Progress | Centre-left Labour politics

Listening to labour

Workers on boards would prevent the short-termism that brought down Carillion, believes Emma Reynolds 

On a cold, dark Monday in January, Carillion’s 20,000 employees, including 400 at their headquarters in Wolverhampton, woke up to an uncertain future. The construction giant had gone into liquidation leaving 450 government contracts up in the air and hundreds of firms in the company’s supply chain worried about whether they would ever be paid.

It became clear that Carillion and the government had serious questions to answer. What exactly had gone wrong and how did the company get into debts of £1.3bn? How many people will lose their jobs and how much will it cost the taxpayer? Why did the government continue to award contracts after their first profit warning? Why was the government’s Crown Representative, charged with overseeing the company’s government contracts, absent from August to November 2017?

Most of these questions remain unanswered and it remains to be seen whether the Official Receiver‘s investigation will get to the truth of what happened. Many column inches have been dedicated to the lessons that need to be learnt about public procurement, but Carillion’s collapse also raises wider questions about corporate governance.

The former chief executive, Richard Howson, resigned after the company issued its first profit warning in July last year, but was still being paid a £660,000 salary and £28,000 in benefits as part of a severance package, which was hastily cancelled last month. Media reports have suggested that remuneration arrangements were amended to prevent the clawback of salaries and bonuses. When we raised the injustice of these rewards for failure with government ministers, they reassured me and other Labour members of parliament that the Official Receiver has the power to impose penalties on the company’s directors. However, it is difficult and expensive to prove the directors are guilty of either ‘wrongful trading’ (continuing to trade when there is no reasonable prospect of avoiding insolvency) or in breach of their duties. It seems more likely that Carillion’s senior management will be let off the hook, as so many directors of failed banks were following the financial crisis.

The Bank of England’s chief economist recently stated that poor management was the cause of the country’s ‘long tail of unproductive companies’. Too many large corporations in the United Kingdom prioritise short-term profits over the long-term success of their companies. The last Labour government put the duties of company directors on a statutory footing. This was a step in the right direction. However, to change the culture of short-termism, real penalties are needed for directors who breach their duties as set in the 2006 Company Act. We need to look at who can bring actions against directors for breaching their duties, whether the voluntary corporate governance code is sufficient or if something compulsory would be preferable. And when company bosses try to walk out with big payouts, as in the case of Carillion, is the bar for finding them guilty of wrongful trading or malfeasance too high?

In addition, the Trades Union Congress has put forward proposals for workers on boards, a promise made by the prime minister only to be quickly withdrawn. Nineteen other European countries already have worker representation on company boards and remuneration committees. Evidence from their economies shows that employee representation leads to corporate strategies which are less focused around driving up short term profits and take a more responsible approach to executive pay. In the UK, prioritising the pursuit of shareholder value leads to lower levels of investment, notably in research and development and this accounts in part for our low productivity.

Meaningful reforms are urgently needed to address corporate short-termism and curb the excessive rates of corporate pay. A corporate sector that listened more to its workforce and prioritised long-term growth over short term profits would help us to create an economy that delivered greater productivity, more skills and higher investment. And hopefully it would prevent the collapse of companies like Carillion.

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Emma Reynolds is member of parliament for Wolverhampton North East. She tweets @EmmaReynoldsMP

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Emma Reynolds MP

is a former member of the shadow cabinet

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