This was just one of the headlines following the collapse of
Carillion in January 2018.
September 2019’s collapse of Thomas Cook, involving the
largest peacetime repatriation effort in British History, begs the same
question. Probably even more so, as many are questioning if there has been any
real change in Corporate Accountability post Carillion. Similarly questions of
who was held to account for Carillion and who will be held to account for
Thomas Cook are being raised.
In a previous discussion in our series of lunchtime events,
held specifically for NEDs, the discussion around corporate accountability was
lively. So much so, we decided to table the same topic for our CEO guests.
Where must corporate accountability change and how can Boards
prevent these collapses? What has to change in your view? Also how accountable
should individual Board members (Executive and Non-Executive) be when
Bird, former CEO of Co-operative Energy:
A number of these high profile failures could in fact be seen
coming a long way off but the way the question is phrased almost implies that
companies should not fail. A key part of operating in a market economy is that
successful firms survive while poor ones collapse. Perhaps there should have
been more accountability in finding alternative solutions, prior to collapse.
We have to accept that these were very big company collapses but lots of
smaller companies go bust all the time. Nobody sees this as an issue although
it has the same knock on effects for their suppliers, staff and communities. We
should not just focus on the large companies but see it all as part of a wider
market economy and look at safe guards as a whole.
Long, CEO of MTR Corporation:
The balance when it comes to risk management for any business
is an interesting one. Although hindsight is 20/20 vision, some decisions were
‘correctly judged’ when made. The balance which needs to be struck in any
business is about the natural and healthy tension which should exist between
those in the senior leadership team who may be very cautious and their
counterparts who are maybe not. Today, most managers are very conscious of risk
and therefore, if a business is in a very precarious position through no fault
of their own, there may be a case for indemnities or waivers so that difficult
decisions can be made.
Ludlow, President of P&O Cruises:
The robustness of the auditing function seems to have raised questions both from an internal and external perspective, in that they were allowed to continue to report in the way they did – both in the accounting of goodwill, which has been widely reported and also as reported that they may have been operating using other peoples’ money. In effect, by operating on the payment terms they had with suppliers, e.g. hoteliers. This could have been systemic for a long time, as highlighted when a previous CEO was asked a direct question on the topic by the Commons Select Committee.
Even now after the rigorous review process, unfortunately, in
terms of finding an outcome from a Corporate Accountability perspective, there
may be none, despite the cascade effect this has had on suppliers and ultimately
consumer confidence both now and into the future.
Toner, CEO of CH&Co:
The scenario around Carillion was very similar. In an example
from a while ago, we ran big group contracting services and our client had sub
contracted to Carillion who in turn said this is the price you now need to do
it for and by the way our credit terms are 160 days. We said no to the price
and the credit terms and walked away from a very big deal. It was endemic as
in, is this the way you now have to do business? The Carillion board should
have known what was happening and that ultimately they were staying afloat with
other peoples’ money. It is fundamentally wrong and hence if this could have
been seen clearly by third party suppliers on the outside, then the Board should
have been able to see it from the inside. Changes should have been made but
sadly Thomas Cook and Carillion were too far gone. The fact is you cannot run a business using
other people’s money.
Paul Ludlow (P&O) agreed by adding, with companies like Thomas Cook, they would defer payments by three extra days at year end so they could report more cash than they actually had. Questions should have been asked of the auditors with regards to their role in this.
“So whose role is it to address these issues, Executives or NEDs?”
Arnold, Group CEO, The North Group:
Mark works in Financial Services and has recently returned to
UK after 15 years overseas. He has returned into a world operating under the
“Senior Managers Regime”. This makes it very clear for both the Executive and
Non-Executive, where accountability lies for each individual’s role. Although
accountabilities are much clearer than they were in 2008 the impact of the
regime is people won’t take risks around new products and business ventures for
fear of running counter to the regime. It is however, a very safe environment
and the accountability is there.
Lenihan, CEO for Aetna Insurance Company:
Concurred with Mark’s points; the regulation they are working
under is extreme and everyone in his organisation knows their responsibility.
The downside is, it does make people avoid risk, in fact, “I would say we take
very few risks now”. Everyone is concerned about their reputation and what
could happen to them individually if something goes wrong.
Sheppard, MD Europe, Intercontinental Hotels Group plc:
If there is sufficient transparency around potential risks
then corporations should be able to take the appropriate risk in order to
strive. Also there is a difference between risks related to a project in one
part of the business versus risks that effect the whole of the business. It is
the latter levels of risk that the Board and the auditors should be watching
At the end of the day, one needs to be able to look in the mirror and know you did the right thing. Businesses need people who will not cross those lines.
Fox, CEO of RoadChef Motorways:
It is interesting that people looked at these businesses and
decided to do less with them as suppliers. That seems shrewd. However it is not
always that clear; e.g. the hospitality industry questioned how Patisserie
Valerie could achieve such “great EBITDA numbers and growth”. Clearly they were
not achieving at the published levels they led the market to believe. If it was
a private business, one might take these numbers with a pinch of salt but
Patisserie Valerie’s numbers were going to the market which pertains to the
point on auditors.
Thomas Cook should perhaps have been allowed to fail gracefully so is a Chapter 11 equivalent right for this market?
You could argue that the use of CVAs is a sort of equivalent
(to Chapter 11), in particular in the retail market. Historically their use was
rare but over the last five years their use has increased significantly and to
the benefit of many companies. However the market can become distorted with
CVAs being used to create competitive advantage in terms of reducing commercial
rents which in turn impacts property values.
It is important to hold auditors to account but it comes back
to the principle of what is the role of a board? It is not good enough to say
you passed it along to the auditors thereby deflecting accountability.
Should the Auditors be held to account?
Company culture is an important factor. For example the CEO
of Thomas Cook will have driven the culture which in turn drives behaviours.
Some of the people responsible for creating the vision were probably doing what
they thought would give the best results. Many of those who might have spoken
up because they saw things differently, were under enormous pressure not to.
It is questionable to what extent NEDs can turn up and
compute a month‘s worth of history from the Board papers. While it is down to
individuals, the ability for anyone to decipher what’s being presented to them
monthly, is almost impossible. As such they can only play a role.
Greenfield, CEO Whitelink Ferries:
In fairness, the problems that both Carillion and Thomas Cook
had suffered were endemic and had been for years and was a whole way of doing
business. It doesn’t need an NED to be fully up to speed with the details of
any particular month’s performance to be able to stand back and say, this is
not looking right. A good NED would flag up things like this and would put
their reputation as an NED ahead of the risk of being fired.
We should not be too prescriptive about the failure of
businesses. With regards to the suggestion that directors of companies that
fail should not be allowed to sit on future boards. A lot of small and start-up
companies will fail and with this idea, no-one would sit on these boards. Any
control or regulation should not apply to small start-ups in the same way they might
to a company with tens of thousands of employees.
The Patisserie Valerie situation sounds more like fraud and a
distinct cover-up and as an NED working a few days a month you are unlikely to
cut through that. Conversely in the public sector the time commitment for NEDs
almost makes it full time. Having also known one of the NEDs at Carillion,
brought in to try and resolve the situation six months before it collapsed; it
seems unfair in this example to say or suggest he could never sit on a plc
To an extent you could say we are debating what might be
called overt risk versus covert risk – either accidental or deliberate. It
could be covert risk right at the top where the MD or CEO is concealing that
risk from others or conversely, might be risk hidden within the organisation
from the senior management.
Smaller businesses or divisions trying to get a new product
to market, may be risky, but if this is overt risk, then investors are able to
assess that risk, and then say go for it if they wish. It’s the covert risk
which needs to be better identified and a judgement made on whether there is any
concealment around the risk assessments.
It begs the question what is the role of the NED and should the number of days an NED devotes to a business be regulated?
Wilson, CEO of Hoggett Bowers:
We raised this whole topic at our recent Chair and NED lunch.
Some of the themes were very similar. One of the big areas though, that the
Chairs and NEDs focused on, particularly as a number of them came from a
finance background, was around the role of the CEOs and CFOs in relation to
adjusted profits. With Thomas Cook, a lot of adjusted profits were put through.
In the case of Carillion, there were at least 9 significant projects where
there were accruals and all sort of adjustments to the stated profits. How much
of the responsibility sits with the CEOs and the CFOs of these businesses when
they are recording adjusted profits as opposed to traditional accounting
profits? One NED told me he reads the notes to the numbers before even looking
at the numbers and another told me she was fed up with getting to page 122 of
the accounts before seeing real figures.
Profit might be more difficult to get to the bottom of but
cash is very clear isn’t it? It’s there in black and white and all these
businesses that go bust, go bust because of cash.
There is certainly a role for the Chair and NEDs to challenge
Executives and, if they are dotting the I’s and crossing the T’s, surely that
is both beneficial and what they are paid to do. There is a fundamental
difference between reading the board notes and believing them verbatim. NEDs
should read the information and question it and go and talk to the workforce
and find out how things are going. This provides invaluable triangulation of
The Chair thanked everybody for attending the lunch and for
contributing to a lively debate around corporate accountability. In terms of
encapsulating the key points of the discussion, there was a consensus around
the view that in market economies successful firms will survive while poor ones
will fail. Common factors around high profile failures such as Carillion and
Thomas Cook included poor corporate governance with blame attributable to both
Executive and Non-Executive Directors as well as the Auditors. However, to
simply debar those who have sat on failed boards from future Executive or NED
roles would be rash and naïve as no one would risk joining a start-up for
example. Market forces combined with pragmatic and sensible regulation would
appear to be the preferred solution.