Oxfam and Carillion show the need for more rigour and vigour around donations and contracts

The recent scandal at Oxfam (and, it seems, at other charities) involving allegations of bullying and sexual exploitation and misconduct, and the collapse of construction and public services firm Carillion, offer significant lessons in the human cost of poor governance, inadequate safeguards, paying lip service to stated values, and insufficient due diligence.

Not only have vulnerable beneficiaries reportedly suffered abuse at the hands of those sent to help them, a considerable number of regular donors (upwards of 7,000) have since pulled donations to Oxfam, affecting its ability to provide for others around the globe.

Similarly, the financial fate of thousands of past and present staff of Carillion and its sub-contractors hangs in the balance, with job losses incurred or looming and doubts over the defunct company's ability to honour it pension scheme commitments.

The Oxfam scandal has led to fears that wealthy donors might be deterred from giving money to big charities.

In an article published in the Financial Times in February, wealth managers warned that revelations about charity workers using prostitutes would likely lead to greater pressure for due diligence into charities before the rich commit their cash.

This could have a big impact on the UK's largest charities, which receive about half of the sector's income (roughly £10 billion in 2016), despite accounting for less than 0.5% of the number of organisations.

Poor transparency and a lack of rigour in the sector have hampered due diligence in the past. Alongside this, larger charities have tended to benefit from a level of 'implicit trust' because of their size.

According to Gina Miller, who runs the True and Fair Foundation and was quoted in the same FT article, rich individuals and corporates do little due diligence over their donations, as they are more interested in the public relations boost of giving to big brands.

Hopefully the Oxfam debacle will lead to more stringent monitoring, as philanthropic investment plays an important role in the sector.

"Larger charities have tended to benefit from a level of 'implicit trust' because of their size"

The Carillion collapse is another example of what happens when insufficient due diligence is undertaken both by and into a company. Ministers have faced questions about why they continued to award the firm work when it was experiencing problems.

The level of due diligence carried out by the government ahead of the more recent contracts awarded to Carillion should also be scrutinised. This corporate failure is also a clear example of how hard it can be to work out exactly who is involved and how when a company the size of Carillion collapses.

As a major UK government contractor and a significant employer, the company employed almost 20,000 workers in Britain and had multimillion-pound contracts across the education, health, justice, defence and transport sectors.The company's various stakeholders are almost too numerous to name.

Figures compiled by the Institute for Government illustrate the scale of the government and Carillion's interdependence – private finance companies in which the company had a stake have been paid £1.4 billion, with future payments predicted to be £6.3 billion.

The government now finds itself in the unenviable position of having not only to investigate the firm's collapse via the Insolvency Service, but to defend itself against charges that it contributed to the collapse. What a veritable potpourri of conflicted interests!

Competitors such as Interserve and Capita are now coming under scrutiny as questions are asked about whether the collapse of Carillion reflects industry-wide rather than company-specific problems. 

Innumerable stakeholders have become embroiled in the collapse, with trade unions trying to protect Carillion's staff, trade bodies defending their members' interests (with many sub-contractors owed money by the company) and questions being asked about the role of the financial sector in the collapse.

The big four accounting firms all had close links with Carillion: KPMG and Deloitte as auditors; EY as restructuring advisors; and PwC, criticised for apparent conflicts of interest as 'special managers' of the liquidation, as advisors to Carillion's pension trustees and helpers to the Cabinet Office when it became clear Carillion might collapse. 

Various parliamentary committees – Public Accounts, BEIS, Work & Pensions, Public Administration and Constitutional Affairs – are all now involved in picking through the debris.

Likewise, numerous regulators are caught up in the melee: the Insolvency Service, Financial Conduct Authority, Financial Reporting Council, National Audit Office, Pensions Regulator and Pension Protection Fund (PPF).

"Interdependence does not negate the responsibility for carrying out the rigorous due diligence required before contracts are awarded"

Banks and bondholders that lent Carillion nearly a billion pounds face a tug of war with Carillion's dozen or so different pension funds, which have over 27,500 members and a gaping hole in the funds supposed to support them.

Carillion's decision to keep paying bonuses and dividends despite its underfunded pension scheme is under close scrutiny, as written evidence shows that the company's pension trustees wrote to The Pensions Regulator twice to flag up problems, once in 2010 and then again in 2013. Could, and should, the trustees have been more vigorous?

The PPF's claim on Carillion's assets is likely to be almost as large as the company's outstanding debts.

Lenders and investors should note with alarm how pension liabilities can soar when a company gets into trouble, particularly as London-based adviser Hymans Robertson has estimated that the FTSE 350 companies have about £85 billion in unfunded pension commitments.

This should also concern the PPF as they do not have the funds necessary to bail out more than a handful of companies with pension deficits on the same scale as Carillion's.

If lessons are to be learned from Carillion's collapse, it would seem that overdependence affects independence and interdependence does not negate the responsibility for carrying out the rigorous due diligence required before contracts are awarded. When organisations this large fail, the ripple effect has major implications.   

Similarly, the charity sector simply cannot afford another such scandal, coming so soon after the notorious Presidents Club dinner and the collapse 18 months ago of Kids Company – another debacle bearing Cabinet Office fingerprints.

Not only do such disasters detract from the good work that charities do, but behaviour that leads to the cancellation of donations fundamentally undermines their ability to help beneficiaries at a time when those in need can ill afford to do without.

Simon Osborne FCIS is CEO of ICSA: The Governance Institute

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