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Crisis management  |  Governance

Carillion’s collapse: lessons learned

NedonBoard Carillion

NEDonBoard has been compiling views from its community following the collapse of Carillion. Members were asked to share with us the main lessons that they have learned, having regards to ‘what went wrong’, given that these may provide useful learning experience to NEDs. Today, we are publishing the view of Laura Marianello, writing in her personal capacity. Laura is one of the NEDonBoard ambassadors; she joined the programme in February 2018. In this short article, Laura outlines some of the reasons that, according to her reading of the Business, Energy and Industrial Strategy (BEIS) and Work and Pensions Committees report, appear to have led to the collapse of the construction business (references to the relevant pages of the Report are included below) and may call for greater powers to be extended to regulators such as the Financial Reporting Council (FRC) and the Pensions Regulator (TPR). At the outset, she summarises her key lesson learned.


Key lesson learned. After reading the Report, a thought suddenly struck me. Carillion’s story reminded me of “The Emperor’s New Clothes” tale: everybody could see what was wrong but no one dared to speak up! Was there an environment in which non-executive directors, managers, auditors and advisers were too afraid of raising questions and challenging the company’s executives? The importance of creating “a psychologically safe, inclusive environment” where people have “the ability to speak up” was one of the “attributes of a good and healthy culture within financial services” discussed at the FCA Transforming Culture Conference on 19 March 2018. 

Regardless from the industry in which the company operates, every chair should bear in mind the importance of promoting an environment that encourages an open and constructive discussion in the boardroom so that concerns can be raised and addressed timely.


Main issues. While reading the Report, these are the points that have caught my attention:

  • NEDs’ role. NEDs have the same duties and liabilities as other directors, according to the Companies Act 2006. What their role requires, and what is expected, is for them to constructively “scrutinise executive management”, as recalled in the Report (pages 30 and 31). Carillion’s NEDs (notwithstanding being the majority of the board members,) were not able to effectively apply the constructive scepticism that would have benefited the company and its stakeholders.
  • Lack of long term strategy. The board and, consequently, the company seemed to lack a long-term strategy. Decisions appear to have been guided by the short-term (personal?) interests of its directors (pages 47 and 86). The business model was unsustainable and consisted of moving from one acquisition to another, which only served to increase the pensions contribution deficit to uncontrollable levels and, more generally, the company’s debt (pages 13 and 14). The desperate need, then, to win contracts by bidding aggressively and venturing into foreign jurisdictions without having the appropriate expertise, in an attempt to generate cash, only exacerbated the lack of liquidity that led to the company’s collapse (pages 15 and 16). The (ab)use of its early payment facility was a clear indicator of the fragility of the company’s business model and its shortage of cash (pages 25 and 26).
  • Corporate culture. According to the Report (pages 3, 16, 19, 86, 87 and 89), the recklessness in running the business, which manifested itself in the use of an aggressive accounting policy, the continued distribution of significant dividends while the company was already in financial difficulties and the undertaking of contracts at unrealistic margins, combined with the absence of professionalism were a lethal combination. It looks like there was no culture of compliance and accountability, rather the opposite. A healthy corporate culture should come from the top and flow down the structure and top management should lead by example. All that seemed to be missing at Carillion. Even after Carillion collapsed, its directors were looking to find the cause of this disaster elsewhere. As the Report pointed out: “Carillion was not just a failure of a company, it was a failure of a system of corporate accountability […]” (p.68).
  • Control system failure. Overall, it seems that every single (internal or external) body that should have exercised some form of control over Carillion somehow failed to act (pages 4 and 5). From the (non-executive) directors to the internal auditors, from the remuneration committee to the auditors, from the special advisers to the regulators (see pages 30–35, 47 and 53-66). No one seems to have carried out their role having regards to the substance, rather than the form, of their duties.
  • Is there a need for reform? As the Report pointed out (pages 5-6 and 84-85), Carillion’s collapse highlighted the need to consider both “breaking up the Big Four into more audit firms, and detaching audit arms from those providing other professional services”. This will probably prove to be controversial. In addition, the Report also highlighted how regulators such as the FCR and TPR only provided feeble responses and were mainly passive (pages 5, 59, 61, 85 and 91). This criticism may suggest that, going forward, regulators should be provided with the powers, skills and mindset to proactively challenge companies and their management, in order to avoid cases like Carillion repeating themselves. How likely this outcome is going to be remains to be seen and is open for debate.


Related posts:

Carillion’s lessons learned – Part 1: Why all non-executive directors and board members should complete a training programme

Carillion’s lessons learned – Part 2: back to basics

Carillion’s lessons learned – Part 3: what the NEDonBoard community says


Written by Laura Marianello, NEDonBoard ambassador. If you are interested in the NEDonBoard ambassador programme, please contact [email protected].


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