Learning from the Carillion Collapse: Improving Corporate Governance in the UK 


It’s been just over 6 years since the collapse of Carillion in January 2018 that sent shockwaves through the UK business world, prompting a critical examination of corporate governance practices. As one of the largest construction and facilities management companies in the UK, Carillion’s demise raised serious questions at the time about governance failures and their broader implications.  

So, how have we evolved from this? We’ve decided to look into the causes and effects of the Carillion scandal, with a focus on governance, and explore the subsequent improvements made in UK corporate governance aimed at preventing similar crises. 

A bit of background…. 

For those of you unfamiliar with the case, the Carillion scandal stemmed from a confluence of systemic governance deficiencies and operational mismanagement. First, we’ll recap several key factors that all collided to contribute to its collapse. 

To start with, Carillion exercised poor risk management where their aggressive expansion strategy led to overextension and high debt levels, exacerbating financial vulnerabilities. The company’s failure to adequately assess and mitigate risks associated with major contracts further compounded its financial woes. 

Next, Carillion’s financial reporting practices were heavily criticised for their opacity and lack of transparency. The company’s complex corporate structure and use of off-balance-sheet arrangements obscured its true financial health, deceiving investors and stakeholders. 

The board composition and dynamics also came into question, with concerns raised about the independence and expertise of non executive directors. Weak oversight resulted in the board of directors’ failure to provide effective strategy and challenge management decisions.    

A lack of auditor scrutiny may also have played a part in the collapse where external auditors were accused of failing to exercise sufficient skepticism and diligence in their audits of Carillion’s financial statements. Critics argued that auditors overlooked warning signs and relied too heavily on management assurances. 

What were the effects? 

The collapse of Carillion had far reaching consequences, impacting various stakeholders and raising broader governance concerns. The social and economic impact of the collapse was profound as thousands of employees lost their jobs, subcontractors faced financial losses, and pension fund deficits deepened. The ripple effects of Carillion’s collapse reverberated deeper throughout the supply chain and affected many local economies. 

Investor confidence was significantly eroded in corporate governance and financial reporting standards. Shareholders suffered significant losses, prompting calls for greater accountability and transparency from corporate leaders together with deeper regulatory scrutiny and reforms.  

How have we evolved? 

So, what improvements have taken effect in UK Corporate Governance since Carillion’s collapse? Subsequent reviews did indeed highlight the need for stronger oversight and regulatory enforcement as government committees investigated the circumstances leading to Carillion’s collapse and proposed reforms to improve corporate governance standards aimed at enhancing corporate governance practices and mitigating systemic risks. 

First of all, reforms focused on enhancing director accountability and responsibility. The UK Corporate Governance Code now emphasises the importance of board diversity, independence, and effective risk management oversight. 

Corporate reporting practices have improved as companies are since required to provide clearer and more transparent disclosures regarding their financial performance, risk exposures, and corporate governance practices. Enhanced narrative reporting requirements aim to improve stakeholder understanding and scrutiny. 

Regulatory reforms have been introduced to enhance auditor independence, accountability, and the quality of audit services. Measures include mandatory audit firm rotation, increased regulatory oversight, and improved audit committee oversight of auditor selection and performance. 

There has also been a growing emphasis on stakeholder engagement and dialogue as a means of promoting long term sustainable value creation. Companies are encouraged to consider the interests of a broader range of stakeholders, including employees, customers, suppliers, and communities, and demonstrate their wider impact of their strategy and decisions. 

When viewed with positive hindsight, the Carillion scandal served as a wake up call for the UK corporate governance establishment, prompting a reassessment of governance practices and regulatory frameworks – it refocused the vital importance of ‘good governance’, what that should look like, and the deeper value it holds when embedded smoothly throughout an organisations’ operation.  

While significant improvements have been made since Carillion’s collapse, ongoing vigilance and continuous improvement are essential to ensure that governance failures are identified and addressed promptly, boosting investor confidence, safeguard stakeholders’ interests, and promoting sustainable corporate performance in the years ahead. 

Independent internal audits are just part of Ebonstone’s service offering – get in touch for an informal chat about how we can help to enhance and better protect your business. 

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