Bandit Capitalism E-Book

Bob Wylie

• Herausgeber: Birlinn
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 556

Veröffentlichungsjahr: 2020

Beschreibung

The collapse in January 2018 of the construction giant Carillion, outsourcer of huge Government building contracts, is one of the great financial scandals of modern times. When it folded it had only £29 million in the bank and debts and other liabilities adding up to a staggering £7 billion. When the total losses were counted it was established that the banks were owed £1.3 billion in loans and that there was a hole in the pension fund of £2.6 billion.That left British taxpayers picking up the tab to salvage the pensions owed to Carillion workers. On one level, this is a familiar story of directors who systematically looted a company with the aim of their own enrichment. But in a wider context the Carillion catastrophe exposes everything that is wrong about the state we are in now – the free-for-all of company laws which govern directors' dealings, the toothless regulators, the crime and very little punishment of the Big Four auditors, and a government which is a prisoner of a broken model born of a political ideology which it cannot forsake. Through the story of Carillion, Bob Wylie exposes the lawlessness of contemporary capitalism that is facilitated by hapless politicians, and gives a warning for the future that must be heeded. Bandit Capitalism charts, in jaw-dropping detail, the rise and rise of the British Oligarchy.

Leseprobe

Bob Wylie has a long association with the Labour movement in Scotland which started as a union rep in his first job as a social worker with Glasgow City Council. However, he is probably best known for his 14 years as a news correspondent with BBC Scotland. After the BBC he worked in media communications in local government and with one of Scotland’s biggest charities. For two years until May 2017, he was the chief of staff and senior advisor to the Leader of Glasgow City Council. Thereafter he worked with Unite Scotland and is now a media consultant with GMB Scotland. In 1991 he co-wrote Downfall: the Ceaus¸escus and the Romanian Revolution and in 2016 he ghosted the autobiography of Mohammad Sarwar MP, My Remarkable Journey.

First published in 2020 by Birlinn Ltd

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Edinburgh

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www.birlinn.co.uk

Text copyright © Bob Wylie 2020

The right of Bob Wylie to be identified as the author of this work has been asserted by him in accordance with the Copyright, Design and Patents Act 1988.

All rights reserved. No part of this publication may be reproduced, stored, or transmitted in any form, or by any means, electronic, photocopying, recording or otherwise, without the express written permission of the publishers.

ISBN: 978 1 7888 5260 9

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Papers used by Birlinn are from well-managed forests and other responsible sources

Printed and bound by Clays Ltd, Elcograf S.p.A.

For Lida

and all those fighting for a better deal

Contents

Acknowledgements

Prologue

1 The Paul Daniels of Profit

2 Beware the Ides of Mercer

3 Something with a Bit of an Edge

4 Tobogganing to Disaster

5 The ‘Perfect Storm’

6 The Empire Strikes Back

7 Downfall

8 A Gigantic Racket

9 ‘Money from Heaven’ and the Crash

10 The Bankers, the Crash, Those Who Paid for It and Those Who Didn’t

11 It Wasn’t about One or Two Bad Apples, It Was about the Whole Barrel

12 Everything Must Change

Epilogue

Notes

Appendix: Carillion Major Projects

Bibliography

Index

Acknowledgements

I need to start with an apology. That is to my family, who have all had to deal with my preoccupation, sometimes obsession and mood-swings related to the writing of this book. They have worn it well, to paraphrase a line. Everlasting thanks are due to Lida, Kathryn, Susan, David, Jennifer and Rory.

For the actual gaining of a commission from Birlinn to write the book there is an identifiable group of people to whom I am indebted. First of all, there is Gary Smith from GMB Scotland, who in a matter of days managed to get agreement from the GMB national union to sponsor the book. He also kept me going when times were tough. When the arrival of Covid-19 jeopardised the entire project, the GMB’s Acting General Secretary, John Phillips, did not flinch in his support. In the same way, Rachel Reeves MP and Chris Stephens MP were enormously helpful with time and advice, which enabled me to write a proposal on Carillion from the wealth of knowledge they had gathered from the House of Commons Carillion inquiry. In like fashion, on the editorial side, Hugh Andrew, Tom Johnstone and Andrew Simmons at Birlinn were marvellous advisors.

When we get to the actual writing of the story, there are four people without whom the book would never have been delivered. They are those who formed the research and writing team – Hugh Bell, Graeme Jolly, Laurie Russell and Gary Westwater. Their intellect, tirelessness and writing skills have sustained the entire project, as well as their ability, from time to time, to insist on the consumption of copious quantities of red wine. I am indebted to them, as the book quite simply would have proved too big a task for me on my own. We did it together. Make no mistake about it.

I also need to thank another group who have given valuable assurance, assistance and advice in getting the thing done. They are Ian Fraser, Andy Kerr, Philip Long, Peter McGinley and Prem Sikka. Those at the GMB union who have unstintingly given their time include Gary Smith, already mentioned, Wendy Bartlam and Justin Bowden, who deserve special mention. Jude Brimble, Lisa Johnstone, John Phillips, Barbara Plant, Peter Welsh, Rhea Wolfson and Alan Wylie also deserve my thanks. The media staff at the House of Commons Work and Pensions Committee gave invaluable advice regarding detailed information on the Joint Inquiry with the Business, Energy and Industrial Strategy (BEIS) Committee and its report on Carillion. The staff at Apple Buchanan Street, Glasgow, must also be mentioned in dispatches, as their technical advice on MacBook, including the retrieving of 3,000 lost words at one point, proved to be genuinely inspirational.

There are also a host of people who have given interviews, many of them more than one. They include the MPs Ian Blackford, Stephen McPartland, Rachel Reeves, John Spellar and Chris Stephens. Beyond the House of Commons, the time Steve and Steph Paul gave me, with all the personal pain that involved for them, is enduringly appreciated. As are the interviews and advice given by Grace Blakeley, John Guidi, Deborah Hargreaves, Rudi Klein, Gary Lemmon and Anthony Stansfeld.

There are a number of former Carillion employees who do not wish to be named but who know who they are, and who have given priceless insights and advice. Those among you who got the Italian Fiano will know how invaluable our collaboration has been for me.

I completed the book whilst for more than a year suffering from serious health issues concerning severe osteoarthritis in my hip which eventually culminated in a total hip replacement. At Hampden Sports Clinic, Louise Mitchell, Alan Scott and Evelyn Thomson were unbelievably supportive; at my GP surgery, Dr Colin Wilson and Dr Brendan Cunning looked after me for so long; and finally at the Queen Elizabeth University Hospital in Glasgow, Drummond Mansbridge, who carried out my hip replacement, Susan Robertson and all the staff there deserve my thanks. So does Tracey Naddell at ChiroCare Scotland, who, from time to time, helped to keep me fit enough to write the book.

Lastly, there is a roll-call of those who knew we would see it through. They are John Boothman, Ingrid Guidi, Brian McAlinden, Eddie McCusker and Dean Smith.

Prologue

‘Let me tell you about the very rich. They are different from you and me.’

F. Scott Fitzgerald, The Rich Boy

According to Bloomberg, the American business TV channel, Vladimir Potanin is number 57 on their world billionaires list. His current worth is $29.3 billion. The Bloomberg Billionaires Index declares that his wealth was ‘self-made’. Not quite. In the mid-1990s the Russian economy was in free-fall, inflation was 215% annually, and the budget deficit was on an Everest scale of billions of dollars. Following the collapse of communism many ordinary Russians had been reduced to the near penury of selling off their grandmothers’ fur coats at flea markets – a state of economic perdition which threatened the political future of Boris Yeltsin, then the Russian president. Perestroika had become Catastroika.

And Yeltsin had an election to win in 1996. If he failed then the return of the old Communist Party apparatchik, Gennady Zyuganov, as President seemed certain. The ‘new Russia’ would then have a Communist Party president to match the then communist-dominated Russian parliament. History’s stakes were looming large. The first Russian wave of privatisation – 1992–1994 – had faltered badly. Voucher capitalism, whereby every Russian citizen was given vouchers to invest in the great industries of the country, had not created the share-owning democracy that was planned by the Russian government. It was based on a relatively successful scheme for the privatisation of the Czech economy. However, most Russian citizens were not well versed in the workings of share ownership and flogged their vouchers.

In time, the former nomenklatura of the Russian economy – the former communist bureaucrats who headed up the great state-owned industries – bought up almost all the vouchers and emerged as the new class of ‘red directors’. Although more than 15,000 Russian enterprises changed hands in this way, fundamentally the voucher revolution only changed titles. It was like a man moving from one train compartment to another. At the start of the journey he was a communist bureaucrat. Then towards the destination he – they were all ‘he’ – became a majority shareholder and owner of the same enterprise. The title on his office door might have changed but little else did. He was still travelling on the same train. Any genuine development of a market economy remained a long way off.

However, under Yeltsin, a group of young reformers all had an eye for the main chance. During the voucher privatisation they emerged as shrewd investors, took over the old Soviet banking system, among other job lots, and got rich. Banking offered the first post-Soviet bonanza and the young reformers grabbed it with both hands. They, and not the old-style red directors, would prove to be crucial to what happened next. Enter thirty-something Vladimir Potanin. He was the brains behind what would eventually become known as the ‘loans for shares deal’. It is a complicated piece of economic history, which had many political twists and turns, but Potanin’s own story might help to simplify it.

At the start of 1995 Potanin’s pitch to Anatoly Chubais, then one of the key figures in the Yeltsin administration, was that he had a scheme which could kill two birds with one stone for Chubais – the ‘loans for shares’ scheme. In effect, Potanin and his band of zealous reformers offered to lend the Russian government 9.1 trillion roubles or $1.8 billion. In return the government would favour any bid Potanin and his backers made for shares in Russia’s leading companies – mainly in oil, gas and minerals. The loans would reduce the fiscal deficit and there would be enough to create a TV station for the Yeltsin election campaign. In essence Potanin was offering to become a pawnbroker for the state. He announced the proposal to the Russian cabinet in March 1995. We get the shares, you get the loans, he must have told them. Then he offered the assurance that they should not be worried that they were selling Russia’s ‘crown jewels’. He explained that, in effect, the government was only pawning them for a while due to serious short-term problems. The crown jewels could be bought back for Russia by redeeming the loans later on when the economy was in better shape.

In August that year Yeltsin signed the decree for the scheme. On the afternoon of 17 November 1995 Potanin became the most successful pawnbroker in world history. He had always had his eye on the gem of Norilsk Nickel – the world’s biggest producers of nickel, platinum and other precious minerals – in the far north of Siberia. Using his own Onexim Bank’s assets and borrowings, Potanin bought a controlling 38% share in Norilsk Nickel for $170.1 million.1 Then its annual sales were $2.5 billion. Now they are touching $10 billion. It was the sale of the century. A few weeks later Potanin bought a 51% controlling interest in Sidanko – a Siberian oil company – for just over $130 million. Two years after this BP paid Potanin and Co. more than $500 million for a 10% share. On 7 December Mikhail Khodorkovsky – one of Potanin’s fellow travellers – purchased a 78% share in Yukos, Russia’s biggest oil producer for $310 million. For the record, Yeltsin got the NTV station for the propaganda campaign he desperately needed to support his nationwide election crusade, and his victory stopped the march of Zyuganov’s neo-communists. However, the crown jewels were never redeemed because the Russian state could never find the cash to repay the loans.

To Potanin and Mikhail Khodorkovsky add Boris Berezovsky, Mikhail Freidman, Vladimir Gusinsky, Alexander Smolensky, Pytor Aven, Vladimir Vinogradov and Vitaly Malkin. These men were the collective advance guard of what became known across the world as the Russian oligarchs. Some fell foul later of Putin, but many like Potanin are here today to tell the tale. There are now another hundred or so who have followed in those footsteps to become oligarchs with assets in the hundreds of millions of dollars. All of them stand united by one undeniable fact – they got rich by looting the state. In doing so they guaranteed that Russia’s reform would create a Mafia-style capitalism from which there could be no return. Even now, decades after the history of Russia’s sale of the century is known, analysed and explained, you still can’t help shaking your head and asking the question ‘How did they get away with it?’

However, this book actually isn’t about them. They feature by way of an introduction to our real subject matter, the distant relatives of the Russians – the British oligarchs. Of course, given that they are not plundering the gigantic natural resources that became the launch-pad for the creation of the Russian plutocracy, the British oligarchy might seem a lesser power. That is only a matter of scale. By British standards the fully paid-up members of this plutocratic club are unimaginably rich, increasingly un-accountable and, it seems, untouchable. They are the top 1% in the UK and they live in a parallel country to most of us. The summer of 2018 in the annals of the Royal Mail provides ‘telephone number’ evidence for accusations of looting the state. In 2010, Moya Greene, the former head of Canada Post, was recruited as chief executive of Royal Mail. Three years later, in October 2013, she masterminded the privatisation of the state-owned company. The plaudits for this ‘exceptional executive’ have been lavish ever since. Yet the day after the Royal Mail sale the share price rose by 40%. Did this mean the share offer devised by Moya Greene was hugely undervalued or was this another sale of the century?

An estimate of Moya Greene’s total earnings from Royal Mail, in her eight years there, takes us to a figure touching £13 million. This is a Euro-millions jackpot where you don’t need to buy the £2 ticket. According to media reports, on top of this astronomical sum Moya got a golden goodbye when she left – a cash bonus of £774,000 and 12 months’ salary of £547,000. That’s £1.32 million to you and me.2 Mind you, there obviously has to be a reward for her persuading the Royal Mail’s 110,000 workers – whose average top-line salary is £22,500 a year – to accept a cut in their final pension scheme to save the company hundreds of millions. But, as with all such attempts to justify them, the rewards seem to be extraordinary in scale when compared to the achievements delivered. Ms Greene has been replaced as chief executive by Rico Back, who is German, lives in Zurich and commutes to work in London. Back was the chief executive of GLS, the Royal Mail’s totally owned European subsidiary. The Royal Mail 2017 annual report and accounts notes he got a £6.6 million payment ‘as consideration for termination of his contract with GLS . . .’ The chair of Royal Mail, Peter Long, praised ‘Rico’s dynamic and astute leadership at GLS’ when speaking to the Guardian about the new wunderkind at the helm. The same article noted that Rico has been offered an annual package of ‘£2.7 million if he hits his bonus targets’. Rico Back’s ‘dynamic and astute leadership’ at GLS didn’t transfer to Royal Mail. By May 2020 the company shares had fallen to their lowest level since privatisation in 2013. On 15 May, Black’s departure was announced ‘with immediate effect’. The Guardian reported that in lieu of notice, Back would be paid £480,000 and an additional £75,000 for legal fees and other support. That was on top of three months’ salary which, according to the 2019 accounts, would amount to around £215,000. How did we get to this commonplace excess?

How did we get to the point, two years before Back’s departure, when BT’s sacking of its chief executive Gavin Patterson meant he received such a huge pay-off that it provoked an unprecedented shareholder revolt? With BT shares languishing at a six-year low, Patterson left with a golden goodbye topping £2.3 million. How did it get to the point where 100 or so managers at Persimmon, the housebuilder, can cash £400 million plus in bonuses – including a final £75 million for the chief executive? 3 This after the British taxpayer funded the government’s ‘Help to Buy’ scheme for first-time home buyers, which was responsible for the sudden gargantuan profits at Persimmon and other housebuilders. How did we get to the point where the UK has a worse inequality index than Africa’s Burkina Faso?

Finally, to get to the heart of this story we can ask the predominant question of these economic times – how did we get to the scandalous downfall of Carillion? Its last accounts were for 2016. The totals there mean that between 2009 and 2016 Carillion paid out £554 million in dividends to its shareholders. For the same period income was £594 million.4 These figures don’t account for the looting of Carillion by its executives. In the same period Richard Howson, the chief executive, took £7.2 million out of the business in salary and pension.5 These figures suggest Carillion was tobogganing to disaster. So it turned out. It’s timely for the whole Carillion story to be told, because it is the embodiment of the state we are in.

CHAPTER 1

The Paul Daniels of Profit

‘. . . the board has increased the dividend in each of the 16 years since the formation of the Company in 1999.’

Carillion plc Annual Report and Accounts 2016/1 March 2017, p. 43

‘In the five years to 2016, the directors recommended paying £357 million of dividends to shareholders, despite generating just £159 million of cash from operations. Over the same period, the bonuses for the two top executives climbed from nothing to more than £1 million a year in 2016.’

Jonathan Ford, Financial Times, 28 January 2018

Berkhamsted is prime commuter-belt territory, some 35 miles up the M1 out of central London. Off Shootersway in Berkhamsted there’s a millionaires’ row – Blegberry Gardens. On 1 March 2017, Richard Adam, the former financial director of Carillion, was probably in his six-bedroom mansion there waiting for the call. He’d left his post in Carillion the previous December. He’d just turned 59 the month before, and had told the Carillion board that he wanted to spend more time with his family. 1 March 2017 was when the Carillion 2016 Annual Report and Accounts was published. It was the first day Adam could cash in his first tranche of Carillion shares. He was satisfied that he was entitled to the return after all he had done for the company, and wasn’t about to miss his chance. The call from the Carillion brokers came through. The first disposal of shares made Richard Adam £534,000 better off; not bad on top of the £1.1 million final salary and bonuses package he’d been paid by the company on his departure. That included £460,000 in base salary, £140,000 in bonuses, £278,000 in previous share awards and £163,000 straight into his pension pot.1 Contrary to normal company protocols, the bonus figure was paid in cash. The usual practice was part cash, part share options.

Come the 8th of May, Adam’s second disposal of long-term incentive shares – share bonuses to encourage top executives to stay loyally with their company – had been vested. That means the 8th was the next day he could cash in again. He did so – for £242,000 this time. That made his share bonus worth more than three-quarters of a million pounds – £776,000 to be exact. Thus Richard Adam went off to spend more time with his family with a golden goodbye from Carillion touching £2 million. Adam said that when he left Carillion it was ‘healthy’ and ‘was operating in challenging markets but was managing those markets satisfactorily’.2 Eight months later the company went bust.

Carillion folded with only £29 million in the bank and debts and other liabilities adding up to a staggering £7 billion. Within the total liabilities it was established that banks were owed £1.3 billion in loans and that there was a hole in the pension fund of £2.6 billion. In Adam’s time as finance director bank debts grew from £242 million in 2009 to the £1.3 billion figure in January 2018.3 If this is ‘managing in challenging markets satisfactorily’ as Adam suggested, then one wonders what failure looks like in Richard Adam’s eyes. Following his own share ‘sale of the century’, Adam says he no longer holds shares of any substance in any company. When asked about any shareholdings he said: ‘I do not take that type of risk.’

This chapter focuses mainly on Richard Adam because if we follow him we can follow the money. In that context it may be worth commenting on some of the issues concerning Carillion’s pension funds. Whilst Richard Adam may insist that Carillion’s downfall was nothing to do with him because allegedly he left the company in rude health, he simply can’t offer the same mitigation as regards the pension fund’s deficits.

Under the 2004 Pensions Act, company directors have legal obligations to ensure appropriate assets and funding are available for them to meet their liabilities in providing for employee pensions. As a result, independent valuations have to be carried out every three years to assess the state of funds, to determine whether the legal funding objectives are being met. If not, then the trustee of the employees’ fund and the company concerned are duty bound to agree a recovery plan to return to the full funding, which will include deficit recovery payments to be made by the sponsor company. Where deficits emerge the recovery plans must be agreed within a 15-month period. On all counts Richard Adam and the Carillion directors abrogated their responsibilities and failed their employees. By the statutes of the 2004 Act this was gross negligence. In 2008, when the trouble with Carillion pension funds was growing, Richard Adam had been in post as the finance director for more than a year. In the next 10 years Adam would emerge as a Janus-like figure, able to resist claims for restitution of pension deficits determinedly because he argued that the company could not afford it, due to serious cash-flow problems, while facing the other way to the stock market, delivering optimistic forecasts and bumper dividends. In Adam’s statement to the 2015 Carillion Annual Report and Accounts he noted: ‘In 2015 the group delivered strong revenue growth with profits and earnings in line with expectations.’ The report was published on 3 March 2016. By the end of that year, as Richard Adam was bidding goodbye, the pension deficit had reached £990 million.4

In his ten-year tenure as finance director, pension deficit recovery payments increased by 1% and dividends increased by 199%. The verdicts of leading agencies with knowledge of his management of the funds are unequivocal. Gazelle Corporate Finance, advisors to the trustees, declared ‘Richard Adam had an aversion to pension scheme deficit repairing funding’. The chair of the trustees, Richard Ellison, said he believed that Richard Adam viewed funding pension schemes as ‘a waste of money’.5 Adam has always strenuously denied that this last statement represented his views or, indeed, that such a statement had ever been made by him. In an email of 15 May 2018, to the Business and Work and Pensions Joint Parliamentary Committees, he demanded that the reference be removed from the report, arguing that ‘There is no objective evidence that supports the contention that I have ever held or expressed these views.’ The Joint Committees refused to delete the reference.

Richard Adam studied mathematics at Reading University. In 1976, when he was 19, Abba were chart-topping with ‘Money, Money, Money’. After graduating from Reading, Adam studied for an accountancy qualification. On 1 January 1983 he joined the Institute of Chartered Accountants of England and Wales, serving his time with the audit giant KPMG. That would be his first introduction to the ties that would bind. By the time he left Carillion in 2016, he had made it to Abba’s ‘rich man’s world’ as a grade-A, fully paid-up British oligarch.

It seems that after qualifying he stayed with KPMG until 1993, when he joined International Family Entertainment (IFE) – an American cable network. Its origins were in the televangelism of Pat Robertson, the right-wing American preacher who once stood in the US primaries to be the Republican nomination for president. The UK arm of IFE, where Adam was finance director between 1993 and 1996, became the Family Channel, which specialised in game-shows, having left the bibles behind in America. It was formed through a buy-out of a former ITV franchisee, Southern Television, for $68 million. In turn the Family Channel was taken over by a British cable concern, Flextech. It had major holdings in a host of cable companies and in Scottish Television. It would go on to set up a partnership with the BBC for a series of new BBC channels. It could be reasonably speculated that this period as finance chief was Richard Adam’s introduction to the world of big-time wheeling and dealing.

In 1996 he left game-shows behind and went into books with the publishing company Hodder Headline. At that time Hodder Headline had some 800 staff and an annual turnover of just over £100 million. Three years later he was in the major league as the finance director of Associated British Ports (ABP). Twenty-one ports were in the portfolio and there were more than 2,500 employees responsible for shifting more than 100 million tonnes of cargo every year, as well as 2 million ferry passengers, on total revenues running well over £300 million.

In 2007, when Adam left ABP for Carillion, he had to resign from six other port-related directorships and a port-linked property company. Collecting non-executive directorships was a way of life for him – the Companies House records show at one time or another he has had 150 director and non-executive director posts. The Carillion move came a year after ABP had been taken over by a consortium led by Goldman Sachs, who brokered a £2.8 billion buy-out of ABP.6 So by the time he was 50, Richard Adam had been around the accounting block a time or two, and was ready to become the chief architect of Carillion’s jaw-dropping accounting tricks, which established ‘smoke and mirrors’ balance sheets everywhere that Carillion was in business.

That would make him millions but, in the end, ruin the company. By the time he left Carillion, Richard Adam had served as finance director for almost ten years. He had allies – notably in the early years the standing chief executive John McDonough – but as far as most Carillion staff were concerned Adam was seen as distant, aloof and uncommunicative. People who worked in his department for years would comment about how they did not know his wife’s name or whether he had kids. He was not the type of bloke with whom you would gladly go for a pint. There was speculation that he had been brought up in South Africa, which accounted for his somewhat strangled vowels.

There wasn’t any doubt, however, about his vaulting ambition. Some staff poked fun at Adam, referring to him as ‘Richard the Robot’ behind his back. But everyone knew he had a stiletto of ruthlessness as real as any Mafia assassin when it came to his own ambition. In August 2010 Carillion’s company structure experienced what might be described as a ‘summer of the long knives’. Five leading executives at the top of Carillion’s major business units left for new jobs, were given packages to go, or were made an offer to leave they could not refuse. This then left Adam free to convince other key members of the Carillion leadership that it would be useful to promote Richard Howson, under his control, to a newly created post of chief operating officer. Howson didn’t need convincing; his hallmark had already been identified as brazen ambition as well.

Inside the business, people whispered that this exposed the Adam plan to make Howson the next chief executive when McDonough left. There were a number of other equally qualified candidates when the time came, but Howson had the Adam seal of approval and was an ‘insider’. The following August, in 2011, it was announced that McDonough would leave at the end of the year and be replaced as chief executive by Richard Howson. One small confirmation of Adam’s strategy came in The Times days after the collapse of Carillion. The report noted that even after Howson’s appointment as chief executive, Adam would frequently interrupt Howson if he started answering financial questions in meetings with analysts and investors. ‘Mr Adam dominated discussions with investors over and above the chief executive,’ one company insider said. ‘It was like he was the guy calling the shots.’7

Adam spent a considerable amount of his working time in the London office of Carillion at 25 Maddox Street, off Regent Street. The premises had been inherited in one of the Carillion takeovers. Adam’s office there was above a Ladbrokes bookmaker’s shop. That could be considered as paradoxical because Adam was no gambler. He only considered ‘sure things’. Howson was one of them – Adam knew that Howson would be a reliable acolyte who would do what he was told for years to come.

Among Adam’s last acts at Associated British Ports was to appoint his successor there as finance director, one Zafar Khan. Khan had been deputy finance director at ABP, answering to Richard Adam for five years. Accountancy Age, the accountants’ in-house journal, heralded Khan’s coming appointment as ABP’s finance chief with a glowing endorsement from Adam: ‘Zafar has played an important role in the development of ABP over the past five years, and I am confident in his ability to lead the finance function, in support of the next stage of the group’s development.’

Khan would become ABP’s finance chief in March 2007. He’d be there for four years before becoming Carillion’s finance director for their Middle East and North Africa division. Then, in 2013, he became his old boss’s right-hand man for the second time. Zafar was reliable – like Howson he could be depended upon to do his leader’s bidding. That included closing his eyes and signing off accounts that even those accustomed to the construction industry’s way with numbers believed were ‘straining at the boundary of reality’.8

There are qualifications to this. If you visit the offices of Construction News in London’s East End, the journalists Zak Garner-Purkis and David Price, who have been ahead of the curve on the Carillion story since day one, will offer some caveats about construction accounting standards. They will tell you that the whole construction industry is blighted by age-old, questionable accounting practices, never-ending sub-contracting chains and cut-throat contracting bids. So, in other words, Carillion is not the only construction multinational familiar with the ledgers of ‘creative accounting’.

Firstly, let’s consider ‘goodwill’ in big company balance sheets. The Economist recently defined the problem – ‘Goodwill is an intangible asset that sits on firms’ balance sheets and represents the difference they paid to buy another firm and their target’s original book value.’9 The estimated intangible assets go on the balance sheet as a gain. This is no small matter, because if we consider the 500 top European firms and the top 500 in America, by market value, more than half of them have a third or more of their book equity represented by goodwill evaluations. Carillion was a big ‘goodwill’ hitter after a series of acquisitions which started in February 2006 with the buy-out of Mowlem. However, Carillion’s 2011 takeover of Eaga, the renewables company, is probably the best case-study of its goodwill hunting. It illustrates clearly where the practice of overestimating takeover ‘goodwill’ inevitably leads.

The Financial Times defines ‘goodwill’ in slightly different terms from the Economist – ‘an accounting item that measures the difference between the purchase price paid for an acquisition and the net value of the assets actually acquired’.10 So when Carillion took over Eaga, which then became Carillion Energy Services, it recorded in the 2011 accounts that the acquisition cost £306 million, and that the assets acquired had a goodwill value of £329 million – more than 100% of the cost of the purchase. Goodwill can include estimates of the value of the brand acquired, importance of the gains of market share, intangible reputation gains, contracts in the pipeline and a host of other positive money-value estimates. ‘Estimates’ is an important word in this circumstance.

One of the more quantifiable elements in the intangible assessment of goodwill, according to Professor Karthik Ramanna of Oxford University’s Said Business School, is ‘the conjectural future profits that an acquiring manager hopes to realise through an acquisition’.11 As Ramanna puts it, thanks to accounting methods, recording ‘hope value’ has become a significant element in corporate balance sheets across the globe.

This allows a return to the question of the stewardship of corporate governance in Carillion, led by Richard Adam, the chief executive Richard Howson and the board’s endlessly unquestioning non-executive directors. The ‘fog of goodwill’12 at Carillion, as the Financial Times describes it, never dissipated. By 2016 goodwill accumulations in the accounts reached £1.6 billion. At the time that was more than a third of the company’s total notional assets.

Here, let’s introduce, for the purpose of simple explanation, the fictitious Joe Brown, who runs Joe Brown Plumbers Ltd. Let’s note that in 2015 Joe decided to buy four new vans for the business and the plumbers who work for it. Each van cost £8,500, paid in a cash transaction from the bank. So on the capital costs debit in the Joe Brown Plumbers Ltd accounts, he can record a debit of £34,000. In the assets/liabilities side of the accounts he can similarly record an increase in the held assets of the business of £34,000 for 2015. The point here is that in his 2016 accounts, Joe’s accountants will have to record a depreciation of the assets the four vans represent, because they will fall in value, in market price, and there will be wear-andtear reductions and so on. Impairment is the correct accounting term for the assessment of the reduced value of Joe’s vans.

So to return to Eaga/Carillion Energy Services (CES), it seems reasonable to expect that the books would show impairment of the £329 million goodwill year after year, as the reduction of the values involved went down. Not so – for whatever reason, KPMG, the Carillion auditors, accepted that the goodwill value of the Eaga acquisition remained at £329 million from 2011 across the succeeding five years to 2016. By then, revenue at CES had tumbled to £43 million and total losses in the disastrous takeover had grown to an astonishing £350 million.13 Yet despite this, Carillion was allowed to maintain the original goodwill values year after year after year.

It is important to point out here that annual goodwill accounting assessments are not simply a case of companies submitting ‘hope values’ to their accountants for verification, who then with a wave of a pen sign them off for another year over a good lunch, even if there are grounds for suggesting that this may have become custom and practice for impairment assessment with Carillion and KPMG. There is an established impairment test which has to be carried out. However, the current accounting procedures allow companies some flexibility in the presentation of these accounts. This means that an acquisition like Eaga can be bundled with what are called, in the trade, ‘cash generating units’, as part of an accurate value of current concerns.

As the Financial Times noted: ‘Not only does this process minimise the chance of an impairment, it depends heavily on the willingness of the auditors to challenge the numbers plucked out by management . . . There is no objective market value for the asset, so you mark it up to a model. And if it’s bullshit, well, it is up to the auditors to call it out.’14 Eaga insiders say that KPMG and Carillion maintaining these goodwill figures was ‘a total fiction’, not least because everyone at Eaga was astonished at the over-valued buying price of £306 million in the first place. At Carillion’s staff meeting in 2011 to salute the takeover, Richard Adam was introduced at the meeting by a senior manager, Dominic Shorrocks, who was believed to be destined for greater things at Carillion. But Shorrocks knew the Eaga numbers and believed they didn’t add up. So in a flight of fancy he introduced Adam to the meeting as ‘Richard, the Paul Daniels of profit and the Ali Bongo of the Balance Sheet’.15 Carillion used to hire the Magic Circle Conference Centre near Euston Station, in London, for staff meetings. This never happened again after the Ali Bongo magic quote. Dominic Shorrocks’ Carillion career did not last long either after his magic-themed introduction. Shortly after it he was invited to do his own disappearing trick by Adam and Co.

The reason the assessments for goodwill are so important for company executives is that goodwill is a vital determinant of the accumulated and realised profits in the balance sheet. In turn this affects ‘distributable reserves’ – the term used to determine the size of shareholders’ funds available for dividend payment. Or, to use a definition shortcut, goodwill affects total available shareholder funds, which determine how much you can pay each year in dividends to shareholders. According to a Financial Times analysis in 2015, Carillion had £373 million in shareholders’ funds which allowed a dividend payment of £77 million. Had Carillion written down the total goodwill in its accounts, it could only have paid out a dividend of £44 million. In turn that would have affected market confidence and would have been ‘a red flag to investors’.16 So, keep up the goodwill, if the auditors can be convinced. The reason that this is so important in the boardroom is that executive bonuses are linked to dividend payments as an indicator of business achievement – the share price and dividends underpin executive remuneration.

That’s why in 2011 – the year of the acquisition of Eaga, and the goodwill that mushroomed with it – the earnings of Carillion’s top three executives almost doubled. The chief executive John McDonough, chief finance officer Richard Adam and the chief operating officer Richard Howson saw their collective earnings rise to £3.35 million – up 43% on 2010 levels.

So much for goodwill’s part in the ‘creative accounting’ practices which undermine the reliability of the books in the construction industry in particular. What of so-called ‘aggressive accounting’? Due to the nature of large-scale construction contracts which can take years for delivery and thus for final payments being made, companies have to find a way of showing an up-to-date valuation of their accounts. ‘Aggressive accounting’, ruthlessly deployed by Carillion, solves those complexities by booking the value of contracts into the balance sheet as soon as possible after the deals are signed, and often, long before the receiving company has been paid a penny by the client. This is linked to the much earlier emergence of what is known in the accountancy trade as ‘fair value accounting’. When the Glasgow Bank went bust in 1878 with unlimited liabilities, the result was ruin for executives and investors. As a safeguard to avoid such calamities in the future, there was the development of the limited liability company. But, in turn, for the limited liability safeguard, businesses had to produce annual accounts to allow investors and clients to have a measure of the financial health of the enterprises concerned. This allowed investment decisions to be made on theoretically reliable public information. These ‘limited liability’ accounts were based on historic costs for assets and liabilities and profit and loss.

In the mid-1960s, accountants and professors at business schools in the US began to question whether the old system presented a fair value, up-to-date picture of the company’s financial standing. Nonetheless, these question-marks remained only theoretical for succeeding decades until the 1980s. Then came the Savings and Loans crisis in the US, which would cost the US Treasury more than $130 billion in a bonanza of bank bail-outs – history does repeat itself in the banking world, again and again. The S and L crisis, as it became known, was partly blamed on the old accounting systems because the banks involved had out-of-date, dare we say unreliable, books with investors making decisions on those presumed facts with disastrous effect. Accountancy had to change, and fair-value accounting, linking asset valuations to current market prices reflecting today’s economic reality, took hold throughout American business from the mid-1990s. As usual, in matters of business, Europe dutifully followed suit. In 2005 the International Financial Reporting Standards were approved by the European Union which conditioned the fair-value shift in Europe. No doubt it seemed a good idea at the time.

Time was when the role of the auditor was to check and verify facts. Now the fair-value system allows for future earnings and profit predictions to be developed by computer models and noted in annual reports and accounts as though they are fact. In today’s construction industry, as has been noted, it is now common practice for accounts to book potential income and profits for any building project the moment a contract is signed. This before a single payment has been made by the client into the construction company bank account. The Financial Times series on audit in crisis in the summer of 2018 concluded: ‘In the UK in the past three decades, standard-setters have progressively dismantled the system of historical cost accounting, replacing it with one based on the idea that the primary purpose of accounts is to present information that is “useful to users.” The process allows managers to pull forward anticipated profits and unrealised gains and write them up as today’s surpluses.’17 Lastly, if you add cut-throat contracting to this, the wonder becomes not why Carillion went down but why it lasted so long and which company is likely to be the next one approaching catastrophe? Major construction companies continually bid at truly perilous margins to gain contracts to keep the flow of cash coming in, even using ‘loss leader’ bids to stay in the market, in the hope that tomorrow will bring better days, bigger margins and bigger profits.

To get to that point, everyone in the great game recognises the necessity that the supply chain of sub-contractors in the contract must be sweated mercilessly to create continual cash-flow and, where possible, a profit margin. The former chair of the European Parliament’s Economic and Monetary Committee, Sharon Bowles, told the Financial Times in 2019 that all these dubious practices have created a circumstance where ‘the un-anchoring of auditing from verifiable fact has become endemic’.18 Nonetheless, to use a criminal justice metaphor, there is a difference of degree between assault and murder. In that context it might be said that those in charge at Carillion definitely murdered the company’s accounts. At one crisis Carillion board meeting, in May 2017, there was open questioning of how Richard Adam’s accounting methods ‘maintained margins’, or profits, which turned out to be wholly unrealistic. Insiders at Carillion say Adam was the numbers man and the rest of the Carillion bean counters did what they were told. If Adam didn’t like your numbers he told you to change them to more agreeable totals to match expectations of Carillion results.

If Carillion’s business history is inspected, it is not difficult to conclude that Richard Adam was the company king for creative accounting, who made the figures look much better than they were on acquisitions, masterminded better-than-real bottom lines by exploiting ‘goodwill’ intangibles, and deployed ‘aggressive accounting’ ruthlessly to deliver Never-never Land growth and profits forecasts. All legal, of course, but which made Carillion into ‘an unsustainable corporate time-bomb’.19 Take the final full accounts for 2016, published on the day Richard Adam cashed in – 1 March 2017. Here, on glossy pages, were tomorrow’s profits added up for today. The title-page might be seen as giving it all away – ‘Making Tomorrow a Better Place’. On page 1 under the heading ‘2016 at a glance’ the income stream sub-paragraph ‘High quality order book and strong pipeline of contract opportunities’ declares:

• £4.8 billion of new orders and probable orders

• High-quality order book plus probable orders worth £16 billion

• Expect over £1.5 billion of revenue from framework agreements not yet included in orders, probable orders or revenue visibility

• Substantial pipeline of contract opportunities worth £41.6 billion.20

These accounts were signed off by Carillion’s new finance director, Zafar Khan. Although Richard Adam remained in post in the 2016 financial year until 31 December 2016, he says he had nothing to do with the preparation of these accounts. He told the Carillion parliamentary inquiry that the preparation of the audited accounts in Carillion ‘takes place in the period of January and February leading up to the announcement of the results in March’.21 Company insiders say that the account preparations for layout and pictures started in August 2016.

Whether Mr Adam added up any of these figures remains to be seen. Nonetheless, in the annual report Adam gets fulsome praise from the chair of Carillion, Philip Green: ‘Richard Adam, who joined the board as group finance director in April 2007, retired on 31 December 2016. Richard made a major contribution to Carillion’s development and success through his outstanding financial leadership and he retired with the Board’s grateful thanks and best wishes for the future.’22

In fact everyone was happy with the 2016 accounts and indeed the prospects for the future. Peter Meehan, the senior statutory auditor from KPMG, approved the accounts submitted by Carillion, in these terms: ‘1. Our opinion on the financial statements is unmodified. We have audited the Group financial statements of Carillion plc for the year ended 31 December 2016 . . . In our opinion:– the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2016 and of the Group’s profit for the year then ended; – the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union.’23

Perhaps we should not be surprised at such encomiums. In the 19 years that KPMG audited Carillion’s books they never issued a single qualified audit opinion. In that time they were paid £29 million in audit fees. By December 2017 Carillion had issued three profit warnings concerning their accounts which amounted to a total hit of £1.2 billion on what the company was supposed to be worth. Those not accustomed to the fine words of the grandiose Big Four auditors of our time, KPMG, PwC, Deloitte and EY, might describe that as a £1.2 billion hole in the accounts down which the company was about to plunge. When those particular chickens finally came home to roost, the acting chief executive, Keith Cochrane, was petitioning for liquidation in the High Court of Justice on 15 January 2018. The game was up.

Richard Adam says it wasn’t him. Nothing to do with him. He says that when he was in the organisation it had liquidity, was operating successfully, and had enough financial flexibility to deal with any shocks that it had experienced in his tenure. The Joint Parliamentary Committee concluded somewhat differently. They say that when Adam sold his shares he was in the know of the approaching catastrophe: ‘Richard Adam, as Finance Director between 2007 and 2016, was the architect of Carillion’s aggressive accounting policies. He, more than anyone else, would have been aware of the unsustainability of the company’s approach. His voluntary departure at the end of 2016 was, for him, perfectly timed. He then sold all his Carillion shares for £776,000 just before the wheels began very publicly coming off and their value plummeted. These were the actions of a man who knew exactly where the company was heading once it was no longer propped up by his accounting tricks.’24

When Richard Adam sold his Carillion shares in March and May 2017 the average share price he gained was £2.12p. After the first profits warning in July the Carillion shares had slumped to 57p. Good timing, you’d say, because Richard Adam says he never saw it coming. Rudi Klein, the chief executive of the Specialist Engineering Contractors’ Group, thinks not. You are not long in his company before his liking of the ironic becomes clear. He told me: ‘Richard Adam telling us that he cashed the shares because they became due and nothing else is like the Russian poison crew telling us they went on holiday to Salisbury so they could see the cathedral. They expect us to believe them? Does Richard Adam expect us to believe him?’

The GMB is one of Britain’s top three unions. Since 2016 Jude Brimble has been the national secretary in the union for the Manufacturing Section, so she knows all about Carillion. When I asked her about Richard Adam’s share dealings, she told me angrily that if any of her union members had abused the system like the Carillion directors they would have been locked up: ‘They’d be jailed for fraud, but then there seems to be another law for Britain’s top executives that doesn’t apply to the rest of us. They just walk away after filling their boots. In Richard Adam’s case that meant a £1 million final pay off, as far as I know. It’s outrageous, and something ought to be done about it. No ifs, no buts.’ Brimble says that British oligarchs like Richard Adam are all about ‘show me the money’. She argues that there is no chance that Adam didn’t know the Carillion crash was coming. Then she asked: ‘If things were otherwise and everything in the garden was rosy, surely Richard Adam would have held on for bigger and bigger return?’ Brimble continued: ‘These top people are always in the financial papers telling us how they deserve their rewards due to their business acumen, their acute abilities for deal making that delivers the bounty for their shareholders. Richard Adam never saw it coming? Don’t make me laugh.’25

When the Joint Parliamentary Inquiry of the BEIS and Work and Pensions Committees was held into Carillion, Rachel Reeves was its imposing chair. She is as unequivocal as Jude Brimble. ‘He got out at the best possible moment. He played his part in preparing the 2016 accounts and then made sure he was out the door before the Annual Report came out, before the revelations about the major contracts came out. Richard Adam was out of there cashing in every penny he could as soon as he could.’ It seems Adam has a bit of a habit of getting out at the right time. In June 2014 he was appointed as a non-executive director of Countrywide plc – Britain’s biggest estate agency. He was chair of the Audit and Risk Committee on a salary of £55,000 until his resignation as a non-executive director at the end of December 2017.

In the early years of Adam’s tenure things went so well that the annual reports were metaphorically predicting that the golden rain of profits at Countrywide would be never-ending. There was no problem then of Countrywide carrying more than £200 million in debt, and ‘goodwill’ totalling £471 million, in its balance sheet. These figures were largely historical, based on its previous acquisition strategy. Between the end of 2015 and the end of 2016, the goodwill valuation didn’t change. Then the bombshell dropped – Adam reported in the 2017 accounts that his committee had focused ‘on the impact of the deterioration in the Group’s trading position with respect to goodwill and other impairments and going concern and viability’.26

In 2017 three significant things happened in Countrywide’s Audit and Risk Committee. It announced an impairment of goodwill of £193 million in the main company accounts and thereby reduced goodwill in the books from £472 million to £279 million; it warned that this, combined with current debts, risked the future of Countrywide’s ‘ability to continue as a going concern’, and Richard Adam resigned. By August 2018 Countrywide had issued a number of profit warnings as shares plummeted. Like Carillion, Countrywide’s future had been overvalued. The 2017 annual report and accounts showed a £208 million loss. In late August 2018 shareholders voted in favour of a share issue to raise an emergency bail out of £140 million. Still, Richard Adam was gone by then. Long gone.

CHAPTER 2

Beware the Ides of Mercer

‘Given the size and quality of our order book and pipeline of contract opportunities, our customer-focused culture and integrated business model, we have a good platform from which to develop the business in 2017.’

Philip Green, Chair of Carillion, Annual Report and Accounts 2016

Mariana Teodorescu spent most of her life in Brasov, Transylvania, the heartland of Romania. She survived World War Two, when she remembered the Germans coming and then going and then the Russians doing the same. But in the Russian footsteps came a communist Romania. That would end in the horrors of the final years of Nicolae Ceaus¸escu’s secret police dictatorship. Mariana celebrated his downfall, not least because it opened Romania’s borders, which allowed her eldest daughter, Lida, to find a new life in Glasgow, in Scotland. That meant a regular supply of precious US dollars sent from Glasgow to Brasov, often secreted in the cut-out middle pages of old paperback novels. In those times US dollars were the ‘legal tender’ of Romania’s currency black market.

In April 1992, a new investment bank, Caritas, arrived in Brasov. It didn’t take Mariana long to find out that it was promising an 800% return on all deposits left untouched, for three months, in a Caritas account. As luck would have it, towards the end of that year Mariana had dollars to invest. She also had the conviction that the best way to deal with this temptation was to give in to it. What could go wrong? Here was the new chief of Caritas, Ioan Stoica, promising a way out of the desperation of day-to-day life in a Romania trapped somewhere between Ceaus¸escu’s communism and the IMF, which was ensuring the birth pangs of capitalism would be accompanied by crushing austerity.

Mariana traded $50 for 50,000 Romanian lei with Brasov’s black market spivs and opened the account. She was following the footsteps of hundreds of thousands of Romanians who had done the same and, three months later, had come home laughing all the way from the bank with their money multiplied eight times. By the spring of 1993 Mariana did the same after her Caritas three months was up – 400,000 Romanian lei ($400) to the good. Mariana was one of the lucky ones. Caritas was a Ponzi scheme. A year or so after Mariana’s pay-out, the cash-flow of new deposits dried up. By this time more than a million Romanians had invested the equivalent of $1 billion in Caritas banks across Transylvania. When the cash-flow of new deposits dried up – as they always do in Ponzi schemes – the pay-outs stopped. By August 1994 Caritas was bust and Ioan Stoica, the saviour with feet of clay, was heading for jail.

Ponzi schemes (also known as pyramid-selling schemes) are illegal. They are a form of fraud, operating by luring unsuspecting investors with promises of huge returns on investment but which use the funds obtained from the most recent investors to pay profits to previous ones. Eventually the new investors dry up, and those late in on the scheme get double-scammed, receiving no profit and losing their investment too. Ponzi schemes got their name from Carlo Ponzi, an Italian conman who is credited with running the first such pyramid investment scheme in America, in 1920s Boston. Ponzi’s cover for his investment pyramid was supposedly buying special mail-reply coupons in Europe which were much cheaper than US stamps. The pitch then was that the coupons would be traded in America for much greater sums: invest with Ponzi and your troubles would be over. This was the cover, it never developed in any real sense. When folk invested to buy the coupons their money went straight into Ponzi’s racket. Of course, when the first Ponzi pay-outs were made, doubling people’s money in three months, and news of that spread, the reach of Ponzi’s scam knew no bounds. By the summer of 1920 he was sitting on a pile of deposits reaching $3 million. But the first Ponzi scheme, like all the rest, went bust when the flow of new cash ran out. If you are swindling Peter to pay Paul, that racket has to collapse when you run out of ‘Peters’ with new money to pay all your previous ‘Pauls’.

By the time Richard Adam left Carillion in December 2016 the whole enterprise had become an elaborate, big-business Ponzi scheme, which could only continue to exist by maintaining cash-flow into the business, at all costs. New contracts were taken on at rock-bottom margins to use the new income to pay for the old debts mounting on previous contracts; so-called ‘aggressive accounting’ put money in the balance sheet, in revenue and profits, which had not actually been made, based on optimistic forecasts; then the construction industry’s so-called early payment facility was exploited to turn it into loans from creditors to Carillion. Finally, the merciless refusal to make proper payments to the employee pension fund, when added to these other scams, built the Ponzi flow of cash to keep the books looking like the money was rolling in. The figures presented by ‘the Paul Daniels of profit’, Richard Adam, made Carillion look like some demented, deluded debtor who counts the money on his credit card bill as personal income. The 2016 annual report and accounts were the last complete accounts issued by Carillion. The glossy brochure’s front page carries a dramatic aerial shot of the Midland Metropolitan Hospital which at that time was under construction in Birmingham. Inside the front cover are the bragging rights:

This state-of-the-art hospital, which will have around 683 beds and 13 operating theatre suites, has been designed to the best international standards that will make it highly patient-focused and support the efficient delivery of high-quality clinical services, as well as achieving the highest standards of sustainability. Carillion will invest £13 million of equity in the project, as well as building the hospital at a capital cost of £297 million and providing hard facilities management and maintenance services worth approximately £140 million over the 30-year life of the concession contract.1

How did that turn out? Not well. When Carillion went bust in January 2018 the Midland Metropolitan project collapsed with it. At the time of writing, by the second anniversary of Carillion’s collapse in January 2020, how the project is ever going to be completed remains an open question. On page 5 of the 2016 accounts there are more vainglorious declarations to follow the boasts about Midland Metropolitan: