Introduction
Financial mistakes are among the most typical corporate failures that can lead to the company’s gradual destruction, and Carillion is one example that illustrates this hypothesis. Carillion had more than 43,000 workers and was the UK’s second-biggest building and property management business before its demise (House of Commons Hansard 2018). It had many agreements for essential services across government agencies, including the NHS, education, defense, energy, and jails (House of Commons Hansard 2018). The PFI arrangements’ adverse economic consequences caused them to disintegrate.
The nation’s government was forced to step in because Carillion left behind plenty of partially completed PFI contracts and raised doubts about public service delivery (House of Commons Hansard 2018). Carillion’s bankruptcy has also raised concerns about government authorities, retirement savings accounts, and accountancy firms’ roles in fostering effective corporate governance (House of Commons Hansard 2018). Carillion’s inability to fulfill its obligations as a company was the direct consequence of its ineffective approach to executive remuneration, which was a reflection of corporate policy.
Early Signs of Financial Decline
The company’s financial downfall was a comparatively long process. In July 2017, Carillion reported that company profits would drop unexpectedly by £845 million and that no dividend payouts would be paid to investors as a consequence (House of Commons 2018). Two days following the disclosure, Carillion’s equities lost 70% of their market value, and its CEO resigned (House of Commons 2018).
The construction of a new £335 million Royal Liverpool University, a novel £350 million Midland Metropolitan hospital, and the construction of a road in Aberdeen that was beset by interruptions and rising costs accounted for about £314 million of the £845 million in losses (House of Commons 2018). According to Carillion’s half-year financial reports, released in September 2017, the business’s operational revenue before tax decreased by £1.2 billion (House of Commons 2018). These details show that Carillion’s corporate decisions were ineffective, and the company was unable to accomplish its obligations, which gradually destroyed its reputation.
Dividend Policies and Investor Manipulation
Carillion’s management increased dividend payments to investors despite changing revenues to avoid conveying unfavorable news. As an illustration, Carillion paid rewards of £77 million in 2014, £80 million in 2015, and £83 million in 2016 (Jones, 2018). According to dividend signaling theory, this payout system was designed to attract investors while hiding unfavorable information (Jones, 2018).
Executive Compensation and Income Inequality
Carillion’s cash flow issues never stopped the company from paying out bonuses and generous compensation packages for top executives. For instance, the chairman’s fee increased by 10% in 2016, while the chief executive earned a rise in his base pay of 8% in 2015 and 9% in 2016, as well as a reward of £245,000 that constituted 37% of his wage, despite not achieving any of his economic objectives (Mor et al., 2018). The employees, in turn, received the same salary during these years, and the increase was insignificant, constituting less than 2% (Mor et al., 2018). This information shows that the company had a severe inequality in revenue distribution, and its executives ignored the corporate problems.
Mounting Debt, Overseas Contracts, and Market Instability
The unwise financial policy did not destroy the company immediately, and the problems accumulated over several years. In 2016, the company’s operating rate was 3.3%, but its gross profit margin was under 10%, providing an inadequate range for protection of pay loans (Work and Pensions Committee 2018). Carillion’s relative strength index (RSI) fell below thirty, indicating an exhausted condition (Work and Pensions Committee 2018).
Contributions to pensions consumed the operational earnings, the payment of dividends, and interest payments, which significantly decreased during 2015 and 2016 due to increased rivalry (Work and Pensions Committee 2018). Additionally, the business owed £400 million for Middle Eastern contracts in Dubai, Qatar, and Oman (Work and Pensions Committee 2018). These aspects contributed to the downfall of Carillion and enhanced its economic instability.
It is possible to draw conclusions concerning Carillion’s financial policy and the reasons behind its bankruptcy based on the behavior of investors. Before Carillion’s bankruptcy, certain shareholders and traders saw the company’s issues. For instance, the co-chief management of Standard Life Investments mentioned in an email to the Pension and Works Committee that despite retaining a 10.8% equity stake in Carillion in 2015 (House of Commons Hansard 2018).
Standard Life Investments diminished its stake to 2.1% in 2016. They had sold their ownership interest entirely by the end of 2017 because of worries about various difficulties, such as the plan of action, accounting, and corporate responsibility (House of Commons Hansard 2018). Short-term traders are typically adventurous but competent investors who wager on declining share values. They owned around 25% of Carillion’s shares at the beginning of 2017, reaching their highest level of 32% (House of Commons Hansard 2018). Therefore, it was evident to the professionals that Carillion had severe problems, and the corporation would soon stop functioning.
Bankruptcy, Government Intervention, and Lessons Learned
The consequences of Carillion’s inability to fulfill its responsibilities led the British government to compensate the company after the official bankruptcy of the corporation. PWC and EY declined to serve as managers before Carillion’s insolvency because they worried they might not have been compensated for their work (Mor et al., 2018). When Carillion fell into liquidation on January 15, 2018, government officials intervened to cover the expenditures of the Official Receiver on the justification that doing so would ensure that public services in educational institutions, medical facilities, and jails would continue being provided (Mor et al., 2018).
The government has pledged to spend £150 million of the taxpayer’s money to continue providing the public services that Carillion was initially hired to supply (Mor et al., 2018). The Pension Protection Fund will bear a large portion of the expense of covering Carillion’s retirement shortfall (Work and Pensions Committee 2018). In other words, Carillion was unable to satisfy its employees’ needs, and it did not fulfill its duties concerning public services.
The issues leading to Carillion’s liquidation are more evident years after this situation happened. Before the decline in the share price, management may have reinforced the business’s financial position by reducing its debt earlier through equity borrowing. In March 2017, it erroneously chose to pay dividends to its higher executives instead (Jones, 2018). They should have changed their leadership more quickly and understood that it was already too late for them to terminate their agreements in the Middle East (Jones, 2018).
The company submitted bids for the four critical deals that were particularly challenging for the business in 2017 (Jones, 2018). In other words, a combination of the negative factors led to the company’s downfall. The corporate financial policy with the unjustified dividends to the higher executives reflected more general issues that the company could not solve.
Conclusion
Therefore, financial problems and controversial decisions concerning compensation for the company’s executives led to Carillion’s unbalanced economic policy. According to the investigation, various business sectors and nations share many of the causes of previous company failures. Carillion’s ascent to fame and dramatic collapse can be attributed to its executives’ careless growth, pride, and avarice. It is possible to draw conclusions based on the accounting data available on this topic and reviews of the remuneration reports that are part of the annual reports. It states that Carillion’s changing executive remuneration structure in its final five years of accounts contributed to the company’s ultimate collapse.
Reference List
House of Commons Hansard (2018) Business, energy and industrial strategy and work and pensions committees oral evidence: Carillion, HC 769. Web.
House of Commons (2018) Carillion PLC. Web.
Jones, R. (2018). After Carillion, how many firms can the pension lifeboat rescue? Web.
Mor, F. et al. (2018) The collapse of Carillion – Briefing paper number 8206. London: House of Commons. Web.
Work and Pensions Committee (2018) Carillion: Government response to the tenth report of the Business, energy and Industrial Strategy Committee and the twelfth report of the work and Pensions Committee of session 2017–19. Web.