The main lobby group representing UK bosses has savaged the “highly inappropriate” pay packets awarded to directors running the now-collapsed construction giant Carillion.
The Institute of Directors also accused directors and shareholders of the stricken firm of failing to provide “appropriate oversight” of the company, which is involved in a host of major government projects and vital public services and slumped into compulsory liquidation on Monday.
Roger Barker, head of corporate governance at the Institute of Directors, said the collapse of the company “suggests that effective governance was lacking at Carillion”. He added: “We must now consider if the board and shareholders have exercised appropriate oversight prior to the collapse.
“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 to the reputation of UK business when top managers appear to benefit in spite of the collapse of the organisations that they are responsible for.”
His comments on clawback refer to a change in the company’s pay policy made in 2016 that limited the criteria under which the company could demand the repayment of executive bonuses. Previously the firm could ask for cash back if the business went bust but the revised policy said it could only do so in the event of gross misconduct or if the financial results had been misstated.
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The chair of the remuneration committee, which sets the pay policy and made the change, is the non-executive Carillion director Alison Horner, head of human resources at Tesco.
Much of the criticism has centred on Richard Howson, Carillion’s former chief executive from 2012 until a shock profit warning last July resulted in his stepping down.
Howson earned £1.5m in 2016, including £591,000 in bonuses. He continued to work for the firm until last autumn after stepping down as chief executive and is due to stay on the payroll, receiving his £660,000 salary and £28,000 benefits for another year, until October 2018.
Howson’s replacement, the interim chief executive, Keith Cochrane, was a Carillion non-executive director who joined the company in July 2015. He was due to step aside in favour of a new permanent chief executive next week – but Cochrane is also set to keep on receiving his £750,000 base salary until July.
The former finance director Zafar Khan, who stepped down last September from his £425,000 a year job, is also due be paid until July.
Vince Cable, the Liberal Democrat leader and former business secretary, said he hoped that bonuses paid to Carillion’s chief executive would be clawed back. In an interview with the BBC’s Daily Politics he said it was “an absolute outrage” that senior executives should receive “rewards for failure in this way”.
How did the company get into trouble?
Companies like Carillion have to keep projects on budget and keep winning new contracts. When one of those fail, problems loom.
Carilllion shocked the market in July with a massive profit warning, writing down its value by £845m, all related to key contracts. Two more profit warnings followed and the company admitted it needed cash quickly not to breach bank loan terms
At the start of 2017 shares were changing hands at 240p. This weekend they were 14p.
With debts of £900m it has been trying to arrange a £300m cash injection. However, lenders will not provide the cash without government guarantees.
What happens to the pension scheme?
Carillion has a £580m pension scheme deficit. If it collapses the government-backed Pension Protection Fund would take over the scheme, although the liability would swell, to £800m. While the Fund provides a safety net for millions of workers, there are limits on what it can pay out.
Who runs Carillion?
Chief executive Richard Howson quit after the July profit warning, with the new boss yet to start. It has been run by engineering industry veteran Keith Cochrane and the group’s chairman Philip Green, the former boss of United Utilities. Sally Morgan, who was director of government relations for Prime Minister Tony Blair, is also a director.
Jon Trickett MP, shadow minister for the Cabinet Office, added: “It will fly in the face of British values of justice and fairness if the fat cats responsible for the collapse of the company get massive payoffs, but the British people are expected to foot that bill for their and the government’s incompetence.
“Carillion went from crisis to crisis. The government must answer questions about why it continued to award the Carillion contracts while the company was lining the pockets of the big bosses who have now endangered our hospitals, schools and transport infrastructure.”
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