Carillion. Failure of stewardship. Or simply bad business model.

(c) B Yeoh, London.  

(c) B Yeoh, London.  


Is Carillion a failure of investor stewardship? Some commentators argue this. There are complex multiple factors at play. Partly due to the business model and the difficulty of pricing large construction projects (eg unforeseen asbestos), the way we price and view “outsourced” labour, and the inter-relation of govt-private partnerships.

I’m not delving too far into that. I make the observation that tick box ESG/Stewardship (Environment Social Governance scores) is often unable to uncover such business model weaknesses.




Take the scores of one leading ESG data provider (picture) it ranked CLLN 3/68, 97th percentile ESG leader. (The two leading providers have a majority of the market). 

Examine proxy advice, one leading proxy adviser recommend a FOR vote on every 2017 proposal. Noting 2016 investor disquiet (33% abstained, 13% against remuneration report), it concludes: “The remuneration report provides comprehensive disclosure of the Company's executive compensation policies and structure, which generally appear to satisfy best practice guidelines”.

CLLN mapped targets against SDGs, was part of FTSE4Good, reported using GRI standards and was signed to UN Global Compact. All positive ESG ticks.

Investors can not, and should not, manage businesses (at least that's established wisdom). In practice, much is delegated to the Board. But, even there how much can a board do with an unsustainable business?

If a company prices a contract at £1m, but in reality it costs £2m but it goes ahead on the companies estimates then at some point the project fails and the company goes bankrupt.

Construction contracts are meant to have enough built in flexibility to deal with unforeseen costs such as hidden asbestos.  However, when all negotiating parties are at such pressure to have low price (and not think about long term sustainable value) and that is built into the business model and business environment then it’s going to be difficult.

Stewardship won’t save that company. I’m uncertain if employee representation or other stakeholders on the board would save that company. Although Prof Prem Sikka arguesHad there been employee elected directors on the Carillion board, at the very least they would have urged directors to honour obligations to employees and take a more balanced approach to paying dividends.”

Prem Sikka also criticizes the auditors, KPMG.  KPMG should have had much more detailed information than investors, even than most board members.

source: Bloomberg.  Note heavy weighting to retail platforms.  

source: Bloomberg.  Note heavy weighting to retail platforms.  

Of note, Blackrock was seemingly both long (mainly passive, 10m shares) and short (active, hedge, 7m sh) the stock and voted for all 2017 AGM proposals. I’m unsure what to make of that although of course the different funds will have different mandates and clients. Also note limited institutional ownership in top holders, many retail platforms and passive funds.   With significant short interest tho the timelines are unclear as this is just a recent snap shot. 

On the politics see below: 


Read a strong defence of PFI in Guardian here by John McTernan (who has always been a supporter from Tony Blair's  time).




Read a balanced defence of PFI in the FT here by

Read a strong attack on PFI in the Guardian Editorial here

Read another strong attack, from a different angle, by George Monbiot here

Telegraph’s Jeremy Warner turns the attack on Labour rather than ‘Capitalism’ – which I read as an attach on the PFI architecture but necessarily the philosophy

Note a personal historic rembrance: “The Country is suffering a national case of amnesia. The British Nationalised industries of the1970's were a disastrous combination of overmanning, underinvesting and politicization. The Unions ran amok with successive governments of both parties terrorised into capitulation. There was running commentary in the Press on how long before the Country would collapse into economic and political chaos. My Grandmother lay unburied for 6 weeks to the great distress of the family in the Winter of Discontent. This would be unthinkable today but not if Momentum and the Unite Union get their way.” From Joffly GU comments, which is a partial defence.