I have not commented to date on Carillion's failure. Partly that has been because of a lack of time. And partly it's because I needed to read enough.
I do not offer specific comment here: there is, very obviously, more to know. But there is now enough known to make some pretty specific observations.
The first is to suggest that there was misreporting by Carillion. The likelihood that markets were misled as to its profitability and balance sheet worth until about a year ago seems very high. It also now seems that some in the City were aware of this risk from 2013 onwards. In that case the questions are obvious. They are:
1) If this was known why didn't the Financial Reporting Council act sooner, quicker, and more directly?
2) Why was there no whistle blowing? Someone in this company knew how bad things were. Is there appropriate protection in place for them? If not, why not?
3) How come the auditors managed to satisfy themselves for several years that sensitive issues, such as turnover and the value of goodwill, were fairly stated in this company when it now looks very unlikely that this was true? KPMG are on the line, again.
But let's get more systemic about this and extend the questions:
4) The losses that will arise as a result of this failure will be to many classes of stakeholder including customers, suppliers, employees, tax authorities, local communities and others. Despite this company law still maintains the pretence that accounts are only prepared on behalf of the shareholders of the company, and that the auditors have no duty to anyone else but those shareholders. Why do we do that when it is so obvious that the consequences of limited liability extend so far beyond the shareholders, who in so many cases (as in this one) represent a tiny proportion of the claims on the company?
5) Why do we remain so relaxed about the concept of limited liability? I do not dispute that it has had its use in mobilising capital for social gain, but it does also give rise to very clear risk of moral hazard. This is particularly true now that the separation of ownership and control is so stark, and when the rewards to control are so often so high, as in the case of Carillion. Management in this case was exceptionally well rewarded, with the chief executive earning more than £1 million a year, and the chairman earning more than £200,000 for a part-time employment. Non-executives were paid £61,000 the year each, again for a decidedly part-time employment, and the simple fact is that they did not do their jobs appropriately: if they had then this failure would not be so severe.
So is it time to ask whether limited liability should be denied to the directors of limited companies? Shareholders need it: they are given remarkably little information to decide upon with regards to the affairs of the corporation in which they have invested, and so it is appropriate that their risk is limited. This is, however, not true of the directors: they are meant to know what is going on, and in that situation to limit their liability simply encourages recklessness. And it cannot be argued that it would be unfair that they carry such risk. As evidence look at what is happening in Carillion: most of the directors will walk away without a penny of personal loss. Many of their employees, most of their pensioners, many of their small suppliers, and many of those small suppliers own employees, will walk away with considerable personal loss arising as a consequence of the recklessness of the action of this Board of Directors.
The directors of Carillion will no doubt think that they did not have liability to these people: caveat emptor when dealing with a limited liability company, they will say. But I do not agree. The primary duty of the directors of a limited liability company is not, whatever most people think, to the shareholders. That primary duty is, instead, to the creditors: it is the duty of the directors to make sure that everyone who deals with the company can be paid. This has failed in the case of Carillion. From the pensioners onwards the creditors of this company have been treated with contempt: in my opinion the directors should be personally responsible for that, to the limit of their own financial assets.
6) The liability of companies to their pension funds has to be reappraised: the indifference of this company to the deficit that it maintained on its pension fund is indicative of the contempt that they had for their employees, both present and past. If the company was unable to make good this deficit then it, along with all other companies in a similar position, should not have been allowed to do three things. First it should not have been allowed to remunerate its directors at a rate more than ten times median company pay. Second, it should not have been allowed to pay a dividend. Third, it should not have been allowed to continue in business without supervision by a board appointed by the pension trustees, to remain in office until such time until the deficit was cleared. It is no longer acceptable that the ultimate risk in a company should be borne by its pensioners.
7) The form and content of company accounts has to be brought into question because, quite clearly, the accounts of Carillion failed to draw attention to the risks that were inherent within it. This issue requires further elaboration in due course, but one of the primary problems in current accounting is, I think, the failure to report cash flow adequately. A long time ago company accounts included a cash flow statement: this is long been replaced by statement of funds flow, but these things are not the same and the funds flow statement does not, in my opinion, draw adequate attention to the ability of the company to service its debts as they fall due, which is vital if solvency is to be proved. I am well aware that there is a purpose to a funds flow statement, and that there is an argument that for a heavily solvent company this is a much better and more useful document, but there is an important caveat in that statement, and it is that the company is heavily solvent. In precisely the circumstance when a statement on insolvency is required the funds flow statement fails to deliver, and a cash flow statement is necessary. Precisely because a cash flow statement would focus the minds of the directors on their duty to ensure that creditors can be paid it should be included in all financial statements.
That are, of course, other additional statements that are required. There was no country-by-country reporting in these accounts, and that means another important aspect of risk could not be appraised.
But then there is perhaps the most important questions of all:
8) Why is it that the Financial Reporting Council's membership is still dominated by those associated with the Big Four firms of accountants? Shouldn't this be brought to an end?
9) Why is it that the UK does not have a company law regulator who ensures that the requirements of the Companies Acts are enforced, because that is not the job of Companies House? Hasn't Parliament been negligent in ignoring this issue?
10) Why is it that financial ethics training does not highlight these issues, and ask these questions. Indeed, why does it seemingly fall to just Atul Shah to do so in academia?
11) When will the audit market be reformed so that we have genuine separation of auditors from other aspects of financial services, not least so that the Big Four merry-go-round does not profit whatever happens in these situations, as PWC are now doing here?
And, perhaps, most important of all:
12) When will government realise that dumping its obligations into limited companies, who have no capacity to fulfil them, at long-term costs to the employees who provide public services, is no way to run a state?
Until such questions are answered Carillion will leave a very big stain on our economy, and the ethics of finance and accountancy.
I am not hopeful.
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“The losses that will arise as a result of this failure will be to many classes of stakeholder including customers, suppliers, employees, tax authorities, local communities and others”.
1. Customers – mainly the government but all customers should have contingency and business continuity plans if the services were critical. Most services contracts have Step In clauses, for example.
2. Suppliers – unfortunately that’s a risk one takes. Insurance and limiting credit can be used as mitigation, as can not being reliant on a single “whale” client.
3. Employees – uncertainty is unpleasant but, presumably the work still needs to be done so they are likely to carry on. See the point above about Step In.
4. Tax authorities – well, corporation tax is paid on profits so that’s gone, but if the work still continues people will still be paid to do it and therefore the NI and PAYE continues.
5. Local communities – not sure I follow this line if thought.
You missed shareholders and bond holders from that list and they will be burned, as Capitalism requires of failed investments.
It’s a mess and someone is likely to spend some time in the big house if the reporting allegations are correct but it’s still a great example of Capitalism doing its magic. All the other systems we’ve tried end up with far more risk of the moral hazard you are concerned about.
(Screenshot in anticipation of your usual editing).
A) I don’t edit comments ever unless asked to do so after posting or to correct obvious typos that are confusing
B) I do wonder what sort of naive, indifferent, unempathic, callous and wholly artificial world you live in. It’s not mine, for sure
C) And you think folding people to account increases moral hazard? How very bizarre
D) And you mean that you don’t get the idea that local communities who have not got the services they anticipated have lost out? How?
A. Baby Jesus cries when we don’t tell the truth, Richard.
B. A world where I contract and sub-contract and deal with client and supplier insolvency risk on a daily basis. ie the real world not academia.
C. Sophistry.
D. As Mayor Joe of Liverpool (hardly the last bastion of Ayn Randian thought) points out, contingency plans are in place.
Your point 12, by the way; are you saying the government should run these services not sub-contract them? Remind me, what’s the recourse and remedy in the case of a failed service provided by a government department?
Again, screenshot.
A) With respect, I tell the truth
B) With respect, I am a chartered accountant, more than familiar with the commercial world
C) I refer you to (A) above
D) That is fatuous, and I know you know it
But any response from you will be deleted: you are very clearly intent on being deeply offensive on many levels
George Kaplan,
If you cannot see how deeply corrosive this sort of institutional cynicism is, I think you are missing the mood of the population of this country. I think a lot of people are becoming heartily sick of it.
Interesting how people like George puff their chest out as if they have monopoly on the ‘real world’-whenever anyone boasts of possessing this self-constructed yardstick they are revealing thimble-deep abilities to think about the world in front of them -in 19th Century philosophical thinking they were referred to as ‘naive-realists’, people who just saw the world given to them as elementary sense data minus the interpretational bit.
If George thinks that the world of capitalism is real, then he has nothing to offer to society , and hope for the future and merely rolls around in an opportunistic sty that see nothing other than a contest of card-sharps taking place.
I prefer it when his type miss the mood. It moves things along quicker.
Well said, Simon.
Well, I’m no fan of Adonis but I agree that there should be a Public enquiry.
What makes me laugh about the Tories is that they come in talking about smashing state monopolies and then we see them aiding and abetting a monopolistic private company like ‘Crapillion’ and this is what you get.
There is very little fairness in this at all. The law is being made to look like an ass. Senior people in these orgs who are so greedy are willing to run the company into the wall and take all their benefits with them and f**k everyone else.
Yet again, the unacceptable face of capitalism. But this is happening so often it is almost being normalised.
Well, according to George Osborne “ Carillion deal is first through new Direct Lending I announced at Budget, boosting exports is key part of #LongTermEconomicPlan”
That worked well didn’t it?
🙂
Carillion’s popularity with short-sellers suggests hedge funds were convinced the company was in trouble long before suspicions reached politicians and the public. ( As Richard mentions)
According to analysis firm IHS Markit, 18 hedge funds made £80m from the initial share slump, with much more likely to have been banked since then, after further steep falls.
The biggest winner from July’s share price crash was hedge fund Marshall Wace, whose co-founder Sir Ian Marshall was a major backer of the leave campaign in the Brexit referendum.
Another institution that took out big bets on Carillion’s downfall is BlackRock, the US-based investment institution that hired former chancellor George Osborne as an adviser last year, on a £650,000 salary.
Meanwhile:
workers building the £590m Midland Metropolitan hospital in Smethwick were told to go home, the West Midlands mayor and former John Lewis boss Andy Street said a new contractor would have to be found, adding that he had set up a regional taskforce to help staff and suppliers.
Liverpool mayor Joe Anderson said “solid contingency plans” were in place to make sure the £490m Royal Liverpool University hospital was not further delayed.
Small business experts warned Carillion’s suppliers could be driven under if they were not paid. Suzannah Nichol, chief executive of trade body Build UK, said she estimated Carillion owed money to between 25,000 and 30,000 businesses which could now struggle.
“Looking at previous cases where large contractors have collapsed, you typically see that around 17% or 18% of businesses who are creditors […] don’t make it through the next five years,” she warned.
The above are all quotes from today’s news (Guardian etc) -isn’t it time we stopped the wealth shuffling of hedge funds that serve no socially productive purpose and limit hedging to where it functions well as a form of realistic insurance?
The much vaunted ‘efficiency’ of the market -seems to boil down to the maxim: ‘whatever happens, happens.’
You clearly know nothing of company law Richard. Part 10 A companies Act 2006 contains 111 sections dealing with the actions of directors. A director who behaves recklessly can be held personally liable for loss.
Why do you insist on constantly making a fool of yourself by commenting on matters you have no understanding of?
I am well aware of that part of the law
I was suggesting amending it to change the criteria, so making liability the default and not the very rare excpetion
Why do you make a fool of yourself by not reading what I was actually saying?
Hilary Howey says:
January 16 2018 at 10:15 am
“…. A director who behaves recklessly can be held personally liable for loss…..”
As they were in the case of the banking crisis? Or was that just lack of competence rather than recklessness in your book?
Precisely why I have suggested change – which Hilary ignored
Fraud Act, 2006 (note the date). Enacted to provide a modern and effective Fraud Act to replace the existing law, that did nor work and was completely ineffective (as everyone agreed). Spool forward only one year, to 2007-8: irony of ironies, the Crash.
Here is my question for Hilary Hawley: how many people have been found guilty under the Fraud Act, 2006 in the Finance and Banking Sector for offences committed after 2006? How many people have been charged under the Fraud Act, 2006 in the Finance and Banking Sector for offences committed after 2006?
Does Hilary Howey think the Fraud Act, 2006 is effective; and if not, why not?
Perhaps I should ask the same questions (mutatis mutandis) of Part 10 A, Companies Act 2006, containing 111 sections dealing with the actions of directors. How many? Please answer; be my guest.
Hilary is not barred
I haven’t got to the end of it yet, but this question occurs:
“Shareholders need it: [Limited liability] they are given remarkably little information to decide upon with regards to the affairs of the corporation in which they have invested, and so it is appropriate that their risk is limited.”
Is the liability of shareholders not inherently limited to the value of their shareholding? In extremis they lose all if the company goes bust, but are they liable for further charges without limited liability.
Or, are they protected to a greater extent than that? Do they have priority claims on the company’s surviving assets?
That is their protection – but without limited liability they would be the equivalent of partners and that means unlimited liability
“That is [shareholders] protection — but without limited liability they would be the equivalent of partners and that means unlimited liability”
OK. I see.
I hadn’t realised that was reliant on the Limited Liability ‘deal’.
Good points / questions as usual and quite worrying.
A tangential question why have investors not reacted negatively to this news? (The FTSE All Share index is steady this week).
Surely this is seismic?
Noted
Ken M says:
January 16 2018 at 11:20 am
“…. why have investors not reacted negatively to this news? (The FTSE All Share index is steady this week).
Surely this is seismic?”
The stock markets are playing a peculiar game (and have been for the past couple of years that I’ve been paying attention). Even geopolitical events which might reasonably have been expected to shift prices have not done so.
eg. US/North Korean nuclear willy-waving tweeting is dismissed by markets as not of any consequence. Ditto Nimitz aircraft carriers (more than just the one I think) swanning about the South China Sea. Continued US interference in the Middle East….
Stock markets are (widely believed to be) in a state of irrational exuberance; making new highs and showing little sign of retreat. Money is cheap. Central Bankers dare not hike interest rates and as long as they hold that course the problems of Carillion are not seismic. Yet.
The market delivered its verdict on Carillion’s prospects last July and again in November. And the stock had been drifting downwards for over a decade. It actually made a little recovery around the time of the GFC (presumably because it had its nose in the government trough with lots of public sector contracts). Government ministers (and their advisors) seem not to have noticed or not to have cared.
Financial and corporate regulation is so very lax that this fantasy bull market can continue for quite a while and probably will do. Carillion is a small fish written-off a while back. in the overall scheme of things.
I’m a little surprised that we have such a notable collapse quite so early in this new year (and one so closely allied with government. I was expecting a big retailer to be the first casualty), but there will be more to come and the ‘shorters’ in the know will make a great deal of money as they are picked off one by one as chickens come home to roost.
I predict we will see a number of household names go to the wall as the year unfolds. But they won’t necessarily slow down the bull run.
Until they do.
Andy Crow says … “I was expecting a big retailer to be the first casualty”
Thanks for replying to my question and for your comments Andy, which I tend to agree with. Irrational exuberance II or is that III I’m losing count!
As for retailers the hurdle they often stumble at is the 1st April quarterly rent bill.
Ken M says:
“As for retailers the hurdle they often stumble at is the 1st April quarterly rent bill.”
It was reported on Auntie Beeb that Debenhams are (Debenhams ‘is’ doesn’t sound quite right,but is probably more correct) seeking rent reductions in the aftermath of disappointing Christmastide sales. Presumably all such pleading will not be regarded as worthy of note by the national broadcaster, but others will be in a similar position. It would be reasonable to expect commercial property companies to feel the pressure sooner or later. (?)
“Non-executives were paid £61,000 the year each, again for a decidedly part-time employment, and the simple fact is that they did not do their jobs appropriately:”
Slightly off topic, but relating to the discussion the other day of Will Hutton’s ideas about an alternative Public Interest class of (part-nationalised) company.
How would such an alternative company structure overcome the difficulty of recruiting a class of Non Executive Directors who could be trusted to look after the public interest?
Would we not just get the same donkeys? (They are surely not known as ‘neddies’ for nothing :-)) They pretend responsibility, and are handsomely remunerated, but seem to have no responsibility when thing go to bagwash.
I think government needs to work hard on recruiting and training suitable personnel
“I think government needs to work hard on recruiting and training suitable personnel”
But this (government) shower think that’s who’s running everything already. They even rely on them to provide advice.
Phillip Green is a name with certain resonances…. is this him ?https://www.youtube.com/watch?v=cmDkPvy7ALY
It’s another one
Why not turn all the constituent parts into Worker Self-directed Enterprises on the lines of the Mondragon Co-operative Corporation in Spain.
Worker co-ops outperform capitalist enterprises hands down.They are much more stable. They are run by the people who actually do the work. In other words they are run by the experts. They don’t allow a self-perpetuating elite to siphon off all the surplus, screw their supplies, sub-contractors, pensioners and employees and dump the resultant chaos and losses for the taxpayer to sort out. The criminality of Capitalism is not that its behavior has no historical precedents, or cannot be seen every single day. The criminality is that such behavior is not criminal.
January 16 2018 at 2:19 pm
“It’s another one”
You mean to tell me there is another person also called Philip Green and also in the clowning business? Which one of them eviscerated BHS?
John Adams says:
January 16 2018 at 2:18 pm
“…Why not turn all the constituent parts into Worker Self-directed Enterprises on the lines of the Mondragon Co-operative Corporation in Spain….”
You ask ‘why not….? and I guess the answer is at least twofold: 1) This government would be unlikely to support or facilitate the idea because it’s contrary to everything they seem to believe in. Anathema even.
2) The process of liquidation is about recouping any financial capital. The human capital is unlikely to be a consideration within its brief.
One article I read suggested that Carillion Is (was), in effect, nothing more than an outsourced government procurement ‘department’. With effectively no assets at all.
I feel a blog coming on out of that….
The unacceptable face of capitalism is the asymmetrical reward structure often put in place by the board and accepted by shareholders linking pay to share price. It encourages short termism ( e.g share but backs vrs investment) – persimmon is the recent case in point. It is grossly unfair. It may also encourage manipulation of the accounts which may relate to Carillion. In any case there is too much focus on the share price and too many incentives provided. How management are rewarded and governed by shareholders needs a radical rethink.
That said for an economy to be strong internationally companies have to feel the pressure of competition, have to make a profit and if they fail then so be it. There wil be hardship no matter what business fails. Those who buy into MMT might argue that the state could print money to keep Carillion going. The same could be said for Woolworths or HMV or British Steel or the coal industry… the point being we could keep any company going but where do you draw the line? Also it promotes “zombie” companies – arguably QE has kept facets of the banking and insurance going on this basis. Indeed avoiding “moral hazard” means accepting the risk of bankruptcy. That said corporate governance has to radically change how senior executives are rewarded.. of course many want a different system to capitalism and that is a different discussion.
I find the logic bizarre
But I will ask the question
Dc,
“Also it promotes “zombie” companies — arguably QE has kept facets of the banking and insurance going on this basis.”
I’ve seen estimates that up to 10% of companies are in ‘Zombie’ territory, (not just banking and insurance) shored up by the easy money of the last ten years. Some should presumably have collapsed ten years ago and the others in the intervening period. MMT would have made this worse somehow, you think? You might be right, but I don’t see it.
I’m not clear why MMT would make much difference to the fact that government is going to have to foot the bill for Carillion’s failure one way or another, and what they chose not to stump up for the public will pay for in loss of facilities, unemployment, disappeared pensions provision etc.
I am bemused by DC’s claim
Funny how this post about Carillion has rapidly attracted a couple of quite aggressive comments not just questioning your views but also attacking you. Do you suppose that there are groups who are quite upset at the spotlight this event is shining on the current status quo and are looking to mount counter attacks wherever they can? I wonder who they might be?
Maybe they’ve got a ‘a bit of skin the game’ directly or indirectly where Carillion is concerned.
Why is anyone surprised? This is fraud, theft and false accounting a-go-go, i.e. business as usual. Things like this don’t happen in democracies.
Keith Crosby says:
January 16 2018 at 12:42 pm
“Why is anyone surprised? This is fraud, theft and false accounting a-go-go, i.e. business as usual. Things like this don’t happen in democracies.”
Perhaps we should ……no, silly idea? Create a (functional) democracy to live in?
Could be worth a try.
Have a look at DiEM 25 if you haven’t already. It might have legs.
As a superannuated, unreconstructed, 1970s egalitarian I tend to agree. Introduce a democratic electoral system then turn the tax and benefits system the right way up. Simples.
I realise not everyone is an insolvency specialist, but the insolvency act contains sufficient provisions to hold directors personally liable eg s.214 wrongful trading etc. the question to be asked is how often the liquidator invokes those provisions or whether a government agency should be able to if the liquidator cant/wont?
yet again with so many of these things, the rules and law already exist to deal with an issue – the issue is their use or lack thereof not whether we need the law in the first place.
I wholeheartedly disagree
I know what the law says
Let me make quite clear what I was saying. I intended that it be assumed a director has unlimited liability and they would have to make the case for protection – which would only be granted with good reason
I am suggesting a whole reversal of the presumption of law
And that’s precisely because the law as drafted does not work and that is known
So we do need new law
Yet it does work (for them) the results it creates are the results intended.
I don’t think “unlimited liability” for directors would be the way to go, unless you only want people who can’t manage their own finances and have “nothing to lose” to end up running large companies.
This is not to say that there should be “no liability”, but that there should be “limited liability”. A more obvious limit would be pay and bonuses received (perhaps minus tax paid on them).
There is precedence in something like the proceeds of crime act. It doesn’t result in unlimited liability because it is typically limited to the benefit gained from relevant criminal conduct. It is difficult to see why a director’s liability should be even greater than that of criminal conduct.
Another approach would be the one taken with bankers following the financial crash whereby bonuses need to be more long term.
I don’t agree
If their recklessness imposes unlimited loss on others why not on them?
“If their recklessness imposes unlimited loss on others why not on them?”
If they were “reckless” I am sure there are various legal avenues that can be taken already, but I don’t think the automatic assumed penalty for something we know with the benefit of hindsight to be a poor management decision should be “unlimited liability”, albeit that the current position of “no liability” (other than outstanding pay, lost bonuses etc) isn’t necessarily desirable either.
Look at the knock on impact of your proposal. There would be the assumption that the director of any business that fails due to the collapse of Carillion also has unlimited liability. [The directors of these companies should have known about the profit warnings and taken insurance etc.]
Furthermore wouldn’t directors fearing the failure of a company either resign or wind them up at the first hint of trouble, which would be bad news for everybody else anyway?
I do think the assumption should be negligence
I would allow an appeal to be let off
And it should cover directors for at least two years before failure
Good observations generally, Richard, about limited liability.
The corporation as we know it, as an entity, is hopelessly at odds with civil society. There can be no peace until it is fundamentally reformed.
I feel particularly sorry for the unsecured creditors. They will I dare say have been made to trim their prices to the bone by the Carillion directors and management emphasising the “gold plated” nature of the contracts being sought – “….our (Carillions) contracts are with government departments! What greater level of security could there be?”
So having trimmed their prices to the bone, they will now not get paid and may have to place themeselves into liquidation, thus defaulting on their employees and subcontractors.
This added risk borne by these type of suppliers is often not appreciated.
If you are an accountant or a lawyer you sell time. So if you bill £1000 and the client goes under, you lose £1000, plus your employees wages at cost.
If you are a normal supplier who has billed £1000, you lose the £1000 plus your employees wages at cost, plus subcontractors costs, plus materials costs.
I don’t feel sorry for the shareholders, unless they have been mislead by bad auditing, manipulation by directors, in action by authorities – that is the price of investing in shares.
This again highlights the problems with pension schemes. As long as companies know they can offload their pension liabilities, surely it’s a foolish company that fully provides for its pension liabilities, better to always be in deficit and the larger the deficit the better. I do not approve of this and it is wrong but directors trying to maximise shareholders funds and income (and their own remuneration which will be dependent on these) can be expected to continue doing this until the givernment acts to stop them
Agreed re contractors particularly: many of whom will have had to lodge a surety to get on the Carillion list of contractors at all – because the government doesn’t deal with small people – too much admin required, not a known quantity etc….. Contractors then get paid after 120 days – 4 whole months – often with 10% witheld in case of any problems within the next year!
By using only a select band of outsourcers the government efffectively empowers these exploitative companies to do this sort of stuff.
You might be interested in this article from the Cambridge Journal of Economics, Sept. 2010, questioning Limited Liability in its present form. It is a hefty read and not for skip reading. https://academic.oup.com/cje/article/34/5/837/1700679
Thanks Demetrius,
That actually looks interesting – for those that might be interested here’s the abstract:
“Abstract
There has long been a tendency to see the corporate legal form as presently constituted as economically determined, as the more or less inevitable product of the demands of advanced technology and economic efficiency. Through an examination of its historical emergence, focusing in particular on the introduction of general limited liability and the development of the modern doctrine of separate corporate personality, this paper takes issue with this view, arguing that the corporate legal form was, and is, in large part a political construct developed to accommodate and protect the rentier investor. It is, moreover, a construct which institutionalises irresponsibility. Against this backdrop different ways of trying to resolve the problem of corporate irresponsibility are explored. The key, the paper suggests, is to be found in decoupling the privilege of limited liability from rights of control.”
It couldn’t be more pertinent.
I have it on my reading list for this evening
Very relevant
“I have it on my reading list for this evening”
As I’ve remarked before, Richard, you just live for pleasure don’t you? 🙂
Oh yes…..
The most significant thing said today, for me, was by Bernard Jenkin, Chair of the Public Administration and Constitutional Affairs Committee. He said that Carillion did not fail as a result of government contracts, it failed because of contracts in the private sector. He said that PFI has been extremely profitable. We all know that, don’t we?
As far as I’m aware the director’s responsibilities are legally to the shareholders until that point in time when the become aware that there was no reasonable prospect that the company would avoid going into insolvent liquidation (CA06 S214).
There are going to be some fairly lengthy arguments over whether they should have realised this years ago, or last week when the banks told them to f*** off.
The underpinning requirement is to be solvent defined as ability to pay the creditors
As a result I think that fundamental and prinary
Only then can shareholders be considered
This debate is ongoing. The ICAEW get it wrong. It’s at the core of true and fair – which is defined about the ability to pay shareholders which is in turn dependent upon the ability to pay creditors. The ICAEW deny this. They are wrong in my opinion and others I think more learned than me.
Two short articles worth sharing
Why are we still allowing giant corporations like Carillion to squeeze smaller companies to shore up their own cash positions?
https://www.forbes.com/sites/francescoppola/2018/01/16/carillions-failure-the-many-questions-that-need-answers/#234cedae27dc
The cabal of outsourcing firms like Carillion, Serco, and Capita don’t add any value to the economy. They merely act as arbiters between a Government that lacks the desire or capacity to do proper public procurement and the suppliers that end up doing the work, extracting millions from taxpayers in the process.
https://medium.com/@graceblakeley/carillions-missing-millions-9090a6ee84d8
And a bit longer, more specific read:
https://www.opendemocracy.net/neweconomics/private-finance-initiatives-are-disastrous-for-the-nhs-lets-nationalise-the-assets-not-the-debt/
Oh and by the way according to radio 4, Carillion also helps to manage GCHQ. How wonderfully reassuring…
Thanks Peter
Good stuff
Excellent links, Peter.
Thanks for posting.
The next crash you speak of might have just started!
Maybe
Leigh Bowden says:
January 16 2018 at 10:04 pm
“The next crash you speak of might have just started!”
Only in hindsight will it be recognised as such.
This from the FT :
“Ford is bloated and needs to cut more costs in order to compete with its global rivals, one of the company’s most senior executives has said.
The carmaker needs to make savings in “every part” of the business, global markets president Jim Farley told the Financial Times. “I’m not satisfied with where our automotive business is, we have to improve our fitness and our cash flow and profitability,” he said.”
Teetering….? This is an austerity plan. Cut spending to shore-up the share price from a reduced level of productive activity. What could possibly go wrong?
They have forgotten Ford’s great lesson – someone has to be able to buy the product
And eventually, out of income
There was mention of the Big 10 (or 8) of private contractors. I’ve been wanting to see an analysis of this whole rabble and have thought of at least compiling a list: Crapita, G4S, Balfour Beatty… Can someone complete the list?
It’s in the Guardian thi,s morning
Thanks, I always read Guardian online, but generally miss the good bits somehow. Probably don’t understand the titles.
Notable that approx. half the directors are chartered accountants. Damages the brand somewhat. Takes me to a hobby horse about democracy within ICAEW. The Victorian era geographical basis for electing council members obviously doesn’t work, so has largely been superseded by much co-option of friendly yes man faces.
Means the ICAEW Council has become a self selecting and self sustaining elite club.
It would have been preferable long long ago if Council members were instead elected per sector interest eg large firm, small firm, tax, insolvency, big commerce, small commerce etc all prorate to the membership as a whole, and no co-options.
The self selecting and out of touch club thing kills off most members potential interest in getting involved. There’s a lack of debate of big issues, and a lack of challenge.
Helps lead to fiascos like Carillion.
I couldn’t possibly comment…..except to agree
I have long felt that companies should not run the pension funds for their workers. Disregard of this principle is one of the horrors of the Carillion saga.
The simple reason is that there is a conflict of interest (especially in this era in which paternalism has all but disappeared). The interest of the company is to get its labour as cheap as possible (even if it means outsourcing to, say, China). The interest of the worker is to avoid a rainy old age.
Furthermore, all pensions should be inflation-linked. To produce a reasonable pension over a life-time, in my guesstimate, needs 15-25% of pay being devoted to pensions, which doesn’t often happen.
Clearly, pension funds need to have plausible assets to invest in for the long-term. I have some published material to my name, which sketches out some proposals, and some of these items have been gathered into my Facebook album, “My Claim to Fame”, which is available for public view.
Generally, the actuarial profession does not seem comfortable with inflation-recognising accounting and one would hope that, in future, discount rates for working out pension adequacy would not stay at current low levels, because pension deficits are being calculated at alarmingly high levels.
However, the crisis in capitalism is upon us and, as they say: “Something must be done”.