Introduction and key information
This assignment will identify what caused the sharp downfall of Carillion and whether anything could have been done to prevent it. Construction giant Carillion fell into the irrecoverable depths of compulsory liquidation as a result of its financial woes and troubles. The bank refused to lend it any more money which threw a myriad of major projects in doubt and bringing down one of the government’s most important suppliers. Furthermore, Carillion’s shares had lost more than 90% of their value since receiving three profit warnings. The amalgamation of its troubles caused by a number of poorly managed factors, such as, the heavy debt; pension obligations and delays in collecting cash from clients, is what arguably caused the downfall of the British outsourcer and construction firm
The multiple profit warnings within five months marked the beginning of the end for Carillion, however, poor decision making and the Government’s lack of understanding in terms of the management of outsourcing and contracts in the years leading up to it were what caused the company serious, irreversible trouble.
Ethics of the process
This section will focus on ethics and… Ethics is ‘A set of standards by which a particular group or community decide to regulate its behaviour.
The relevant ethical theory in regard to the Carillion crisis is utilitarianism. Utilitarianism refers to going along with those actions that give the greatest net benefit for the greatest number of people. In Carillion’s case, the massive Government contracts were beneficial for the general public and the majority of people benefitted from their services such as their management of schools and hospitals. However, it could also be argued that the massive greed culture that took over Carillion proves that they were self-serving and only took themselves into consideration.
The least relevant ethical theory in relation to the downfall of the British outsourcer is the stakeholder view of justice which advocates the belief of businesses having a wider set of interests than just simply being stakeholders and consider the impacts of both internal and external stakeholders. Despite Carillion promoting the belief of ‘making tomorrow a better place’, they did not seem to take any internal or external stakeholders into consideration when making ill-conceived and somewhat reckless decisions for the company. A prime example of this is the Royal Liverpool Hospital contract. This was at the forefront of the Carillion’s accountancy tricks to convince the general public that all was promising. A Royal hospital was due to have opened in March 2017, the £325 million project was being built by Carillion and was nearly a year late and 85 per cent complete, when the company collapsed into compulsory liquidation in January 2018 as well as an extensive amount of asbestos being discovered on site. Not only did the collapse of Carillion affect the internal stakeholders such as the managers and employees, the ‘human misery’ they caused to their external stakeholders was irrefutable according to McCluskey (2019
With respect to the ethical objections, the most significant would be psychological egotism whereby the only interest is the business itself and the organisation is the most important entity. As mentioned above, Carillion and its directors such as Howson favoured the company over other stakeholders. The construction empire was seen to take on large, risky contracts, some of which proved much less lucrative than expected, simply having profit maximisation and the reputation of the company in mind. This is evident when Carillion was seen ‘massaging’ their accounts to make it seem as if they weren’t making a loss on paper. As well as window dressing their accounts, the large, public contracts they were involved with were doubtlessly weakening.
The less relevant objection seems to be cultural relativism which is defined as ‘respecting other cultures and going along with how businesses operate in the ‘host’ culture’. This necessarily doesn’t apply in Carillion’s case as most projects and decisions were carried out in the UK. Nonetheless, the involvement of overseas contracts such as …. do apply
Ethics applied to outcomes
The outcome of the crash meant that the company was under £1.5bn of debt which cost the UK taxpayers an Ethics estimated 148m according to the National Audit Office. The company only had £29m in cash and £7bn in liabilities, leaving the UK government to step in. This created a chain reaction in terms of the impact of stakeholders. Firstly, the employees were left without jobs. Carillion employed approximately 19,500 people in the UK; only 6,668 jobs have been saved with at least 1,000 staff being made redundant. This directly impacts the economy in terms of them giving more handouts to people that need it but also receiving less tax due to the decrease in employment. Carillion was notorious late payers; court documents reveal that the smaller companies are less likely to get anything back. Writing these off could threaten the stability of smaller organisations. Similarly, there is a huge impact on larger businesses. The rival outsourcing firms have seen their share prices tumble due to the concern among investors about the general outlook for the sector.
In reference to the ethical perspectives, the most fitting for the outcome is utilitarianism. The reason behind this is
Conversely, the less fitting perspective for the outcome of Carillion is justice which is based on the idea of notions of rights and principles of fairness. The loss of thousands of jobs; the strain on the government; the pension deficit of £587m and the disastrous effect on the general public are all factors that are the complete antithesis to justice and fairness. The company’s carelessness in providing a basic duty of care exemplifies its lack of care and thought in providing moral services.
Agency arguments fits well in regard to the result of Carillion’s poor management. This suggests that profit maximisation is key and social responsibility is an oxymoron. [Friedman,1970] Carillion’s intention was focused on generating/accumulating as much profit as possible. This is portrayed by the deception and duplicity they
Machiavellian concerns
On the other hand, cultural relativism doesn’t necessarily apply to the outcomes of
The question still remains over how the business accounts changed so drastically between March 2017 and its collapse in July 2018. The financial reporting council (FRC) are investigating the audits of Carillion from the years 2014-2017 as well as the conduct of two former finance directors, Richard Adam and Zafar Khan. The focus areas have been the financial performance of Carillion’s major contracts in the construction and service sectors. According to Kingman, the ineptness of the FRC to regulate their auditors and recognise the tremendous trouble Carillion was actually in, due to the lack of Government interest in expanding their powers, resulted in them being replaced by the Audit, Reporting and Governance Authority (ARGA). The focus of ARGA served to be more effective as it would be the first time a statutory body with powers could make direct changes to accounts rather than apply to the court to do so.
The pensions regulator had been criticised for failing to take early action to protect the pensioners even after reports show the pensions trustees wrote to the regulators in 2010 and 2013 to highlight problems. It has pension liabilities of around 2.5 billion pounds due to the Pensions Regulator not using any formal powers whilst the company was solvent even though trustees urged it to do so in the years 2010 and 2013.
Legally and morally, Carillion did not comply with the Companies Act 2006 which focuses on exercising reasonable care, skill and diligence in discharging their duties and promoting the long-term success of the company. The £2bn owed to its 30,000 suppliers; the company’s pension scheme deficit of over £800m; the fact that they paid out £217m more in dividends than it obtained from cash and their reliance on borrowing which increased their debts from £242m to £1.3bn are all factors that prove the lack of long-term interests of the organisation.
In a similar way, Interserve is a multinational group of support services and construction companies that questionably face an identical fate.
Numerous stakeholders were massively affected by the collapse of the firm. In spite of this, it is fair to say that the Government were impacted massively. Not only does this directly affect the government and economy but the general public too. This is due to them needing to significantly cut budgets in an attempt to make back the money they lost.
A domino effect was created for the suppliers in the sense that Carillion created a negative impression of the sector. As well as that, their payments got written due to Carillion’s necessary liquidation, preventing payments.
External view
Understandably, the media did not take Carillion’s crash lightly. Their wrongdoings were highlighted and scrutinised. Every minute detail was put under the microscope. This scrutinization was focused towards the Government and how they let these states of affairs spiral out of control. Additionally, the immediate affect on the private sector was mentioned
The huge uproar throughout the private sector industry
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