It’s risk, risk, risk, not location, location, location.
Risk management is rapidly becoming the most important issue for boards
and managements of public companies. Governance, transparency and clear
and effective communication might be part of the answer, but the big,
fast growing black hole that’s catching corporates by surprise is the
risk of doing business, in areas that they should know intimately.

The NAB’s the highest profile example, but in recent years Coles Myer
has been caught out, Western Mining in its various guises, especially
at the troublesome Olympic Dam operations. And now the country’s
premier contractor, Leighton Holdings has stumbled badly over three
contracts.

The NAB’s greatest sins in the past four years have been risk-related.
The about to be settled brawl on the NAB board is all about
personalities, but the catalyst was the $360 million in forex option
losses, incurred because the board, senior managers and the line staff
in the treasury operations all had little understanding of the risk
involved.

And the Homeslide debacle in the US cost the best part of $4 billion,
while the dodgy loans to the King bros bus group in NSW another $140
million. Those were just examples of poor management and a lack of
understanding of risk at all levels.

Leighton Holdings looks like a slightly different example and it raises the question, how far should management changes go?

The problems are in Melbourne’s Spencer Street station and the Hilton
Hotel revamp in Sydney, plus the write-off of $28 million before tax on
a mining contract at the now-closed Southland Colliery in the NSW
Hunter Valley.

The upshot so far is an estimated slump of $40 million dollars in nine months earnings, and a flat result for the full year.

The press release described Leighton’s result as ‘solid’ and yes that’s
a good word for a set of figures that shocked the market and drove the
share price down 23 per cent on Thursday.

The two building deals in Melbourne and Sydney have yet to be resolved.
More negotiations are underway to try and sort things out and put a lid
on costs, and a new managing director has been appointed to the
subsidiary, Leighton Contractors.

That is the company’s key construction arm and one which holds a lot of the $12 billion or more in contracts.

But while the CEO of this arm has been replaced, you’d be entitled to
ask, shouldn’t others higher up go. What about group CEO Wal King. He’s
been there for quite a while and wants to continue for another three
years.

Wal was one of the drivers behind the plunge into telecommunications
through the NextGen business that cost the company around $140 million,
with the last of the writedowns happening a year ago. Leighton did a
deal with the business and now has a telecoms business very cheaply,
but one that is still finding new customers hard.

Isn’t it time to find a new leader?

Leighton has a new chairman in existing director Geoff Ashton who has
just replaced John Morschel who stepped down recently to do other
things.

With the Hoctief construction group of Germany controlling the company
with just over 50 per cent, don’t expect much more in the way of
change. It’s a blokey board full of grey men in suits. Engineers and
Bob the Builder types.

The problems described in the Leighton statement makes sobering reading
for a company that prided itself on its professionalism and recognition
of risk. After all it’s been judicious in handling risk in Indonesia
and other parts of Asia over the past eight years

Spencer Street Station, Hilton Hotel impact solid Leighton result

This does not make good reading. There’s the sense Spencer St could be
a blackhole (yet another poor Victorian project), which must raise
problems about the future profits, if any, from this contract. This in
turn puts further concerns in the public eye about the overall
profitability of the group.

So far the disclosure is fine and timely and accountability has been
seen to be done with the removal of the head of Leighton Contracts. But
should more problems emerge, with an impact on earnings, the fickle
finger of fate should reach upwards and finger the collar of really
senior managers and board members.

Peter Fray

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