Richard Adams (Finance Director of Carillion) - An expert in deceit.

Multimedia Blog – Blog 2. 

03/11/2019

In this week’s blog I bring to you an insight into the works of Richard Adams and his ability to cook books and magic up money like no other before. I am writing this blog as a response piece to watching the financial documentary ‘How to lose 7 billion pounds: Channel 4 dispatches’, an episode based around the collapse of Carillion; a case I’m sure we’re all very familiar with. 

I would like to focus on whom I believe was actually an expert in deceit; Richard Adams, Financial Director at Carillion from 2007 – 2016 (An aptly timed resignation at just a year before the company’s collapse). So to summarise for those less familiar with the case; Richard Adams was responsible for all financial accounts at Carillion and so surely the fact that millions of pounds of debt had been hidden was solely his responsibility? To shareholders, the government, the public, and the entire world; Carillion appeared to be one of the UK’s biggest construction firms – and a successful one at that. With hundreds of public contracts and the government continuing to throw new contracts at the company, it continued to spiral into disarray, in silence and unbeknown to everyone, including Richard Adams, or so he claims. 

So who is to blame for the ‘sudden’ collapse of what appeared to be a billion-pound company? As per the documentary, hedge fund managers began to see cracks in Carillion’s flawless façade and soon began to realise that all was not what it seemed. The worrying aspect is that in March 2015 UBS investment bank looked at Carillion and noted to all of their investors to sell their shares immediately…yet it wasn’t until 2 years later that the full extent of Carillion’s issues came to light. Also by late 2015, the majority of shares in hedge funds were used in bets that the company was going to collapse, a clear indicator that something was amiss. Frances Coppola, a financial writer who talks in the documentary, says that she believes Carillion may have even been insolvent from 2016 if not earlier (Channel 4, 2018). So how did Carillion manage to hide its debts and still pay out huge dividends to shareholders – alluding to a successful, profitable company? In 2016, the company paid out record breaking dividends of £79m, but in 2017 collapsed with millions of pounds of debt, so where did this immediate cash flow come from that paid for these huge dividend pay-outs? Carillion sold assets worth up to £217m to continue paying dividends to shareholders from 2012-2016 (Mor, Conway, Thurley, & Booth, 2018). The use of this money for dividends implies that the company had financial stability to be able to offer a reward to the shareholders, when in fact it was potentially one of the methods that Richard Adams used to keep share price up whilst also enabling bonuses for directors! And again, hiding the actual decrease in cash flow and increase in loans that the company was facing.  

When reflecting on the works of Richard Adams and the reason he may have manipulated the finances of Carillion in the way he did, we can consider how academically shareholder wealth can often be seen as a better tool for decision making than profit. In this graph you can see how the market capitalisation is relatively steady, likely to be due to the company keeping up high dividend payments despite the decrease in cash for the company. 

As per previous research, results appear to be driven by high-pay related CEO overconfidence that leads to shareholder wealth losses from activities such as over-investment and value-destroying mergers and acquisitions(Cooper et al, 2014). I inferred from the documentary that Richard Adams lavished shareholders to enable for the best possible returns in bonuses for himself and CEO Richard Howson. I believe this can be supported by the fact that in 2016 there was a change to the bonus rules where at no point did it say that if the company were to collapse that the bonuses needed to be paid back… Again an indication that Richard Adams had clear plans to cover up the failings of the company and receive as much personal benefit as possible. It was also captured within the documentary that when Mr Howson was asked if he was going to return his bonuses seeing as the company had collapsed, he quickly said no and offered no further explanation. In December 2016 Richard Adams chose to resign and decided to sell all of his shares in Carillion, worth a netof £500k. A year later the £500k of shares he sold weren’t worth a penny…lucky or planned? Within Jensen’s research he suggests that the mistake is to consider shareholder versus stakeholder (Jensen, 2010). Within this graph, I can draw similarities from Jensen’s theory to the story of Carillion, despite volatile cash flows, their focus was to always prioritise and focus on shareholders and their dividend pay-outs, appearing to make Carillion seem as though it had steady financial situation. Despite Carillion actually sitting on £7billion of liabilities. 

Despite Richard Adams successfuly concealing the extent to which Carillion were in trouble, some liability must sit with KPMG, the auditors whom were to audit Carillion's accounts. The relationship between companies and their auditors can be perceived as cosy, and often it appears to lead to bias (Sadan, 2018). The real question is where exactly does corporate governance come into play in the story of Carillion; it appears there was no stopping them, manipulating figures, paying huge dividends with little to no consistent cash flows, and essentially orchestrating what would later be called a 'legal Ponzi Scheme'. Carillion continued to accept smaller contracts, as well as government contracts - using expected revenues to pay lenders or suppliers in an attempt to keep afloat. Where should the blame lie? In reflection of this company there needs to be more board accountability, instead the board of directors were able to keep their bonuses and walk away with no legal offences against them - a failure in terms of corporate governance. 

To conclude, the documentary on Carillion was a fascinating watch and drew similarities from several theories surrounding shareholder wealth and the importance of never neglecting other financial aspects, as well as other stakeholders, to maintain company success. When reflecting on what I’ve learnt from researching more into Carillion and its demise, I was alarmed by the capabilities to lie and manipulate financials to make a company appear in a much more favourable light and manage to hide liabilities to that extreme scale. Also, the way in which no criminal charges were made against Richard Adams or Richard Howson despite the fact they hoodwinked the government into giving them further public contracts and further damaging several other companies in the construction industry whilst accumulating £7billion of liabilities - a prime example of where corporate governance failed to prevent a huge company entering liquidation, reform is most certainly required following this catastrophic event. 

List of References 

Channel 4 (Director). (2018). How To Lose 7 Billion Pounds: Channel 4 Dispatches[Motion Picture].

Cooper et al. (2014, October 1). Performance for pay? The relation between CEO incentive compensation and future stock price performance. Performance for pay? The relation between CEO incentive compensation and future stock price performance.

Jensen, M. (2010). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Finance.

Mor, F., Conway, L., Thurley, D., & Booth, L. (2018). Briefing Paper - The collapse of Corillion. .London: House of Commons Library .

Plimmer, G. (2018, May 16). Carillion probe pulls no punches on individuals or institutions. Retrieved November 2, 2019, from The Financial Times : https://www.ft.com/content/aad5cb88-5820-11e8-b8b2-d6ceb45fa9d0

Sadan, S. (2018, February 14). Carillion’s collapse exposes deep corporate governance failings.Retrieved from Financial Times : https://www.ft.com/content/1958fb80-0fe6-11e8-940e-08320fc2a277