109. While ultimate responsibility for the success of a company rests with the board, shareholders have an important role in holding the board to account for its performance. Under the principles set out in the FRC's Stewardship Code, investors monitor the performance of companies in which they invest, including by checking on the effectiveness of leadership and the quality of reporting.340 The Code sets out a menu of options for escalating stewardship activities where there are concerns, from private meetings with board members to public statements and voting against resolutions at annual general meetings. It states that investors should be willing to act collectively with other investors when there are risks that threaten to destroy shareholder value or at times of "significant corporate stress".341
110. The stewardship activities of some of the major shareholders in Carillion in March 2017 are set out in the table below. The different approaches adopted in the final months of trading are in part a reflection of the different investment strategies of the investors and the preferences of their clients. For BlackRock, most of their investments were through passively managed funds which were sold automatically as Carillion shares fell out of the tracked indexes. The Canadian investor, Letko, Brosseau & Associates, on the other hand, continued to see Carillion as a long-term investment and were willing to consider offering additional support even after the initial profit warnings. Shareholders, including BlackRock, did push back successfully on proposals by the remuneration committee to increase the maximum bonus opportunity from 100% to 150%, but these objections were a protest against the pay proposals rather than a proxy for discontent with the company's performance.342
Table 1: Investor engagement
| Company | Shareholding on 1 March 2017 (%) | Engagement activities |
| BlackRock Inc. | 8.81 | Discussions with board prior to March 2017, including in February on remuneration arrangements. Voted in favour following changes to maximum bonus proposals. Long and short positions held for clients. No engagement after March 2017. Majority of shares held in passive funds, sold in line with changes to indexes arising from profit warnings. |
| Brewin Dolphin Ltd | 5.00 | Met CEO and FD on 9 March 2017 for routine shareholder meeting and options for improving financial position discussed. Shareholdings reduced during 2017 in the light of changing assessment of the investment, accelerated after July profit warning. |
| Deutsche Bank AG | 5.82 | Not proprietary investments. Shares held on behalf of clients and for hedging purposes. No engagement with Carillion management. |
| Kiltearn Partners LLP | 5.01* | Continued to buy Carillion shares on behalf of clients until early July 2017. Kiltearn voted all its shares against the Remuneration Report in May 2017 due to "excessive" pay award to the CEO and concerns about debt and working capital levels. No engagement on performance prior to July 2017, although Kiltearn voted all its shares against the Remuneration Report in May 2017 due to "excessive" pay award to the CEO and concerns about debt and working capital levels. Met CEO on 17 July to discuss funding gap. Concluded that recovery was "unlikely" and that no effective assessment could be made of its finances due to unreliability of published financial information. Began selling shares on 3 August 2017. Kiltearn met CEO on 13 October and, unconvinced by his answers to questions, sold all shares by 4 January 2018. |
| Letko, Brosseau & Associates Inc. | 4.97 | No change in plans or engagement after March 2017 until July profit warning, although a routine review call, requested on 13 June, was not met. After an urgent call on 10 July, shares held on basis that there was a "fair chance" of Carillion remaining a going concern; a further injection of capital considered. Further engagement around September profit warning. After November profit warning, view was taken that recovery was "unlikely" and all shares sold rapidly. |
| Standard Life Aberdeen | 4.96** | Standard Life1 began to gradually divest in December 2015 owing to concerns about financial management, strategy and corporate governance. Bi-annual meetings with Carillion board from 2014, at which concerns were raised about widening pension deficit, high levels of debt, weak cash generation an unwillingness of board to change strategic direction. Meeting with CEO on 17 July, by which time shareholding was minimal. All shares sold by end of 2017. |
Source: Letters from investors and oral evidence. Shareholding figures from Carillion Annual Report 2016.
* According to Kiltearn, this figure should be 10%. ** According to Standard Life Aberdeen, this figure should be 0.56% at this date.
1 Standard Life merged with Aberdeen Asset Management in in August 2017. Aberdeen held limited shares in Carillion during this period, mainly in passive funds, and had little direct engagement with the board.
111. Effective stewardship by investors depends in large part on the availability of trustworthy financial reporting and on honest engagement with board members in response to the raising of concerns. The Carillion board failed on both these counts. In private meetings with the board, the Standard Life representative, Euan Stirling, referred to the fact that "the financial statements have been made to reflect a much more optimistic outlook for the company",343 and that there was "a gloss to the presentations that we felt did not reflect the true business circumstances".344 BlackRock shared the view that management teams were "overly optimistic" and retained its position of not actively investing in a company it did not view as an "attractive investment proposition".345 For Standard Life, direct engagement was an important element of their investment strategy, and they began to divest as those meetings revealed that the board was not going to change direction in the face of their concerns.346 Other investors, with less resources to devote to direct engagement, relied heavily on the published financial information. Murdo Murchison, Chief Executive of Kiltearn Partners, told us that, in the light of the July 2017 profit warning, that information "could no longer be considered reliable":347
What was brought to the table in July last year was evidence of misstatement of profits over a prolonged period of time, evidence of aggressive accounting and evidence of extremely poor operational management, which was completely at odds with the way the business was presented to the marketplace.348
Following the July 2017 profit warning, Kiltearn met Keith Cochrane, by then interim Chief Executive of Carillion, on 17 July and 13 October. Unimpressed by his inability to offer "any meaningful information" about how the company proposed to address its financial problems or "give answers that Kiltearn considered satisfactory to relatively straightforward questions", they determined they could only continue to sell shares.349
112. Representatives of the institutional investors were, at best, frustrated by the behaviour and performance of the Carillion board.350 Kiltearn, unhappy with the level and timeliness of financial disclosures, were considering legal action in respect of what they considered could be "dishonest concealment" of information in the 2016 annual report.351 In spite of these significant concerns on the part of some major investors, as a group these owners of the company did not manage to act in a co-ordinated manner to exert effective influence on the board of Carillion.
113. Major investors in Carillion were unable to exercise sufficient influence on the board to change its direction of travel. For this the board itself must shoulder most responsibility. They failed to publish the trustworthy information necessary for investors who relied on public statements to assess the strength of the company. Investors who sought to discuss their concerns about management failings with the board were met with unconvincing and incompetent responses. Investors were left with little option other than to divest.
114. It is not surprising that the board failed to attract the large injection of capital required from investors; we are aware of only one who even considered this possibility. In the absence of strong incentives to intervene, institutional investors acted in a rational manner, based on the information they had available to them. Resistance to an increase in bonus opportunities, regrettably, did not extend to direct challenges to board members. Carillion may have held on to investors temporarily by presenting its financial situation in an unrealistically rosy hue; had it been more receptive to the advice of key investors at an earlier stage it may have been able to avert the darkening clouds that subsequently presaged its collapse.
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340 Financial Reporting Council, Stewardship Code, Principle 3
341 Financial Reporting Council, Stewardship Code, Principle 4
342 Q1076 [Amra Balic]; Letter from Alison Horner to BlackRock, 7 March 2017
343 Q1033 [Euan Sterling]
344 Q1030 [Euan Stirling]
345 Q1008 [Amra Balic]
346 Q1002 [Euan Stirling]
347 Letter from Kiltearn Partners to the Chairs, 2 February 2018
348 Q1125 [Murdo Murchison]
349 Letter from Kiltearn Partners to the Chairs, 2 February 2018
350 Q1041 [Amra Balic]
351 Letter from Kiltearn Partners to the Chairs, 2 February 2018