Lessons from the Carillion Collapse: Seeing what you want to see

The government's monitoring system rated it green. But short sellers had already been betting on its collapse for two years.

Carillion was the UK's second-largest construction company. At its peak, it employed tens of thousands of people, and held over 420 public sector contracts for vital things like hospitals, schools, roads and rail links. Lots of Britain ran through Carillion.

And the government (understandably) considered it a strategic supplier.

Yet in January 2018, it went into liquidation with just £29 million cash in the bank and debts of over £1.3 billion (up from £277m in just 8 years).

The collapse didn't come from nowhere. 

In 2015, UBS publicly claimed Carillion's debt was higher than the company was declaring. Over the next two years, major shareholder Standard Life Investments sold down its entire 10.8% stake, citing concerns about strategy, financial management and corporate governance. By 2017, over a quarter of Carillion's stock was owned by short sellers. 

The market had reached a verdict that was clear for all to see. Well, all apart from those that mattered most, it seems: the board and the government.

The board had been increasing dividends year on year, and adopting ever more aggressive accounting policies. Ten months before the collapse, Carillion’s annual report described the company's prospects in upbeat terms. The government's own "traffic light" supplier monitoring system rated Carillion as green until July 2017. Nothing to see here, keep cracking on as we are. 

A parliamentary inquiry later described Carillion’s collapse as "a story of recklessness, hubris and greed." 

But that phrase makes Carillion’s collapse sound like a one-off freak event: something that can be put down to a one-off mistake or miscalculation that other CEOs can easily tell themselves they’d never make.  That dangerously misses the key learning that I see. 

Rather than accounting fraud or reckless acquisitions, to me Carillion’s collapse is about what happens when boards, auditors and regulators – the ‘forward looking’ mechanisms that are specifically there to ensure a business’s long-term future - all either fail to see what’s in front of them, or (having spotted the problem) fail to properly debate and decide what to do about them.

The signals with Carillion were loud. They were public. But they still weren't being taken sufficiently seriously inside the room. And as a result, they could be parked, ignored or dismissed in favour of charging on aggressively.

CEO followers: Most long-term plans fail not because the threat was unforeseeable. They fail because no one looked ahead and made sure the threat was considered and responded to. Make sure you’re looking ahead and taking the threats you see seriously.

(And if you want to know how well your long-term plan is protected against the things you might not be seeing, our quick, free Long-Term Plan Confidence Check is a good place to start)