and disqualified directors.

The Prompt Payment Code lacks teeth, which meant standard payment terms for the firm’s 30,000 suppliers were on average 126 days instead of 60 days. Of course the company was more than happy to release payments after 45 days, provided a healthy cut went to the company through the Early Payment Facility. Companies must publish in their annual reports their average payment times – something suppliers understand before working for a business, and that would flag to the market a risky business. The Project Bank Accounts proposed by Bill Esterton MP must become central to large-scale public sector contracts.

Carillion impacted us more than many – hospitals services and cleaning, road building projects and school maintenance contracts have thankfully largely continued. But over 2,000 employees have already paid the ultimate price. The hospital cleaners – my mother-in-law included – face a precarious future with lower pension payments, while the directors and their consultants live off their bumper payouts.

Carillion won’t be the last. Other large companies will face insolvency, but we have a duty to act on the lessons from Carillion to ensure directors don’t get away scot-free while employees and suppliers pay with their jobs and pensions.

John Lehal is a business and voluntary sector adviser, charity trustee, mentor, and Labour Party activist.

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