The inquiry into the collapse of Carillion has highlighted the pivotal roles played by company directors. By focusing on short-term financial goals rather than the long-term interests of the company’s stakeholders, Carillion’s board fatally undermined the business’s resilience, ruined their own reputations, and reinforced popular stereotypes of the construction and services sectors as outdated and dysfunctional.
Corporate or organisational resilience has been much discussed in the UK construction industry in 2018 – mainly due to the repercussions of the January collapse of construction and services giant Carillion (The demise of Carillion won’t detoxify construction).
After the Wolverhampton-based firm went into compulsory liquidation with debts of around £7 billion, thousands of stakeholders immediately faced major difficulties. The group employed over 40,000 people (around 18,000 of them in the UK), relied on a 30,000-strong network of suppliers, and had 450 contracts with the UK government alone – many of them for delivery of vital public services.
Construction of two English hospitals and six Irish schools was put on hold. Shareholders and lenders saw their investments and loans evaporating. Joint venture partners took on millions in new liabilities. Supply chain businesses went bust, and – with an estimated £2 billion still owed – many more may follow. Over 2,300 UK workers have lost their jobs so far. And some 28,000 members of the group’s pension schemes are facing lower future incomes, partly because Carillion directors favoured dividend payments instead of addressing a growing shortfall in its pension funds.
‘Delusional fantasists chasing a pot of gold’
A Parliamentary inquiry by two select committees published a hard-hitting 100-page report on 16 May 2018 and was scathing about the role of Carillion’s leaders. It was “a story of recklessness, hubris and greed,” MPs said, describing the company’s “relentless dash for cash”, its exploitation of suppliers, its misrepresentation of its finances, its contempt for its pension schemes, and its misguided focus on maintaining dividends and on increasing and protecting executive bonuses.
The role of the government, the complicity of the ‘Big Four’ accounting firms (a “cosy club”), and the feebleness and chronic passivity of financial regulators were also laid bare. However, the pivotal role of Carillion’s board is clear. Its directors were described by MPs as “fantasists” chasing “a pot of gold”.
Chairman Philip Green was “delusional” and an “unquestioning optimist”; ex-CEO Richard Howson displayed “misguided self-assurance” and “was part of the problem rather than part of the solution”; and, as “the architect of Carillion’s aggressive accounting policies,” ex-FD Richard Adam was practising “accounting tricks.” (Adam disputed parts of the committees’ findings, but they rejected his protestations, citing “the Carillion board’s short-termist, cash-chasing, dividend-plumping approach.”)
As an organisation representing private sector companies (including many construction firms and all of the ‘Big Four’), the Confederation of British Industry protested about the language used in the select committees’ report, suggesting it gave a “wholly inaccurate” impression that Britain’s businesses are all greedy and reckless. However, the Institute of Directors begged to differ, insisting MPs were “right to criticise the failures” at Carillion. The company’s problems were not unique – they have been a regrettably persistent feature of UK construction for decades.
In PR Week in January, I explained many construction projects are delivered late, over budget and with quality issues. Mark Farmer’s 2016 “Modernise or Die” report on the construction labour model identified low margins, adversarial pricing models and financial fragility, plus poor industry image, among ten symptoms of the industry’s poor performance; construction productivity has broadly flatlined for decades, and it lags all other sectors in digital transformation. These symptoms persist because the industry and its clients have a deep-seated cultural resistance to change; the leaders of many construction firms remain fixated on short-term financial goals rather than delivering long-term corporate resilience.
The select committee’s report into Carillion’s collapse was published on the same day that members of industry reform body Constructing Excellence debated a March 2018 report on the organisational resilience of the UK construction industry (based on research undertaken in late 2017 – before Carillion’s liquidation – by management consultancy, Project Five Consulting, replicating a 2015 survey undertaken for BSI by the Economist Intelligence Unit). Organisational resilience is defined as:
“the ability of an organisation to anticipate, prepare for, respond and adapt to incremental change and sudden disruptions in order to survive and prosper.”
The report cited insolvency statistics suggesting construction firms are more likely to fail than businesses in other sectors. Only a third (32%) of construction firms surveyed said organisational resilience was embedded in the business and a clear factor in success/improvement in performance. The biggest sources of risk were seen as disruptive competitors, macroeconomic uncertainty/events, and political instability. After long-term viability of the business (56%), the second most frequently selected benefit of investing in organisational resilience was protecting the company’s reputation (42%).
Yet despite awareness of the risks and benefits, the most frequently mentioned obstacle to incorporating organisational resilience into companies’ strategies and practices was that “immediate financial goals are more urgent” (selected by 43% of respondents) – underlining the short-termist view of many of the sector’s businesses and their leaders.
Not surprisingly, the report recommends learning lessons from Carillion’s collapse. It also identifies a need to “develop approaches to support leaders in construction to upskill them and enable them to provide the strategic leadership required to drive organisational resilience.”
Trust and communication
Such strategic leadership should embrace a strong understanding of the power of public relations. As I said in January, public relations brings the outside world in to organisations. It enables responsible engagement with all of a company’s stakeholders so that they challenge practices that might threaten organisational resilience and, in so doing, undermine the company’s reputation.
Trust and communication are vital to effective stakeholder relationships. Leaders need to demonstrate their integrity, empathy, knowledge and judgement. Effective leaders monitor, listen and respond, and can clearly articulate a long-term strategic vision for the organisation and all of its stakeholders. They understand that their organisation also has wider obligations to civil society and the economy, and they ensure their business is able to identify, and is resilient enough to adapt to, both gradual and sudden changes.
While disastrous for many thousands of stakeholders, Carillion’s collapse has highlighted, once again, the need for construction to modernise. Responsible business leaders in the sector (and beyond) will, I hope, learn lessons from the company’s failure, and from the leadership failures of its directors, and look to make their own companies more forward-looking and resilient. This cannot be achieved in isolation, nor can it be achieved without effective communication.
(This is an edited version of a post first published on the CIPR’s “Influence” blog.)