Should Carillion have paid more dividends or continued to build the conglomerate?

We have one of those lovely times when the received wisdom is doing a screaming u-turn:

Lifting the lid on Carillion’s strategic plans, it is clear that the company’s board mistook tactical nous for strategy. Not that there was much common sense in taking a building company and morphing it into a conglomerate that tries to meld together the management of prisons, hospitals and schools as if they were all the same.

We can - approximately and roughly speaking you understand - have two models of company finance. One is where a successful business, doing whatever, uses the profits being made to finance expansion into some unrelated area. Become a conglomerate in the jargon. We can also have a system whereby a stream of profits is returned to shareholders and they then invest in other companies, other management teams, which attempt at least to specialise in those other tasks.

The 1950s to 70s - roughly speaking again - were dominated by the conglomerate idea, subsequent decades by the sticking to the knitting and allowing the shareholders to allocate capital. One of the reasons for the change being that capital markets became much deeper and more liquid, meaning that shareholder allocation dropped in price in comparison to management allocation.

Oh well, shrug, horses for courses and all that. We'll find out which works best in time as those better attuned to current conditions outperform those who aren't. This is, after all, the point of having a market in such forms of organisation in the first place. We don't know which is better until we try it out.

But do note this screaming u-turn going on. We've got here the criticism of the conglomerate route. That critique coming from the very same source as the critique of the dividend paying method. How dare companies return profits to shareholders to allocate instead of management "investing," but also how dare management build a conglomerate? 

We have a preference for the pay it out and let the owners of the money, the shareholders, make the decisions. We do think capital markets are liquid enough for that to work. We're happy enough to argue the toss with those who prefer the conglomerate version. But we do still insist that cake cannot be had and eaten. Shouting that Carillion both paid too much in dividends and also used capital to expand into unrelated businesses to ill effect is really to gorge on that gateaux while still admiring it on the plate.