Leadership in Carillion – Part 2

Collapse of Carillion

Within the last year Carillion has faced financial issues and has gone into solvency, even before this Carilion was facing issues with how they treated their employees, including pension contributions and suppliers, which at the time of their collapse in January 2018 owning £2 billion to 30,000 suppliers (Partington, 2018).

The problems for Carillion began as it started to rely more and more on major contracts from the U.K. government, some of which proved less lucrative then the directors through. Initially a construction company Carillion took on contracts that included everything from ‘paving motorways’ to ‘ladling out school dinners’ (Freedland2018). It’s believed that the financial issues were known to the directors by mid-2016, however they refused to act to rectify them (Davies, 2018c). By the end of 2017 Carillion had slashed the value of the contracts by £845 million while at the same time company debt increased to £900 million and when the company sought a cash injection of £300 million the banks refused the loan while the U.K. government refused to bail Carillion out. This left Carillion unable to continue trading and the company was forced to go into liquidation (Partington, 2018).

The Carillion directors have been accused, by the House of Commons business select committee – which in itself can be considered a sign of how serious the collapse of Carillion is towards U.K. national interests, of putting their own rewards ahead of business sustainability, “a story of recklessness, hubris and greed” where “its business model was a relentless dash for cash” (Davies, 2018e), more concerned about their pay and bonuses than looking for signs that the company was in financial trouble (Partington, 2018). While ensuring maximum dividends for shareholders, even as Carillion faced financial collapse while at the same time treating pension payments as a “waste of money” (Davies, 2018c)

Despite the financial issues facing Carillion, the board of directions determination to increase the dividend each year helped create a perception of a healthy and successful company, with the inquiry report (Work and Pension Committee, 2018) noting that the board of directors was more concerned with increasing and protecting their ‘generous’ executive bonuses. Carillion’s own remuneration committee papers from August 2016 showing that the board of directions sought to “increase the maximum bonus opportunities” (Partington, 2018), despite shareholders becoming increasingly concerned at the way in which pay was set for senior managers. For example, Richard Howson, CEO from 2012 until mid-2017 in 2016 alone took home a salary of £1.5 million, alongside a cash bonus of £122,000 and pension contributions of £231,000 (Partington, 2018). In response, rather than make any changes Carillion decided to instead rebadge the bonuses, while at the same time weakening conditions of clawbacks and increasing the maximum bonus levels, although in the latter they were forced to back down due to shareholder revolt. Carillion’s former chairman, Philip Green, who also played a part in the collapse of BHS in 2016, was apparently not fully aware of the financial issues the company was facing until just before the £845 million write down.

The former finance director Richard Adam, who retired late 2017, was the architect behind Carillion’s accounting policy and has been described as aggressive and refused to make adequate contributions to the company’s pension schemes which he personally considered a waste of money (Davies, 2018d). Adam himself sold nearly £800,000 in shares leading up to the news of Carillion’s financial issues upon his retirement (Davies, 2018e).

Ultimately it can be considered that either the board of directors was either negligently ignorant of the rotten culture at Carillion or complicit in it. That honouring the pension obligations was of little interest to a board that thought little past their next quarters market statement, while also treating their suppliers as a “line of credit” (Wood, 2018) as an accounting trick in delayed payments to make a better appearance of their balance sheet, often delayed by 120 days.

Bad Leadership

While maximising profit margins and reducing outgoings is sound business policy, the extent to which Carilion engaged these practices can be considered bad leadership practice, even destructive, particularly as Carillion has now collapsed and ceased to function as an organisation.

The characteristics of bad leaders, given by Kellerman (2005), Pinto (2004) and Shaw et al (2011) were prevalent throughout Carillion’s senior management team in how they treated the company itself and how they reacted to the financial issues caused by their own leadership practices.

Throughout their tenure, and particularly in how they reacted to the investigation by the House of Commons select committee, with top executives being called “fantasists” (Goodley, 2018), “shutting their eyes and ears” to the financial problems facing Carillion and failing to take meaningful action that could solve the issues facing the company, instead preferring to act that nothing was wrong, despite being made aware of the issues since mid-2016 (Davies, 2018c). This displays incompetence of the highest sort, particularly in minimising the damage to themselves by instead causing financial hardship through their attitude towards suppliers and their own employees’ pension contributions.

This callousness towards their employees, with the pension contributions being considered a waste of money, had been in a deficit since 2010, with attempts by the pension scheme trustees to have Carilion’s directors plug the gap being constantly refused (Davies, 2018b), despite increasing dividends. This itself isn’t limited to only Carillion, with numerous companies linking bonus payments to increased profits and higher dividends (Guldi and Armitage, 2014), but does indicate that senior management puts their own self-interest before the betterment of the company, to ensure maximisation their own bonuses, meanwhile 30,000 former employees have been affected by the collapse of Carillion and their refusal to pay into the retirement schemes, costing themtheir own pension funds.

There is no clear example if the senior management team tended towards ‘evilness’, but their behaviour when going before the commons selection committee where they refused to voluntary return their bonuses got them branded by MPs as “delusional characters” showed that they were willing to blame everyone except themselves for Carillion’s collapse (Davies, 2018a), with complete disregard for the damage in which they played a major role.

While the exact decision making for the appointment of the senior management team is not clear, it can be argued that processed similar to those suggestions by Erickson et al (2015) were not in place. Indeed, it could be argued that the senior team recruited like for like, looking for new members who shared the same values as them – personal profit before long term sustainability. This is speculation however, but what is clear is that Carillion had no clear ethical framework for the values and behaviours to which their leadership was expected to conform. Similarly, it can be assumed that any employees who were aware of the financial issues were not encouraged to challenge the leadership team.

As Shaw et al (2011) note, a destructive leader can be perceived as such from only a handful of such characteristics, and Carillion’s senior management team exhibited a majority of the characteristics given in the literature receive, indicating that they truly can be considered destructive leaders.

Aftermath

The story of Carillion is an unhappy one for business, particularly so for the company’s employees who have suffered for the leadership by its directors. A story that has been felt all too often from RBS and Northern Rock during the 2007/08 financial crisis to the collapse of BHS in 2016. Calls have been made to review and change corporate governance law to make senior managers take more financial responsibility when a company collapse as the current system of limited liability often limits the damage senior leaders take to their own finances (Monbiot, 2018).

With luck, change will occur. Not only for how companies are governed but that Carillion’s end will encourage other company’s leadership teams to focus a little more on sustainability and less on personal profit.

Conclusion

This essay begins with a literature review into ethical leadership before moving on to bad, toxic and destructive leadership. The characteristics that make an ethical leader are described as are the traits of a bad leader, as bad, toxic and destructive leaders are contemporaries, sharing characteristics these are described together.

Carillion’s collapse at the start of 2018 led to a number of questions being asked, and in finding the answers the leadership style of the company’s senior management team was brought into light. Seeking to maximise their pay and bonuses Carillion’s leaders ignored signs from 2016 that the company was in financial trouble, instead pretending and giving the opposite impression that Carillion was doing fine by ensuring maximum dividends for shareholders, even thou they refused to pay into the company’s pension funds, deeming the payment a “waste of money” (Davies, 2018c) and by delaying payment to suppliers.

This has been shown in the behaviour of the former CEO and former finance director, who when interviewed by the House of Commons select committee were amongst the senior executives called “fantasists” (Goodley, 2018).

When compared to the characteristics of bad leaders, given by Kellerman (2005), Pinto (2004) and Shaw et al (2011) Carillion’s former senior leadership matched several of the characteristics indicating that they can be considered destructive leaders. The displays of incompetence of the highest sort, particularly in minimising the damage to themselves by instead causing financial hardship through their attitude towards suppliers and their own employees’ pension contributions indicate their callousness and greed.

As noted by Shaw et al (2011) a destructive leader can be perceived as such from only a handful of such characteristics. Carillion’s senior management team exhibited a majority of the characteristics given in the literature receive, and this essay takes from these that Carillion’s leadership team are examples of destructive leaders.

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Author: Jamie Hall

Author of Jamie A Hall.

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