Carillion bosses prioritised pay over company affairs, MPs hear

Former Carillion directors appeared to be more concerned about their pay deals than the operation of the company in the year leading up to its collapse, according to evidence given to MPs by City investment firm BlackRock.

The allegation came during the latest hearing of a joint inquiry by two Commons select committees, in which investment fund Aberdeen Standard Investments appeared to back calls for the Big Four accounting firms to be broken up.

BlackRock managing director Amra Balic told MPs from the business and pensions committees that the investor’s last conversations with the board before Carillion’s failure were about pay.

“My team meets with the board and has interaction with the board,” Balic said.

“Most recently in 2016 and 2017 that was around executive pay, where we received a letter from the remuneration committee looking to allow for more opportunity, larger bonuses for the executives and we categorically said no to that.

“It seems that the board was focusing more, thinking again how to remunerate executives rather than actually what was going on at the business.

“Definitely too much focus at the board level around remuneration,” said Balic, who also revealed that BlackRock’s customers made £36m betting that the company’s shares would fall.

Her comments on pay follow disclosures that Richard Howson, who headed the company from 2012 until July 2017, pocketed £1.5m in 2016, including a £122,612 cash bonus and £231,000 in pension contributions.

As part of his departure deal, Carillion had agreed to continue paying him a £660,000 salary and £28,000 in benefits until October 2018.

Similar deals were struck for former finance chief Zafar Khan and interim chief executive Keith Cochrane.

The evidence session also saw leading investment firms back calls to address a lack of competition between the Big Four accountancy firms that audit the books of major companies, including Carillion’s auditor KPMG, PwC, EY and Deloitte.

Murdo Murchison, chairman of Carillion’s former largest investor Kiltearn Partners said: “There appears to be a lack of competition in a key part of the financial system, that periodically causes a lot of participants in that system a lot of trouble.”

He said Kiltearn had written to directors at other companies in which it invests that are audited by KPMG, asking them to assess the “quality of service” they are receiving.

“We remain puzzled by the fact that someone can be six weeks in a job and discover material issues in accounts that have been approved [by auditors].

“There appear to have been issues that were hidden in plain sight but were not visible to auditors. That’s a puzzle.”

“I do share the concern over the audit industry,” said Euan Stirling, Aberdeen Standard Investments’ head of stewardship. “There is a lack of competition.”

Murchison also voiced concern about the length of time that one company can act as auditor to the same company, pointing out that KPMG had analysed Carillion’s books since 1999.

Stirling also raised concern that Carillion’s former directors were presenting a better picture of the company’s finances than was correct.

“There was a gloss to the [shareholder] presentations that we felt did not reflect true business circumstances.

“Our dealings with the company suggested a confidence in their approach that wasn’t necessarily supported by the facts.”

Referring to non-executive directors, who are tasked with questioning the company’s management, he said they were “hoodwinked as much as anyone else”.

The Guardian has approached KPMG and former directors of Carillion for comment.