40. We recommend that the Government immediately reviews the role and responsibilities of its Crown Representatives in the light of the Carillion case. This review should consider whether devoting more resources to liaison with strategic suppliers would offer better value for the taxpayer. (Paragraph 169)
41. The current Stewardship Code is insufficiently detailed to be effective and, as it exists on a comply or explain basis, completely unenforceable. It needs some teeth. Proposals for greater reporting and transparency in terms of investor engagement and voting records are very welcome and should be taken forward speedily. However, given the incentives governing shareholder behaviour, and the questionable quality of the financial information available to them, we are not convinced that these measures in themselves will be effective in improving engagement, still less in shifting incentives towards long-term investment and away from the focus on dividend delivery. A more active and interventionist approach is needed in the forthcoming revision of the Stewardship Code, including a more visible role for the regulators, principally the Financial Reporting Council. (Paragraph 179)
42. The case of Carillion emphasised that the answer to the failings of pensions regulation is not simply new powers. The Pensions Regulator, and ultimately pensioners, would benefit from far harsher sanctions on sponsors who knowingly avoid their pension responsibilities through corporate transactions. But Carillion's pension schemes were not dumped as part of a sudden company sale; they were underfunded over an extended period in full view of TPR. TPR saw the wholly inadequate recovery plans and had the opportunity to impose a more appropriate schedule of contributions while the company was still solvent. Though it warned Carillion that it was prepared to do, it did not follow through with this ultimately hollow threat. TPR's bluff has been called too many times. It has said it will be quicker, bolder and more proactive. It certainly needs to be. But this will require substantial cultural change in an organisation where a tentative and apologetic approach is ingrained. We are far from convinced that TPR's current leadership is equipped to effect that change. (Paragraph 187)
43. This case is a test of the regulatory system. The Carillion collapse has exposed the toothlessness of the Financial Reporting Council and its reluctance to use aggressively the powers that it does have. There are four different regulators engaged, potentially pursuing action against different directors for related failings in discharging their duties. We have no confidence in the ability of these regulators, even with a new Memorandum of Understanding, to work together in a joined-up, rapid and coherent manner, to apportion blame and impose sanctions in high profile cases. (Paragraph 193)
44. At present, the mindset of the FRC is to be content with apportioning blame once disaster has struck rather than to proactively challenge companies and flag issues of concern to avert avoidable business failures in the first place. We welcome the Government's review of the FRC's powers and effectiveness. We believe that the Government should provide the FRC with the necessary powers to be a much more aggressive and proactive regulator: one that can publicly question companies about dubious reporting, investigate allegations of poor practice from whistle-blowers and others, and can, through the judicious exercise of new powers, provide a sufficient deterrent against poor boardroom behaviour to drive up confidence in UK business standards over the long term. Such an approach will require a significant shift in culture at the FRC itself. (Paragraph 194)
45. The market for auditing major companies is neatly divvied up among the Big Four firms. It has long been thus and the prospect of an entrant firm or other competition shaking up that established order is becoming ever more distant. KPMG's long and complacent tenure auditing Carillion was not an isolated failure. It was symptomatic of a market which works for the members of the oligopoly but fails the wider economy. Waiting for a more competitive market that promotes quality and trust in audits has failed. It is time for a radically different approach. (Paragraph 210)
46. The lack of meaningful competition creates conflicts of interest at every turn. In the case of Carillion, KPMG were external auditors, Deloitte were internal auditors and EY were tasked with turning the company around. Though PwC had variously advised the company, its pension schemes and the Government on Carillion contracts, it was the least conflicted of the Four. As the Official Receiver searched for a company to take on the job of Special Manager in the insolvency, the oligopoly had become a monopoly and PwC could name its price. The economy needs a competitive market for audit and professional services which engenders trust. Carillion betrayed the market's current state as a cosy club incapable of providing the degree of independent challenge needed. (Paragraph 212)
47. We recommend that the Government refers the statutory audit market to the Competition and Markets Authority. The terms of reference of that review should explicitly include consideration of both breaking up the Big Four into more audit firms, and detaching audit arms from those providing other professional services. (Paragraph 213)
48. 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. (Paragraph 214)
49. 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. (Paragraph 215)
50. 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. (Paragraph 216)
51. 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. (Paragraph 217)
52. 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. (Paragraph 218)