Counterfactual: the FRC Code and @IRLSR S4.12 together prevent the collapse of Carillion

Carillion is in the news again. Not that it ever was, or ever will be, fully out of the news because it will never be forgotten.

It’s in the news because:

The UK’s financial regulator has said it is planning to take action against former directors of Carillion, almost three years after the government contractor collapsed under £7bn of liabilities, leaving taxpayers to pick up the pieces.

On Friday, the Financial Conduct Authority announced that it had issued warning notices to the company itself and to “certain previous executive directors” over a series of breaches of financial rules before the business failed. 

These include giving “false or misleading signals as to the value of its shares”, “failing to take reasonable care to ensure that its announcements were not misleading, false or deceptive”, and “failing to take reasonable steps to establish and maintain adequate procedures, systems and controls”.

Financial Times 13 November 2020

It will never be forgotten in the history of corporate collapses because its demise was wholly a function of conduct – behaviour over time:

Carillion’s rise and spectacular fall was a story of recklessness, hubris and greed. Its business model was a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers. It presented accounts that misrepresented the reality of the business, and increased its dividend every year, come what may. Long term obligations, such as adequately funding its pension schemes, were treated with contempt. Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses. Carillion was unsustainable. The mystery is not that it collapsed, but that it lasted so long.

House of Commons Joint Committee Report 9 May 2018

In July 2018 the FRC published its updated Corporate Governance Code, the first three Principles are set out as follows:

Financial Reporting Council
A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.
B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and
promote the desired culture.
C. The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed.

FRC Corporate Governance Code July 2018 (the Code)

In June 2020 The Centre for Ethics & Law, University College London published its Final Report of the Independent Review of Legal Services Regulation written by Professor Stephen Mayson in which he recommended:

Recommendation 20 (page 151): An in-house legal department should be capable, for regulatory purposes, of being registered as a distinct business unit, so that the department’s delivery of legal services would be subject to the same regulatory obligations as any other registered provider. Individuals within such a registered in-house unit should also be registered personally if they carry on activities for which before-the-event authorisation or personal accreditation would otherwise be required.

Final Report of the Independent Review of Legal Services Regulation June 2020

Professor Mayson set out his reasons for this Recommendation as follows:

There is little doubt that a tension is inherent in this relationship when the client for legal services is also the adviser’s employer. The usual expectation of ‘independent’ legal advice is often stretched … arguable that those with professional obligations might benefit from further regulatory support… In principle, they should not be at risk of dismissal or disadvantage simply for observing their professional obligations … This might entail express conditions in their employment contract, and a direct reporting line to the Board … As we have seen in recent years, corporate failures can lead to consumer and societal detriment. In-house lawyers have to be able to sound alarm bells without the chilling effect of potential reprisal.

Section 4.12

Furthermore, and of particular relevance to the Carillion case, he goes on to point out that:

…I agree with a submission in response to the interim report that we should not presume that “corporate governance alone is sufficient to address the public interest – there will be times when general counsel need recourse beyond their board, to their regulator (e.g. when the concerns derive from, or are perpetuated by, behaviour at board level)”.

Section 4.12

What if the the Code and Recommendation 20 of the IRLSR had been in force and enforced, with criminal prosecution consequences for breach, over many years prior to the collapse of Carillion? Here’s my guess:

  • Fear of prosecution relating to breaches of the Code would have prevented the creation of a decision-making culture that led to the more reckless conduct of the Board
  • Carillion’s in-house lawyers (in respect of whom the HOC Report is silent) would have been in a position when the early signs of reckless conduct presented themselves to reach “beyond their board and, to their regulator (e.g. when the concerns derive from, or are perpetuated by, behaviour at board level)” and which recourse would have acted as a brake on that behaviour. I don’t accept the point, often made, that this would mean that all companies would stop employing in-house lawyers. If some did , would that not be a statement about them?
  • The lives and pensions of thousands would have been protected, the taxpayer saved millions, and trust in boards, lawyers, regulators and politicians to protect wider society would not have been tarnished so irreparably.

But that’s the counterfactual.

The current reality is that the Code is an excellent framework, but without criminal sanction to back it up, it won’t prevent another Carillion. Nor, even worse, will the current regulatory framework under which in-house lawyers function.

Sadly, there appears to be little appetite in parliament, boards, the legal profession and the SRA to grasp this nettle.

I have written extensively on this subject in the current edition of the Modern Lawyer quarterly journal, edited by Catherine McGregor and published by Globe Law & Business, in a long read entitled: Inherent tension in-house: defusing the law department time bomb at a time of pandemic. I have spare copies. Email me at with your postal address if you would like a copy.

Meanwhile, there is light at the end of this bleak tunnel: the pandemic and the ESG movement will create an environment in which parliament, boards, the legal profession and regulators will be forced by society, including employees, customers and suppliers through social media, to prevent another Carillion because the price of the furlough schemes and COVID-19 Financing will be much better conduct.

Much better, or else.

Ciarán Fenton

The IICSA Report on the Catholic Church and The Carillion Report share identical lessons: protecting society is a legal requirement, not a work in progress

Last night I downloaded the Independent Inquiry into Child Sexual Abuse Report on The Roman Catholic Church and scrolled through its 150 pages or so with mounting horror. Not that any of it was a surprise but, somehow, seeing it all set out in a formal ‘report format’ was as shocking as it was surprisingly reassuring.

I had a similar feeling when, in 2018, I downloaded the Select Committee Report into the collapse of Carillion.

Both reports investigated organisational conduct risk events which lead to societal detriment on a scale which beggars belief.

The victims of sexual abuse will struggle to recover. The lives of the victims of the financial collapse were blighted irreparably.

Both reports highlight identical leadership, governance and decision-making failures.

Principles, Provisions & Frameworks were clearly no bulwark against raw power at the top of these organisations

Both reports refer to ‘progress’ made by various commissions and reports.

The Catholic Church held at least three internal reviews since 2000. The business community has reviewed itself to death since the global financial crash in 2008. For sure, ‘progress’ was made and there was a welcome new focus on ‘purpose’.

But failure in defending its moral purpose is at the core of the IICSA Report. And failure in its purpose to protect wider society was at the heart of the Carillion Report.

When it comes to ‘safeguarding’ society, claiming progress is an admission of failure.

Progress in protecting society is not acceptable. We either protect society or we don’t.

Claiming progress is a cop out. It’s a fig leaf for protecting the raw power that keeps those who fail to lead in their positions of power.

The truth is that the sexual abuse in the Catholic Church was avoidable and those involved know it.

Equally the collapse of Carillion was avoidable and those involved know that too.

Three things would have prevented these human catastrophes:

– Enforced laws

– Enforced governance

– Good leadership

These three elements were missing in both cases and, sadly and indeed horrifically, nothing will change until they are ubiquitous.

Ciarán Fenton

3 Steps to check Trumpian behaviour on your board

One of President Turmp’s enduring legacies will be his contribution of an new adjective to the modern dictionary:

Trumpian is an adjective form for President Donald Trump. The term is especially used by critics to characterize his language, conduct, and policies.

The word will endure because no one needs to work hard to figure our what it means.

His language is coarse and bullying.

His conduct, defined as behaviour over time, is bullying.

His policies, save those that are mainstream Republican, are bullying and racist.

President Donald Trump is, based on the evidence available, a narcissistic bully.

While he may appear an extreme example of that personality type. He isn’t. It’s an illusion afforded by the unique and awesome power of his office.

For, this very morning, just a few days after the Trump regime was toppled, Trump-like CEOs, CXOs and NEDs in organisations all over the world are preparing today to make the lives of those around them miserable, their organisations wholly dependent on their whims and success by any measure short-term, at best.

We all know these narcissistic bullies by name. We can cite their unacceptable behaviour by rote behind closed doors, in pubs and at dinner parties.

But we are all experts in Trumpian behaviour because few of us reach the boardroom, or near it, without experiencing it and/or doling it out.

We are all narcissists. We each sit somewhere on its behavioural scale:

• Become impatient or angry when they don’t receive special treatment
• Have significant interpersonal problems and easily feel slighted
• React with rage or contempt and try to belittle the other person to make themselves appear superior
• Have difficulty regulating emotions and behavior
• Experience major problems dealing with stress and adapting to change
• Feel depressed and moody because they fall short of perfection
• Have secret feelings of insecurity, shame, vulnerability and humiliation

I’ll put my hand up to some of these, at times. Will you? If not, you may well be part of the problem and not the solution.

Three steps

Step 1

The first step to check Trumpian behaviour on your board is to embrace emotional intelligence (EQ/EI) as core to your board’s behavioural strategy. This is simply a matter of passing a resolution to do so.

No director should be forgiven for not knowing the core principles of EQ. These are set out in management books, articles and podcasts in one form or another and have been for years. No excuse.

Step 2

The second step is to focus on the three EQ principles most likely, in my view, to lead to behaviour change: develop empathy and self awareness and find a way to negotiate your needs productively.

It’s the latter principle which trips up Trumpian narcissists. They do not believe that they can have their needs met without bullying behaviour.

The experts tell us that the etymology lies in their formative years, frequently brutal.

Mr Trump, and indeed his emotional bedfellow Mr Johnson, had sadly brutal formative years. Recovery from these is available through psychotherapy.

But recovery from formative years’ trauma must be sought out by the sufferer driven by their unhappiness.

Few doubt that Mr Trump and Mr Johnson are unhappy – both appear not to enjoy their day-jobs. But while it’s unlikely they will seek help it is highly likely for those struggling readers of this piece to find more fulfilling outcomes through psychotherapy. I have.

Step 3

The third step is to ensure that your board complies with the behavioural principles and provisions in whatever corporate governance code you use – FRC, QCA or Wates.

Each of these frameworks offers an existing bulwark against Trumpian behaviour on your board. All you have to do is to use it.

Finally, even President Elect Biden expressed himself surprised at the outpouring of joy on the streets of the USA after his election.

He shouldn’t be. We all know the feeling: it’s when the teacher came back into the room and some child was saved from a beating or taunting by the class thug; it’s when that hubristic priest/bishop/cardinal/ is called to book for crimes, or facilitating crimes, unspeakable; it’s when that boss who feeds on your abject humiliation trips up and is fired.

Noteworthy that Mr Biden’s first act was to publish on his transition website an ethical framework.

Let’s hope he sticks to it.

More than that, let’s hold him to it but also help him do so. He too is fallible.

But none of us have to endure Trumpian thuggery.

We won’t.

They can count on it.

Principle C of the FRC Code should generate “creative” tension between the board, Finance, Legal, Risk and Compliance

Principle C of the FRC Corporate Governance Code 2018 (the Code) states:

The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed.

FRC Corporate Governance Code 2018

The word ensure is unambiguous. It means that the board must to put in place the resources necessary to achieve its objectives.

This puts the ball in the CFO’s court.

But neither the words objectives, goals nor any other synonym are defined in the Code save the implied definition that the board’s objectives and/or goals are contained within its purpose, values and strategy statements “aligned” with its culture (Principle B) in order to “promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.” (Principle A)

It follows that to comply with the Code the board, through the CFO, must ensure that the necessary resources are in place to comply with Principles A & B.

So, using my working example – GSK’s Annual Report 2019 – GSK’s CFO would be required to ensure, for example, that the necessary resources are in place to improve the “quality of life” (its stated purpose) of its customers, to “promote long-term sustainable success” and to “contribute” to wider society.

How do you evaluate all of that accurately, let alone report it?

In particular how do you evaluate contribution to wider society in advance and how do you budget the ‘necessary resources’ to achieve that contribution?

The second sentence in Principle C is about establishing a risk framework which, one assumes, includes both business and legal risk.

That means the GC’s legal risk register must identify top and emerging risks that threaten purpose, strategy, values, culture, etc. and must have the necessary resources in place to mitigate those risks and, in theory, the CFO must satisfy the GC that the resources are in place to do so. Good luck with that.

Turf wars between Finance, Legal, Risk and Compliance in respect of the issues above functions are common place. Some are legendary. I suspect none of these dramas are reflected in Annual Reports.

For example, one of the chief risks on any risk register which is likely to threaten the ‘long-term sustainable success” of a company is conduct risk. The long list of corporate failures in recent memory resulting from conduct risk events are testimony to the reality of those risks.

Conduct is defined as behaviour over time. Board behaviour is comprehensively addressed in the Code. It follows that a board evaluation should address the behaviour of the board in relation to conduct risk. Good luck with that, too.

In summary, Principle C of the Code is an evaluation and reporting minefield which the accompanying Guidance doesn’t fully address but it is nevertheless an excellent framework for private discussions on relevant ‘matters arising’ which could mitigate significant risks if boards have the courage to have those discussions.

Ciarán Fenton

Least likely to read in an Annual Report: “We failed to comply fully with Principle B of the FRC Code, but we’re working on it”.

Principle B of the FRC Corporate Governance Code 2018 (the Code) states:

The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and  promote the desired culture.

Principle B

The word purpose – an innocent noun, which in my view has endured more than its fair share of abuse – is explained in the guidance to the Code:

A company’s purpose is the reason for which it exists. The board
is responsible for setting and reconfirming the company’s purpose.
A well-defined purpose will help companies to articulate their
business model, and develop their strategy, operating practices
and approach to risk. Companies with a clear purpose often find
it easier to engage with their workforce, customers and the wider

Section 1.12

For example GSK’s Annual Report 2019 addresses Principle B at length in a section of its Annual Report with the following opening paragraph:

Our purpose, values and culture
Our purpose is to improve the quality of human life by helping
people do more, feel better and live longer. This is underpinned
by our values of patient focus, integrity, respect and transparency.
Our purpose and values have always been a source of great
pride for the Board, management and our employees. They help
attract and retain talented people who, as individuals, want to be
part of a Group that contributes meaningfully to society. They
also drive the quality of our relationships with each other, our
patients, consumers and other key stakeholders and ultimately
should enable swifter progress in getting new medicines,
vaccines and consumer healthcare products to our patients
and consumers around the world. Our culture set by the Board
is intended to deliver high standards of business conduct and
promote the long-term success of the company.

While I suspect GSK’s reporting on these matters is broadly in line with others in the FTSE100, I wonder to what extent they all focus on the verbs in Principle B in their self evaluation?:

  • establish
  • satisfy (itself)
  • (are) aligned [passive voice!]
  • act
  • lead
  • promote

GSK has clearly established purpose, values and strategy statements as others have done and has set out the process to align these with its culture. But surely, for GSK and others, the actual aligning, as opposed to the process, must be a constant work in progress? That’s a complex task.

I can see how the Board can satisfy itself that the processes are aligned but how does it satisfy itself that its purpose/values/strategy ARE aligned with behaviour?

The problem for GSK and others is illustrated by looking at a comparison between its Corporate Governance Report which starts on Page 75 and it’s introduction page at the start of its annual report:

Our purpose
To improve the quality of human life by helping people do more, feel better, live longer.
Our goal
To become one of the world’s most innovative, best-performing and trusted healthcare companies.
Our strategy
To bring differentiated, high-quality and needed healthcare products
to as many people as possible, with our three global businesses, scientific
and technical know-how and talented people.
Our long-term priorities
Our priorities are underpinned by our ambition to build a more performance focused culture, aligned to our values and expectations.
We invest in scientific and technical excellence to develop and launch
a pipeline of new products that meet the needs of patients, payers
and consumers.
We deliver growth-based performance by investing effectively in our
business, developing our people and executing competitively.
We are a responsible company and commit to use our science and
technology to address health needs, make our products affordable
and available and to be a modern employer.
Our values and expectations
Our values – patient focus, transparency, respect and integrity.
Our expectations – courage, accountability, development and teamwork.

Introduction page

What’s the difference between purpose, goal and long-term priorities? Where in the FRC Code is the word “goal” used or defined? What if the goal conflicts with the purpose, say in terms of “best performing”? Does best-performing mean financially or in terms of improving quality of life or both?

The Code is clear what it means by “long-term” but GSK defines long-term as involving a “performance focused culture”. What does it mean by performance? Financial? Quality of life? Both?

My point is not to question GSK’s reporting – which I use only as a FTSE100 example and which I suspect reports similarly to others on this matter nor is it to question its efforts to reflect its compliance with the Code in its Annual Report – no, my point is to ask how is it possible for any company to state, hand on heart, that it complies with the the first sentence in this Principle?

As for for the second sentence, how is it possible to evaluate truthfully whether or not “all directors” acted “with integrity” led “by example” and  promoted “the desired culture”? How?

Isn’t the real value of the Code its use as a framework for candid private discussion to answer these important questions during the matters arising phase because they matter to the long-term success of the company and to society?

Ciarán Fenton

Chairs: how can your Board comply with Principle A of the FRC Code if it isn’t promoting, generating, and contributing, equally?

Principle A of the FRC Code 2018 (the Code) states: “A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.”

Principle A is the first principle of the Code and sets out the role of your Board.

All of the later principles – all the way to letter R – can be linked back to this foundation principle.

Principle A is the basis on which you evaluate your board: how well is it performing this role?

Clues to the answer to your question can be found in the action words of that sentence which are the verbs promote, generate and contribute. Each verb is given equal weight.

Principle A doesn’t say that you must generate maximum value for shareholders and then, if you can, do so over the long-term and ideally along the way sponsor the local primary school’s tombola.

The word long-term is key. It’s an adjective which, obviously, means occurring over a long period of time.

Long-term qualifies the noun success. That means a company must be successful over a long period of time. Again, obviously.

A long period of time isn’t defined but my guess is that it’s about years, not quarters.

The FRC goes on to define success as value for shareholders and contributing to wider society.

But it doesn’t define value nor does it quantify contribution.

How much value is enough?

How much contribution to wider society is too little?

It’s interesting too that the FRC used the term wider society which implicitly acknowledges that business is part of society. Take-up of public COVID financing is proof of this, as if proof were needed.

The Guidance to the Code helps us understand the FRC’s intentions:

“A sound understanding at board level of how value is created over

time is key in steering strategies and business models towards  

a sustainable future. This is not limited to value that is found in  

the financial statements. An understanding of how intangible  

sources of value are developed, managed and sustained – for  

example a highly trained workforce, intellectual property or brand  

recognition – is increasingly relevant to an understanding of the  

company’s performance and the impact of its activity. These  

are important considerations for boards when setting corporate  

strategy. ” (Section 1.13)

Value according to the Code therefore isn’t just about “the bottom line” but a more nuanced approach to decision-making. An evaluation of the key decisions of your Board over the last financial year are key to evaluating compliance with this Principle.

The FRC’s use of the phrase ‘impact of its activity” gives us a clear steer on what it means by contribution to wider society. This is backed up by references to Section 171-177 the Companies Act 2006.

This means that your Board should, at the very least, know what impact its decisions have on society.

Does it? Do you?

Ciarán Fenton

Could the 800 + lawyer signatories now sign letters regarding other endangerments?

Last week more than 800 former judges and senior legal figures signed a letter sent to the Guardian saying that the UK Prime Minister and Home Secretary are endangering the personal safety of lawyers through their abusive attacks on the profession and should apologise.

The Guardian report noted that “the letter is the largest coordinated response so far to increasingly vehement rhetorical attacks on the legal profession by the two Conservative politicians.”

And attacking lawyers for doing their jobs is bad enough coming from any random quarter. But when the Prime Minister and Home Secretary are name calling “lefty lawyers and do-gooders”, the profession rightly came together and decided something must be done.

And they did something special: they demonstrated to each other and to society, which mandates their practice, that they are capable of speaking with one voice in the service of a shared purpose: protecting the core of the profession which is to be allowed to practice and uphold the rule of law without fear or favour.

Broadly speaking, the public got behind their letter. Their website had to remain open a further day for signatures. The letter was a success in terms of the line it drew in the sand even if the government’s response was dismissive. A line had been crossed. Lawyers and judges were not having it. They had each other’s backs. Full stop.

But the problem with this story is that the profession appears to be saying that only when the Barbarians are at the gate will they act in unison. Atrocities committed or permitted within the gates somehow don’t generate the same level of empathy or outrage.

It’s as if their training in an adversarial system prevents them from having each other’s back’s save only when the system itself is attacked. Or so it appears.

What atrocities?

– bullying by lawyers of lawyers in law firms

– unacceptable stress levels in law firms

– #metoo behaviour in law firms

– diversity issues in law firms

– “elevated ethical pressure’’ on in-house lawyers (@UCLLaws 2016)

– failure to change regulations (@IRLSR 2020)

Is the the word atrocity an overstatement?

If you think so, read the research on the above matters. You may change your mind.

If not then ask yourself this question: what’s the difference between the PM and the Home Secretary endangering a lawyer’s life by encouraging hatred of them and a thuggish partner or CEO creating a culture of terror for their lawyers?

If you feel the latter is the less endangering than the former you are part of the problem.

If you feel it’s time for lawyers to have each others backs and stamp out the terrorism of their number then you are part of the solution.


Ciarán Fenton