Standard Life Aberdeen said Carillion directors had no 'inclination' to change the company's strategy before its collapse despite raising concerns over its strategy, financial management and corporate governance.
Responding to a letter from the Work and Pensions Committee, Standard Life Aberdeen co-CEOs Keith Skeoch and Martin Gilbert said the firm's engagement on corporate governance matters with Carillion left it with ‘concerns about the willingness of the board to alter the strategic direction of the company to address our concerns.’
They added: ‘These issues were raised with the management through our ongoing engagement.
‘However, it was felt the management was not giving sufficient weight to the probability that trading may deteriorate further or to the downside risk from this scenario given the high level of debt.
‘The board showed no inclination to drive the management to change.’
The bulk of firm's position in the firm was held through Standard Life Investments (SLI), with Aberdeen Asset Management holding a smaller stake prior to their merger last year.
SLI began selling its shares in Carillion as early as 2015 after meetings with the company's directors left it with concerns around its strategy, financial management and corporate governance, and the firm ceased to have an active shareholding in the firm from July 2017 as a result of the divestment process.
From that point on it only held a ‘small number’ of shares through passive funds, representing 0.65% shareholding at the end of 2017.
It was one of a number of wealth and asset management firms responding to the committee, including Brewin Dolphin, UBS and BlackRock, who wrote to the firms asking why they sold their shares in Carillion before its collapse.
Brewin CEO David Nicol said that as a wealth manager, the firm did not have any information which wasn’t available to all investors, and ‘necessarily relied on and trusted that information, including that the company was operating at all times as a going concern.’
Throughout 2017 Brewin’s assessment on Carillion changed, Nicol said, adding that its investment managers reduced client holdings in Carillion during 2017 and accelerated this after the firm’s profit warning on 10 July 2017.
SLI said following two meetings in September and December 2015 with Carillion’s then CEO Richard Howson and chairman Philip Green to discuss management and corporate governance arrangements, it changed its investment position on Carillion from hold to sell.
From late 2015, SLI had concerns over the company’s strategy, vulnerability to worsening market conditions and financial management, including the strength of its balance sheet.
Specific concerns highlighted include the high levels of on and off balance sheet debt for a ‘cyclical, low margin business’ with ‘limited possibility of this debt burden being reduced in the near term due to acquisitions and a high dividend payout’.
Another concern SLI highlighted was the widening pension deficit – which went from £317 million to £663 million in 2016 – as well as ‘downward pressure on earnings in spite of revenue growth due to narrowing margins on new business’, particularly in support services, UK construction and projects in the Middle East.
SLI was also concerned about Carillion’s ‘weak cash generation’ due to working capital outflows, restructuring costs, pension contributions and capital expenditure needs.
In its response, BlackRock said it raised concerns with Carillion’s board in February 2017 over proposals to increase annual bonuses for the construction firm’s executive directors.
BlackRock added that its portfolio management teams maintained long and short positions in Carillion since March 2017 on behalf of specific investment strategies of their clients, but that the majority of positions have been held in long-only passive funds.
UBS said it had no ‘material market exposure’ to Carillion throughout the period in question.