The opportunity to beef up corporate governance regimes in the UK must be seized, experts have warned, after it emerged that the bosses of construction giant Carillion will still be awarded significant pay packets despite its collapse into compulsory liquidation on Monday.
One of the government’s biggest contractors and the country’s second largest construction firm, Carillion employs roughly 20,000 people in the UK, and has worked on contracts stretching from railways to hospitals and military bases.
On going bust, the firm had racked up debts of about £1.5bn and had a reported pension deficit of £587m – but while the majority of its employees and sub-contractors are left in financial uncertainty by its collapse, members of the executive team will continue to receive pay packets described as “highly inappropriate” by the Institute of Directors.
Former chief executive Richard Howson, who stepped down from the organisation following a shock profit warning in 2017, is due to stay on the Carillion payroll, receiving a £660,000 salary and £28,000 in benefits until October 2018.
The company’s interim chief executive is set to receive a £750,000 base salary until July, while the former finance director, who left the firm in September, will continue to earn £425,000 until the summer. Executives received a total of £4m in bonuses during 2017, with media reports suggesting that the company changed its remuneration policy last year to prevent these being clawed back in the event of financial collapse. The government yesterday said the official receiver would examine directors’ conduct around remuneration.
By contrast, while staff working on public sector contracts have been told they will continue to be paid by the official receiver in the interim, those in the private sector face being laid off on Wednesday.
“Today's outcome suggests that effective governance was lacking at Carillion, and we must now consider if the board and shareholders exercised appropriate oversight before the collapse,” said Roger Barker, head of corporate governance at the Institute of Directors, in a strongly worded rebuke.
“There are some worrying signs. The relaxation of clawback conditions for executive bonuses in 2016 appears in retrospect to be highly inappropriate. It does no good for the reputation of UK business when top managers appear to benefit in spite of the collapse of the organisations that they are responsible for.”
Commenting on the figures, Stefan Stern, director at independent think tank the High Pay Centre, said tougher provisions over executive pay were crucial in preventing similar circumstances occurring in future.
“People will raise not one but both eyebrows at the idea that the former CEO could still collect this sort of money even as the firm is collapsing. There should be effective rules in place to allow shareholders and creditors to claw back payments in these circumstances,” he told People Management.
“A bigger issue is that some of these CEO contracts are simply too complex and not transparent enough – remuneration committees are supposed to exercise discretion, but we must have transparency and effective sanctions on poor performance moving forwards. In the most extreme cases, such as with Carillion, it should be an option to withhold further payment to executives.”
Proposed measures published in December by the Financial Reporting Council have encouraged listed firms to consider rank-and-file staff when setting pay levels for directors. Under the proposals, which are open to consultation until 28 February 2018, all companies with a premium listing of equity shares, from their accounting periods beginning on or after 1 January 2019, would establish a remuneration committee of at least three independent non-executive directors.
Carillion’s collapse is also anticipated to have significant knock-on effects in different industries and sectors.The training division of the firm held a £6.5m contract for apprenticeship provision in 2017, leaving the futures of hundreds of 16 to 18-year-olds in flux.
The company also spent £952m with local suppliers in 2016, relying on an extensive network of small firms, an estimated 30,000 of which are owed money by the giant and are waiting to discover if they will be paid. An estimated 28,500 members of Carillion’s 13 pension schemes are also facing a shortfall.
“Assuming the company goes into administration and the scheme is taken over by the Pension Protection Fund, retired members will continue to receive their pensions in full, while those yet to reach retirement will see cuts of typically between 10 per cent and 20 per cent,” Tom McPhail, head of policy at Hargreaves Lansdown, said.
“There will be an initial reduction of 10 per cent when they reach retirement, they may lose some of their inflation proofing and higher earners may have some of their pension capped.”
In a statement issued by Carillion, chairman Philip Green said: “We understand that HM government will be providing the necessary funding required by the official receiver to maintain the public services carried on by Carillion staff, sub-contractors and suppliers.”