By Tony Collins
Royal London, a Capita investor, said yesterday it has been “raising concerns about Capita’s weak governance with the firm for a number of years, and voting against many resolutions on director re-elections and pay consistently since 2014.”
Royal London is the UK’s largest mutual life, pensions and investment company. It managed £113bn of funds as of 31 December 2017. It owns a 0.44% stake in Capita.
Ashley Hamilton Claxton, Royal London Asset Mananagement’s Head of Responsible Investment, said in a statement,
“We welcome the honesty and transparency with which Capita’s new CEO has accepted the company’s past failings, and put a plan in place to simplify and improve the business. However, we believe this was preventable and have been privately raising concerns about Capita’s weak governance with the firm for a number of years, and voting against many resolutions on director re-elections and pay consistently since 2014.
“Until recently, Capita’s board flouted one of the basic rules of the corporate governance code, with a small board primarily comprised of management insiders. The result was a board that lacked the independent spirit to rigorously assess whether the company was making the right long-term decisions.
“Our concerns about governance were compounded by the complexity of the underlying business and the company’s acquisition strategy. Capita’s approach to remuneration also left something to be desired, with major losses in 2013 being excluded from the profit figures used to assess the bonuses paid to executives at the firm.
“The sea change in the board over the past 18 months has been welcome and has addressed the key issue of independence. It will be up to the new Chairman and the Board to ensure that Capita does not repeat the mistakes of the past, and that its strategy is fit for purpose during a particularly turbulent time for the outsourcing sector.”
Last week Capita issued a profits warning and announced plans to raise £700m from investors to reduce debts.
With Capita seeking to raise money and cut costs, where will this leave local government customers that are reliant on the supplier to cut the costs of running local services?
Barnet Council has, controversially, contracted out a large chunk of its services to Capita – and also gives the company tens of millions in advance payments in return for a discount on the supplier’s fees.
By becoming a “commissioning council”, Barnet has made itself wholly reliant on Capita, say critics of the outsourcing deal. Among other responsibilities, Capita produced the council’s latest annual accounts – including a financial account of its own services to the council. The accounts were not produced on time which created extra chargeable work for the council’s auditors BDO.
Capita has run into problems on a number of its major outsourcing deals. The National Audit Office is investigating its work on GP support services.
Councillor Barry Rawlings, leader of the Labour group in Barnet, said the profits warning and Capita’s low share price raised questions about how it may respond to further troubles.
He told The Guardian that Capita may be looking to cut back services it supplies.
“Capita handles all of the back office, enforcement, planning, environmental health, trading standards, estates, payroll and so on. Will that be part of their core services? We might be one of the only places they do some things. If they narrow their scope, what is going to happen to these services?
Conservative leader of Barnet council, Councillor Richard Cornelius, said, “Capita currently runs approximately 10 per cent of our services by value. They do not run the entire council as some reports have suggested.
“The council regularly reviews the financial status of its major suppliers as part of its contract management and contingency planning arrangements. This is what any responsible local authority would do.”
Capita’s share price has more than halved in the last month – from about 400p to a low on 1 February 2018 of 158p – but today rose by about 10% to 196.
When an outsourcing giant is looking to cut its costs and raise money to cover debts, how does that square with local government customers that also want to cut costs – which is why they outsourced to Capita?
Outsourcing can make good sense – when for example a global company like BP wants to standardise IT services across the world. It doesn’t always make sense when an organisation wants a service transformation while also cutting costs. Something usually has to give which, perhaps, Barnet Council and its taxpayers are slowly finding out.