UPDATE 2-Serco CEO quits after government contract scandal

Christine Murray and Neil Maidment
Friday, 25 Oct 2013 | 8:25 AM ET

* Firm's UK contracts under review after tagging scandal

* Americas boss to be acting CEO before external replacement

* Business reorganisation aimed at restoring reputation

* UK government welcomes move as positive

LONDON, Oct 25 (Reuters) - Serco, the global outsourcing firm battling to save its relationship with the British government after a series of scandals, said its chief executive had quit as part of a major reorganisation aimed at restoring its reputation.

The government, which accounts for about a quarter of Serco's revenue, said in July it would not award Serco and rival G4S any new contracts pending a review of their existing ones, after an audit discovered they had charged for tagging criminals who were dead, in prison or not being monitored.

On Thursday, G4S said its UK chief executive had resigned and been replaced by the group's chief operating officer.

The scandal has intensified the debate in Britain over the outsourcing of public services to profit-driven private firms - a key strategy to reduce government spending, but which has also led to a string of embarrassments, such as when G4S failed to supply enough security staff for the 2012 London Olympics.

Serco, with over 120,000 staff in more than 30 countries, said on Friday Chris Hyman had resigned as chief executive.

As part of a company-wide overhaul, the group said it would strengthen its board by adding three new non-executive directors and would split its UK central government work into a separate unit, allowing it to devote more time to its biggest customer.

The news was taken well by investors, with Serco shares initially rising over 2.5 percent, before they fell back to be up 0.5 percent around 1200 GMT. It was also welcomed by the government which described it as a "positive move".

"They were always going to have to make some sort of major change," Cantor analyst Sam Thomas said. "This is about transforming their recently damaged reputation and I think in appointing an external new CEO they are hoping to draw a line under the previous issues."

Serco shares had lost more than 10 percent of their value, or about 320 million pounds ($517 million), since the government said in May it had concerns over a tagging contract.

"The decisive and comprehensive actions we have set out today, alongside the programme already underway, should leave no-one in any doubt about how seriously Serco takes these issues, and our commitment to rebuild the confidence of our UK government customer," Chairman Alastair Lyons said.

After the discovery of problems with the tagging contract, the government asked the Serious Fraud Office to consider carrying out an investigation into G4S and then later Serco.

In August, Serco's problems increased when the British justice ministry asked police to investigate alleged fraudulent behaviour by some Serco staff working on a prisoner escorting contract.

Ed Casey, who has led Serco's Americas division since 2005, will take over as acting chief executive while the group looks for a full-time replacement who will come from outside the firm.

The government review into Serco and G4S's contracts is expected to be completed next month.