Why Did Carillion's Downfall Take So Long?

Abstract

Carillion as a red ocean strategy, the increase in its loans debt was so very clear to bystanders before its collapse, but some of the major shareholders analyzed the finances to be perfectly sound because Carillion had a unique way to keep the entire market dark without revealing (Rogers, 2018). Carillion was the second largest construction company in the United Kingdom (UK) and was one among the poorly mismanaged and the factors that support the same was purely a rotten corporate culture and contracts to supply chain management. Carillion was corrupt to the core and turned out to be a giant and an unsustainable corporate time bomb. It was so obvious that when the debts soared up really high that all the banks refused to give any sort of financial aid and the Government refused to step in and bail out the firm in spite of working major contracts for construction of roads, hospitals, and many city development projects. The downfall was pretty obvious but could not understand that why did it took 19 years to come to an end.

Introduction

The number of construction company liquidations has been on the rise. Many organisations that uproot are primarily due to inadequate finance, poor managerial skills, inefficient and non-ethical leadership, and corruption within and outside the system (Hassan, 2011). Red ocean is a strategy that a company adopts when there is an existing competition in the market and there are huge entry barriers, It utilizes the existing demand in the market and turns them to profit figures but in turn sustainability in this is a matter of concern (Chan, 2005)(Mauborgne,  2004).Carillion had adopted a similar strategy in turn making it unsustainable. Construction has always been considered a high-risk business and requires an early warning system of bankruptcy (Abidali and Harris,1995) . Corruption in the construction industry is very prevalent. Corruption, is an unethical behavior, an obligations overseeing the activity of a favored job or office of reasons for private gain (Shakantu,2006); it might do as such by overlooking denials against specific acts, or by satisfying commitments to act or by extracting genuine attentiveness to act, as long as it does as such far private preferred standpoint or private in regards to intentions corruption is an unscrupulous conduct which goes astray from the standards and the norms(ibid,2006).Corruption inescapably takes advantage of the loopholes prevalent in operating situations and reaches its roots down deep into the entire system and pollutes it irrespective of the field of study(Mair and Jones ,2015). The two main factors revolving around the downfall of Carillion - unethical leadership and corruption are discussed and their deficiencies are laid out in this paper.

Signs of downfall – Were they ignored or unnoticed?

The collapse was not so sudden and was predictable and based on the reports and analysis points out to have had six warning signs:

1. Profit warnings – Subsequently there were three profit warnings namely on July, September and November respectively which gave a sound alarm that Carillion was on deep trouble, followed by major executives stepping down (Mor, 2018)(Conway, 2018)(Thurley, 2018)(Booth, 2018)
2. Short selling – The majority of the shares were shorted, shares were sold back knowing that they can buy it for a cheaper price in the future (Monaghan,2018).
3. Debts kept accumulating and pension deficit – Carillion’s loan debts as shown in Fig.2 was on the rise and based on the reports in eight years the loans increased by five times the value in the beginning of the decade (Carillion plc, 2018 ; Financial Times,2017).As Shown in Fig.1 the pension deficits were on the rise from £249 million in 2009 to £805 million in 2016.

Fig:1 Title Source: Carillion’s annual financial statements; interim financial statement for the six months (2017); (Financial Times, 2017) Fig:2 Title Source: Carillion’s annual financial statements; interim financial statement for the six months (2017); (Financial Times, 2017)

4. Payment delays for sub-contractors – The sub-contractors were not paid on time as per generally accepted 60 days instead had to wait for 120 days. According to the reports Carillon owes more than 30000 firms (Goodley;et.el, 2018).
5. Quality depreciation – The major hard hit project was the royal Liverpool university hospital which had issues over quality of construction such as asbestos found in site extensively and cracks in the structural beams. This was also part of the first profit warning signs (Monaghan,2018)
6. Complex Financial related courses of action - Carillion was utilizing progressively surprising strategies to secure finances – a sign it was attempting to get to more conventional sources, from banks and standard securities (Work and Pensions Committees,2018) (Monaghan,2018)

Corruption

In recent times, some major construction companies have gone under. For example, Connaught plc, operating in social housing, public sector and compliance markets collapsed in September 2010 (Knight, 2010). Stone (1999) author of ‘Markups and Profits- A contractor’s guide’ knows too well about mark-ups, profit, and survival in the construction industry. Pricing too low automatically threaten survival. Secondly, poor financial management; Connaught plc gave false impressions of its financial health by tweaking its financial statements to hide losses and accelerate growth (Jagafa and Wood, 2012).Carillion had the same as stated of Connaught leading it to the collapse. Carillion was not the only conglomerate that collapsed because of corruption it has happened with other companies as well namely Connaught and ROK. Carillion was considered to be a criminally corrupt organisation aided and condoned by the Government (Workers weekly,2018). According to The Week, Carillion received £2bn in government contracts despite having three profit warnings and collapsed under a debt of £1.5bn after failing to reach a rescue deal with the Government. Dynamic financial specialists have communicated amazement and dissatisfaction that Carillion's chiefs picked short-term gains over the long-term sustainability of the company (Work and Pensions Committee,2018). “A story of recklessness, hubris and greed” where “its business model was a relentless dash for cash” (Davies, 2018) The collapse of Carillion likewise raises issues of the oversight of Public Private Partnerships (P3) organisations by reviewers. Just 10 months before liquidation, its auditor, KPMG, had given its seal of endorsement to Carillion's financial statement. However, Carillion declared the crumbling of its accounts toward the beginning of December 2016 which was trailed by enormous and unsustainable increments in its obligation (Loxley,2018). How the auditors KPMG could not have understood this or is it they knew and purposely kept it in the dark? Corruption of the kind revealed by the collapse of Carillion is an integral part of the usurpation of the public authority by private monopoly interests.

Unethical Leadership

Carillion's leadership team are models of ruinous pioneers. Corruption along with bad leadership which paved the way to doom of Carillion. The Board of Directors prioritized executive bonuses and dividends for the shareholders even on the verge of collapse, while pension payments were imagined to be waste of money (Davies,2018). In spite of the money related issues confronting Carillion, the leading body of headings assurance to expand the profit every year made a view of a sound and effective organization (Work and Pension Committee, 2018). With the inquiry report noticing that the top executives were more concerned about expanding and ensuring their 'liberal' executive bonuses of putting their own rewards ahead of all other concerns (Rogers, 2018)(Davies,2018).According to a guardian analyst the same happened with Connaught plc. within two years three top executives quit and cashed their shares which contributed to the demise of Connaught plc. (Jagafa and Wood, 2012).Carillion followed the footsteps of Connaught. The people in the key positions of the company were corrupt and did not consider the welfare of the company: Richard Adam who was working as a Finance Director (FD) with Carillion knew the end of it and was smart enough to quit early. He was the architect of the aggressive accounting policies and denied contributing towards the Company's pension fund which he considered a waste of money. According to the financial reports submitted and verified by KPMG as well, Richard Howson who headed the company from 2012 until July 2017 pocketed £1.5 million in 2016, including a £122,612 cash bonus and £231,000 in pension contributions. As a part of his sign off deal when he quit, Carillion agreed to pay him £660,000 salaries and £28,000 in benefits until October even though he left the company after serving as an advisor for a brief period of time (Financial times ,2017). Even the Government played along with the corrupt forces within the company all the warning signs were there to see but the Government not only chose to ignore the signs of profit losses they continued to throw tax-payers money at Carillion giving them billions more for new contracts (Demirag,2018). While the unethical executives such as Richard Howson former Chief Executive (CEO) and Richard Adam could at present stroll off with rewards unblemished, employees were left dreading for their jobs and suppliers faced ruin (Hall, 2018). As the company started to decline to an impending death, there was obviously, no right leadership present for upbringing Carillion. For a company to have any chance at recovery, the leadership has to be good, humble, and possess a strong will (Collins, 2001). Fletcher and Wearden (2010) also affirm this by stating that “the onus on recovery is management-driven, and outweighs any macro concerns about the construction industry”. According to the literature available, it says Carillion's weakness was always not able to merge with Balfour Beatty the rival company because they turned down all the merger offers by Carillion and knew exactly what the company was heading (Carillion plc, 2016).

Conclusion

Carillion was a predictable downfall based on the business strategies they upheld referred to as Red Ocean Strategy .The major reasons that revolve around the collapse was unethical leadership and corruption.  Indications showed that Carillion focused on competing in a marketplace, beating the competitors and exploiting the existing market demand. The collapse was predictable to close watchers. Corruption within the system and which was prevalent over the Government as well made sure that none of the risks of the company was visible to others until they have satiated their financial needs until edge of chaos. It is hazardous putting a ton of public contracts in the hands of corporate giants like Carillion. Carillion was a business empire built on sand and run by deranged leaders.

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