214. The collapse of Carillion has tested the adequacy of the system of checks and balances on corporate conduct. It has clearly exposed serious flaws, some well-known, some new. In tracing these, key themes emerge. We have no confidence in our regulators. FRC and TPR share a passive, reactive mindset and are too timid to make effective use of the powers they have. They do not seek to influence corporate decision-making with the realistic threat of intervention. The steps they are beginning to take now, and extra powers they may receive, will have little impact unless they are accompanied by a change of culture and outlook. That is what the Government should seek to achieve.
215. The Government has recognised the weaknesses in the regulatory regimes exposed by Carillion and other corporate failures, but its responses have been cautious, largely technical, and characterised by seemingly endless consultation. Our select committees have offered firm and bold recommendations based on exhaustive and compelling evidence but the Government has lacked the decisiveness or bravery to pursue measures that could make a significant difference, whether to defined benefit pension schemes, shareholder engagement, corporate governance or insolvency law. That must change. Other measures that the Government has taken to improve the business environment, such as the Prompt Payment Code, have proved wholly ineffective in protecting small suppliers from an aggressive company and need revisiting.
216. The directors of Carillion, not the Government, are responsible for the collapse of the company and its consequences. The Government has done a competent job in clearing up the mess. But successive Governments have nurtured a business environment and pursued a model of service delivery which made such a collapse, if not inevitable, then at least a distinct possibility. The Government's drive for cost savings can itself come at a price: the cheapest bid is not always the best. Yet companies have danced to the Government's tune, focussing on delivering on price, not service; volume not value. In these circumstances, when swathes of public services are affected, close monitoring of exposure to risks would seem essential. Yet we have a semi-professional part-time system that does not provide the necessary degree of insight for Government to manage risks around service provision and company behaviour. The consequences of this are clear in the taxpayer being left to foot so much of the bill for the Carillion clean-up operation.
217. Other issues raised are deep-seated and need much more work. The right alignment of incentives in the investment chain is a fiendishly difficult balance to strike. The economic system is predicated on strong investor engagement, yet the mechanisms and incentives to support engagement are weak and possibly weakening. The audit profession is in danger of suffering a crisis in confidence. The FRC and others have their work cut out to restore trust in the value, purpose and conduct of audits. Competition has the potential to drive improvements in quality and accountability, but it is currently severely lacking in a market carved up by four entrenched professional services giants. There are no easy solutions, but there are some bold ones.
218. Carillion was the most spectacular corporate collapse for some time. The price will be high, in jobs, businesses, trust and reputation. Most companies are not run with Carillion's reckless short-termism, and most company directors are far more concerned by the wider consequences of their actions than the Carillion board. But that should not obscure the fact that Carillion became a giant and unsustainable corporate time bomb in a regulatory and legal environment still in existence today. The individuals who failed in their responsibilities, in running Carillion and in challenging, advising or regulating it, were often acting entirely in line with their personal incentives. Carillion could happen again, and soon. Rather than a source of despair, that can be an opportunity. The Government can grasp the initiative with an ambitious and wide-ranging set of reforms that reset our systems of corporate accountability in the long-term public interest. It would have our support in doing so.