The chair of Thames Water was suspected by government officials of holding a potentially “conflicted position” when his company made an “unjustified” dividend payment of £37.5m to its shareholders.
The water provider, on the brink of bankruptcy, was in the high court last week seeking an emergency £3bn loan as it struggles to stay afloat under massive debts. It is under fresh scrutiny over its dividend payments.
Thames Water – long accused of favouring the interests of its shareholders over its 16 million customers – faces an £18.2m penalty from Ofwat over dividends it paid out, including an intra-company payment of £37.5m in October 2023.
The Observer and Democracy for Sale have established that officials were concerned before the dividend was paid that Sir Adrian Montague was the chair of both Thames Water and its controlling company Kemble Water Holdings. Thames Water insisted this weekend there was no conflict of interest.
Steve Goodrich, of Transparency International, said: “There are serious questions as to how this conflict of interests was allowed to go unchallenged for so long.”
Montague was appointed to the boards of Thames Water and Kemble Water Holdings on 10 July 2023. Both firms were already in severe financial distress.
Government officials thought that “Adrian’s chairmanship of both Thames Water (regulated entity) and its holding company (Kemble) may put him in a conflicted position”, according to a briefing document.
The July 2023 note prepared for a meeting between Montague and officials from the Department for Environment, Food and Rural Affairs (Defra) stated: “The company and its directors may well need to make decisions that diverge from the interest of shareholders.” Montague, an experienced City “troubleshooter”, had already told Ofwat he would step down if a conflict “was to arise”, it shows.
Despite the concerns, Montague kept both roles until February 2024, when he resigned from Kemble citing “personal” reasons. A further intra-company dividend of £158.3m was paid in March 2024. Thames Water said it considered all regulatory obligations in making the payments, which were used to service debt obligations, settle amounts for group relief surrendered and make pension contributions.
Rules introduced in May 2023 required water companies to take account of environmental performance and customer delivery when deciding whether to pay dividends.
In a provisional decision in December 2024, Ofwat found Thames Water had broken dividend payment rules. It proposed a penalty of £18.2m for the “unjustified” payments of £37.5m and £158.3m, with a consultation on the proposal closing last month and a final decision yet to be announced.
“Such an obvious conflict of interest between the chair of the operating company and the holding company should never be allowed,” James Wallace, the CEO of River Action, told the Observer. “What on earth were the previous government doing allowing that to happen?”
Thames Water has paid out more than £7bn to shareholders since it was privatised in 1989. The firm said it had not paid a dividend to “external shareholders” since 2017.
Ofwat said: “We were aware of the potential for a conflict of interest to arise through the dual roles [held by Montague], and Ofwat requested and received assurance from the company that these points were recognised and would be managed pro-actively.” It said its investigation into the dividend payments was not yet concluded and it would be inappropriate to provide further comment.
Thames Water said: “Sir Adrian resigned as chairman of Kemble Water Holding Limited and its Kemble subsidiaries on 17 February 2024, because he felt the time was right to fully focus on the work ahead at Thames Water.
There is no suggestion a conflict of interest occurred. Thames Water follows the principles set out in the UK Corporate Governance Code and Ofwat’s Board leadership, transparency and governance principles.
“Our plans assume no external dividends to shareholders until at least 2030, to support our turnaround.
“Sir Adrian, and the board of Thames Water are focused on putting the business on a firmer financial footing and unlocking billions of pounds for investment.”
Defra said: “This government has wasted no time in cleaning up the water sector. We have … taken immediate action to ban bonuses for polluting water bosses and ringfence money earmarked for vital infrastructure, so it is never spent on bonuses or shareholder payouts.
“We have also launched the largest review into the sector since privatisation 30 years ago, which will make further recommendations about how to stamp out conflicts of interest and improve financial resilience.”
