Upheaval at Leighton Holdings as chair and two directors resign in protest

The chairman of Leighton Holdings, Stephen Jones, has resigned from the board of the construction company because of a breakdown in relations with major shareholder Hochtief.

Also resigning for the same reason are non-executive directors Wayne Osborn and Ian Macfarlane.

A company statement issued this morning said the three directors have formed a view that Hochtief “no longer supports an independent board at Leighton”.

“Under the current governance arrangements between Hochtief and Leighton, Leighton operates under an independent board and management,” the company announcement says. “Leighton believes these governance arrangements, which have been in place for a long period, have contributed significantly to the value created for all of Leighton’s 57,000 shareholders. The current arrangements… are expected to continue and we believe this is well understood by the market.”

The move suggests the chairman and two directors want to alert shareholders to changes at Leighton, says corporate governance expert, Julie Garland McLellan. Of the alternatives facing unhappy directors – calling an extraordinary general meeting, resigning quietly, and resigning with stated reasons as they have done – this tactic is the most dramatic.

Hochtief is a German construction company that owns a majority stake in Leighton.

In November, Hochtief appointed a new chief executive, Marcelino Fernandez Verdes, who said the board would review the strategy for the entire group and its divisions in the next few months. Verdes sits on the Leighton board as a Hochtief representative, a position he has held since before his appointment as CEO. Hochtief currently has two representatives in the 10-member Leighton board.  

It is a mistaken belief that the interests of big shareholders are always aligned with those of smaller shareholders, Garland McLellan says. Although it is often thought that major shareholders deserve a position on the board, it can lead to conflicts of interest, because they have more influence and information than most shareholders.

For example: “The major shareholder might be about to sell their holding so they jack up the share price,” she says. “They get the board to stop spending money, profits look good, the share price goes up, and they sell out. The new board members find themselves with a company that has underinvested in its business.”

They might also seek to influence the board’s decision about whether or not to declare a dividend in their own interest rather than those of everyone.

In cases similar to Leighton, where a big company in the same or similar industry buys a big equity stake, the smaller company can end up becoming a defacto subsidiary. Without specifically commenting on the Leighton example, Garland McLellan explains.

“A major shareholder might start running the investment as if it is a subsidiary. They will denude the management structure and run everything as if it is their own projects because it saves them salary costs, and improves profits for shareholders. The corporate entity is for convenience, and the management runs up another line, but the directors are personally liable. Once this happens, you are in real trouble. The major shareholder is using other people’s money and the board is technically independent, but not in reality.

“This often happens in the mining sector: a small exploration company will find something good, and big mining company puts in money, and a management team and they share price goes up, and everyone is a winner. Until the exploration company wants to do more exploring, and then the miner says there is no way the company is going to waste shareholders’ money on that. The other people become passive shareholders.

“There is no right or wrong here,” says Garland McLellan. “It is just a matter of everyone being clear. If the shareholders want to stay in and be passive, or to take their money out and put it somewhere else.”

ASIC is reportedly in dialogue with the ASX over the sharp decline in Leighton’s share price which followed the announcement. The stock was down 6.5% at noon.