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Find out how you can obtain a Non-Executive Director position by booking a place on this interactive 1-day course.   <img data-attachment-id='2823' data-permalink='https://nedworks.net/become-non-executive-director-manchester-24-september-2014/ned1/' data-orig-file='https://i2.wp.com/nedworks.net/wp-content/uploads/2014/06/NED1-e1403709592905.png?fit=600%2C300&ssl=1' data-orig-size='600,300' data-comments-opened='0' data-image-meta='{'aperture':'0','credit':'','camera':'','caption':'','created_timestamp':'0','copyright':'','focal_length':'0','iso':'0','shutter_speed':'0','title':''}' data-image-title='NED1' data-image-description=' ‘ data-medium-file=’https://i2.wp.com/nedworks.net/wp-content/uploads/2014/06/NED1-e1403709592905.png?fit=300%2C149&ssl=1′ data-large-file=’https://i2.wp.com/nedworks.net/wp-content/uploads/2014/06/NED1-e1403709592905.png?fit=695%2C347&ssl=1′ class=’alignright size-medium wp-image-2823′[...]
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Find out how you can obtain a Non-Executive Director position by booking a place on this interactive 1-day course. <img data-attachment-id='113603' data-permalink='https://nedworks.net/10-things-non-executive-directors-can-do-to-satisfy-their-legal-responsibilities/ned3-2/' data-orig-file='https://i1.wp.com/nedworks.net/wp-content/uploads/2015/04/NED31.png?fit=1500%2C883&ssl=1' data-orig-size='1500,883' data-comments-opened='0' data-image-meta='{'aperture':'0','credit':'','camera':'','caption':'','created_timestamp':'0','copyright':'','focal_length':'0','iso':'0','shutter_speed':'0','title':'','orientation':'0'}' data-image-title='NED3' data-image-description=' ‘ data-medium-file=’https://i1.wp.com/nedworks.net/wp-content/uploads/2015/04/NED31.png?fit=300%2C177&ssl=1′ data-large-file=’https://i1.wp.com/nedworks.net/wp-content/uploads/2015/04/NED31.png?fit=695%2C409&ssl=1′ class=’alignright size-medium wp-image-113603′ src=’https://i0.wp.com/www.nedworks.net/wp-content/uploads/2015/04/NED31-300×177.png?resize=300%2C177&ssl=1′[...]

Five key lessons NEDs should learn from Carillion

By Jean-Philippe Perraud

The are lessons to be learned from the collapse of contrutuction giant Carillion almost exactly a year ago. A recent panel of experts examined the red flags that could have given the game away including boardroom curiosity and skills, diversity in the leadership team, and procurement.

Key learning #1: Several red flags were not picked up by the non-executives sitting on the board of Carillion. A few elements should have triggered debates in Carillion’s boardroom. Kate Holton,a Thomson Reuters writer, named a few: the use of suppliers as a source of financing; the increase in dividends distributed to shareholders when cashflows were down and visibility over future cashflows was limited; the low profitability of new contracts; the breadth and complexity of Carrillion’s operations and the high compensation of senior management.

The panelists asked the audience to consider whether any board can oversee such a large and diversified business and take the appropriate decisions. This point was highlighted by Lucinda Case, managing director for Thomson Reuters UK & Ireland Legal, in her opening welcome address.

Serving as a trustee for the council of the Royal Albert Hall, Lucinda pointed out the challenge in navigating extensive board information packages and striking the right balance between getting involved into the details and leaving the “experts”, (ultimately, the executives), to get on with their job.

Key learning #2: The Board of directors was lacking some of the skills to address the challenges faced by Carillion.

According to Giles Boothman, partner and insolvency lawyer at Ashurst, the skills required in the boardroom vary depending on the stage of growth at which a company finds itself. While some directors are suited to a high-growth environment, or to an IPO, others are better equipped to deal with the challenges that arise in a more mature phase.

The role of boards and chairs is crucial in identifying the skills needed in the boardroom, which should be in tune with the stage of the relevant business life cycle of the company.

The unfortunate collapse of Carillion has had the merit of raising awareness of directors’ duties and liabilities, and highlighted the importance of non-executive training and professional development.

There is no difference in liability between non-executives and other directors. They all have the same fiduciary duties to act in the best interest of stakeholders (which means shareholders in the good times but also creditors in the critical times).

There is a stronger understanding that non-executives can suffer damage to their reputation, as a result of their actions or inaction, in addition to facing potential liabilities. This supports the increasing need to professionalise the non-executive role.

Key learning #3: Carillion’s non-executive lacked curiosity and did not ask the right questions.

In addition to lacking the right combination of skills, the board of Carillion did not seem to have asked the right questions about the company’s dividend distributions, acquisitions, new contracts or accounting policies.

Two parliamentary committees—Business, Energy and Industrial Strategy (BEIS) and Work and Pensions—report pointed out that one of the non-executives questioned senior management but was isolated and the questions did not result in meaningful debates and corrective actions.

Carillion’s non-executives went with the consensus, did not challenge the information they received and did not interrogate the executives or their advisors to form an independent view for courageous decisions. Non-executives should be inquisitive and seek to access all the information they need to inform decision making, even if this means engaging into discussions with divisional and operational managers.

Key learning #4: The Board of directors was not truly diverse.

Diversity was not only a matter of gender creed or skin colour but more importantly one of skill competence, communication and decision-making style complementarity among all board members.

Key learning #5: The collapse of Carillion has also highlighted the role of procurement.

The collapse of Carillion was a combination of many factors that compounded risk and raised the issue of how procurement is performed, as short-termism typically prevailed and the lowest bidders usually awarded new contracts. This depresses margins far too much and does not allow for much contingency.

The UK government was one of Carillion’s largest clients. Pursuing its own austerity agenda, the government contributed to squeeze in margins that resulted in Carillion winning unprofitable multi-year contracts.

The UK outsourcing sector is under pressure with players such as Capita and Interserve having issued several profit warnings. Brexit may increase the challenges that the sector is currently experiencing given that companies and the government may be even more reluctant to enter into such big procurement contracts.

Conclusion

The panel, gathered together by NEDonBoard, concluded that no one single factor contributed to the collapse of the company.

Olivier Garrigue, a chairman, chief executive and entrepreneur, summarised some of the main factors that contributed to the failure: many acquisitions that failed to be properly integrated; aggressive accounting policies that could have recognised revenues too early and spread costs over longer periods; the choice of funding the business with too much debt instead of equity; dividend policies which were not aligned with the true financial state of the company and perhaps compensation policies that where themselves not aligned with the company’s overall performance.

External stakeholders such as the government, financial institutions and auditors supporting the company also had an important and influential role to play in the run up to the collapse of Carillion.

The case has offered valuable lessons that should be taken into account in the reform of UK corporate governance reform and in on-going professional development.

Jean-Philippe Perraud, general director, NEDonBoard.

NEDonBoard is a professional body for non-executive directors and board members in the UK.

The post Five key lessons NEDs should learn from Carillion appeared first on Board Agenda.

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