The soap opera that has become Leighton Holdings appears to have drawn to a temporary intermission, with former CEO Wal King announcing he was not offered, nor is he seeking a role, on the Leighton Holdings board.
The notion of King returning to Leighton as board member was somewhat perverse. King had ruled over Australia’s largest construction firm since 1987, and until recently, been lauded as one of Australia’s leading CEOs, with a remuneration to match. The King legacy was, however, irrevocably tarnished in the past year, as the Leighton’s humiliatingly announcing three profit downgrades, culminating in the recent $1 billion write down on three of its major projects. Instead of generating a $480 million profit, the company forecast a $427 million loss.
Given King was happy to take credit for Leighton’s successes (at a recent AGM, shareholders were given copies of a book entitled The Wal King Years and King was paid a short-term bonus largely based on the company’s net profit) one can reasonably also attribute recent results towards King. King can also take credit for Leighton’s dramatically reduced share price, with the company’s scrip having fallen by almost 70% in the past three years.
The adulation of King came to an abrupt end this year, after the $1.1 billion downgrade, so much so Australian institutional investors were openly questioning the corporate governance implications of King’s return to the Leighton boardroom. In practical terms, this wouldn’t have mattered: the new parent company of Leighton’s — Spanish-based construction company ACS has the ability to appoint its own directors. ACS, which is controlled by billionaire Florentino Perez Rodrí´ıguez (an apparent friend of King), recently took control of Hochtief, Leighton’s long-time parent company. It was widely thought that Perez was in favour of King returning to the board, but whether the Real Madrid president actually held those views may never be fully determined.
The Leighton situation also provides another salient lesson to investors. That is, shareholders should remain increasingly wary of investing in publicly listed companies with a majority shareholder. Ultimately, that majority holder will act in its own interests, rather than the interests of minority shareholders.
As the King imbroglio showed, minority shareholders would have been virtually powerless to prevent the former executive’s appointment to the Leighton board. Similarly, a shareholding in Village Roadshow leaves investors with no recourse to the might of the Kirby family who own a controlling stake in Village (as diluted Village preference shareholders discovered out in 2004). More perversely, News Corp shareholders remain largely under the control of the Murdoch family, courtesy of their dual-class structure, rather than any majority shareholding. Village and News Corp have delivered tepid returns to shareholders in the past decade.
If King’s aborted boardroom return provided any lessons, it is that an investment in Leighton Holdings poses substantial commercial and governance risks. King, who shrewdly sold virtually all of his Leighton shareholding, departed the company a very wealthy man, largely courtesy of extraordinary cash bonuses paid (for performance that would soon be shown to be sub-standard). King’s return would have been completely unacceptable, but the mere speculation of such would give rise to investors wondering why exactly they would want to own a minority stake in a company that is controlled by ACS.