Describe the regulatory responsibility of the Australian Securities and Investments Commission (ASIC). Why was it suggested in the case study that ASIC was a regulatory body with weak foundations that failed to effectively handle the investigation into Leighton Holdings? (500-600)

LEIGHTON HOLDINGS: Leighton on the rooftops Leighton is a project development and contracting group headquartered in St. BUILDING BRIBERY Leonards, Australia. Leighton's principal subsidiaries comprises of Leighton Contractors Pty Ltd, Thiess Pty Ltd, Leighton Asia Limited, John Holland Pty Limited and Leighton International Limited (Leighton International) and operates in Australia, Asia, the Gulf region and Africa . Leighton provides engineering, building construction, facilities management and contract mining services. Case overview Allegations relating to a culture of corruption, bribery and cover-ups involving The bricks of bribery laid the world's 12th largest contractor by revenue, Leighton Holdings (Leighton), "I asked did Wal K approve this? And he said 'yes'." - Memo by David shook the Australian corporate landscape in October 20131. It was reported that Stewart, then acting Chief Executive company executives of the Australian construction empire had known of various kickbacks paid to secure projects, and that payoffs made to Leighton employees A series of articles by Fairfax Media in Australia that began on 3 October 2013 had happened as early as 2009. Early warning signs that executives may be revealed the existence of a handwritten memo by the acting Chief Executive of involved in rampant corruption and mismanagement had been observed. Other Leighton, David Stewart, on 23 November 2010*. According to the memo, David internal company documents also revealed a corporate culture that accepted and Savage, former Managing Director of Leighton International, and Wal King, who rewarded corruption, leading to a scrutiny of excessive remuneration packages paid was the Leighton CEO for 23 years, were aware of and approved an A$42 million out to former senior executives. The Leighton saga placed regulatory bodies in the kickback paid to a Monaco-based company, Unaoil, which was "nominated by spotlight, as the media and politicians heavily criticised regulators' lack of prompt Iraqi officials who selected Leighton for a A$750 million oil pipeline contract". The and thorough investigations, which allowed the incident to manifest. The objective payments were called "project support" fees in the contract. The fees were to be of this case is to allow a discussion of issues such as corruption and bribery; the reviewed by the Board of Leighton International, including King, who was also part response of the board, management and regulators to bribery allegations; the of the Board. However, these fees had "mysteriously disappeared... when they role of tone at the top; remuneration and other corporate governance practices were revised by top Leighton's staff one month later". in reducing bribery and corruption risks; and corporate governance in company groups. "He [Savage] said less than 50% of the payment." - David Stewart's memo on questioning the proposed payment and the real value of the work to extend the Iraqi contract. Court documents between Unaoil and Leighton also revealed the existence of Memorandum of Agreements in early 2011 between the two firms to guarantee a minimum payment of US$55 million for "construction and marketing fees in This is the abridged version of a case prepared by Dalton Sim Daoheng, Nicolette Rachel Mei Long, the event that the Iraqi government awarded Leighton with a second pipeline Then Co Mint and Zhao Binru Bryan under the supervision of Professor Mak Yuen Teen. The case was developed from published sources solely for class discussion and is not intended to serve as illustrations contract" that was worth US$500 million. Of this US$55 million, marketing- of effective or ineffective management or governance. The interpretations and perspectives in this case specific fees were specified to be "no less than US$25 million", even though no are not necessarily those of the organisations named in the case, or any of their directors or employees. This abridged version was edited by Thing Wan Ying under the supervision of Professor Mak Yuen Teen. actual marketing services were required". Copyright @ 2015 Mak Yuen Teen and CPA Australia.Bribery Stealing steel Building a stonehouse A specific incident involving Gavin Hodge, senior project manager for the building "Savage and Leighton International had extraordinary autonomy compared of an Indonesian barge, revealed senior executives' mismanagement of the to the rest of the operating companies ... One of our major concerns impropriety, which may have enabled the culture of corruption and cover-ups to here was that there was very little corporate governance within Leighton take root all across Leighton. International." - Leighton witness to the Australian Federal Police (AFP)15 In early 2009, a whistleblower informed the top executives that Hodge had A lack of corporate governance and excessive autonomy within Leighton allegedly diverted A$500,000 of steel from Leighton to build a barge for an Indian International also created the opportunity for Savage and fellow executives to company, Adani, in a black-market project . A company legal report indicated use confidential information to establish a private business venture. All these were that Russell Waugh, a Leighton executive who was also Savage's right-hand man, carried out via the company's internal email system, at a time when Leighton had approved of this transaction. Waugh later ordered internal investigations, International was facing probes on corrupt practices. which concluded that Hodge's actions "had no material benefit to Leighton" and put the company "in a position of potential compromise of integrity"". Despite A review of Savage's confidential emails revealed that he had covertly launched these findings, Waugh merely gave Hodge a stern warning. A second inquiry "Project T", which sought to lure Leighton senior officers to a private firm in order by the company's accountants then failed to find further evidence of these illicit to compete directly against Leighton so as to win projects . This was evident as payments and the matter was put to rest. Despite this, Waugh rewarded Hodge in Savage's new venture "emphasised resource projects and offshore shallow-water appreciation of his "efforts over the last year", giving him an A$40,000 bonus and projects", which was very much similar to work he had been helping to win for salary increments upon closure of the incident12. Leighton19. "If you go quietly, you'll be back in three months." - Phone conversation between Waugh and the whistleblower who shed light on the Hodge incident13 Towering remuneration packages Amidst the corruption scandals and a time of heightened media attention, the The persistence of the whistleblower eventually led to a launch of a third inquiry, excessive compensation packages of executives that came to light enraged the this time independent of Waugh and carried out by a newly appointed Leighton public further. executive. It was revealed that the investigations carried out previously were sorely inadequate. Reference was made to Waugh paying out a bonus to Hodge and During King's tenure, he was criticised for receiving excessive executive pay, also directing the investigations when he himself was in a potential conflict of collecting at least A$100 million in remuneration since 2004, including a A$14.7 interest, since Waugh himself signed off and approved the steel transaction 14. million compensation package in 2010, which was the year of his departure?. Moreover, King's remuneration package was not strongly linked to shareholder In response to criticisms, Leighton eventually dismissed Hodge and initiated legal returns and mainly in the form of cash rather than equity. His short-term incentive proceedings against him to recover the money he allegedly stole. In Leighton's was also substantially above his counterparts at similar-sized companies - in a media release to shareholders in response to the allegations by Fairfax Media, it year that Leighton suffered a fall in profits?. was mentioned that this incident also led Leighton to "strengthen and improve its corporate governance and risk management processes", such as the revision of its comprehensive Code of Business Conduct as well as a *5 gate tender review and approval process".A closer scrutiny of Leighton's remuneration structure revealed its heavy emphasis In a leaked Australian Federal Police (AFP) interview transcript, a former top on financial measures in its Key Performance Indicators (KPIs). More specifically, executive said that he "never got the sense that the Board was excited by this the company's profitability played a crucial role in determining the amount of stuff [due diligence, upholding corporate governance standards etc.]. The way remuneration. Executives' short-term incentives, such as cash bonuses, were Leighton International had been managed was an absolute disaster from a directly linked to achievement and outperformance of profit targets, while medium- commercial perspective*2. term deferred incentives hinged on profitability over a three-year period. Likewise, 50% of the long-term incentives were only achievable with substantial growth In earnings per share, which in turn depended on earnings and profitability??. In 2009, King's and Savage's short-term variable bonuses constituted 65.6% and Fire alarms kept silent from authorities and 62.9% of their respective total remuneration . This was noticeably higher than all shareholders other executives. Moreover, in 2009, performance against financial KPIs was also Despite uncovering appalling evidence of serious misconduct and corruption, significantly weaker compared to previous years. On average, key executives only the media reported that Leighton had withheld the memos and files detailing obtained 58% of the maximum remuneration payable to all eligible employees24. corruption and failed to notify authorities. The company had waited a year before it called the Federal Police in 201130. It also took a further three months of delay till February 2012 to notify shareholders that an investigation was underway about The Board's grounds of defence the work in Iraq, and that the company had voluntarily notified the AFP of the alleged breach of its Code of Ethics3 Throughout Fairfax Media's numerous allegations, the Board had maintained the directors had "at all times executed their duties with the appropriate care and In response to these accusations, the Board has maintained that upon their diligence, and in the best interest of each company [within Leighton]"25. knowledge of the matter, they had immediately reported it to the AFP. The reason that the market and shareholders were only notified in February 2012 was due to Yet, the signature of former Leighton senior executive David Savage appeared on a the confidential nature of the investigation32 preliminary tender document that includes an alleged A$42 million kickback to win a lucrative project in Iraq. In defence of the Board's approval of the Iraq Project in October 2010 despite the alleged A$42 million bribe, a former director claimed that the bribe was deliberately disguised by Leighton's management as an "onshore A Board facing constant shake-ups and security payment" to avoid raising the suspicions of the Board. He also added In the midst of the alleged corrupt deals in 2010, Leighton's controlling shareholder, that there were no discussions of potential "agency" payments of bribes. Instead, the Hochtief Group, faced a takeover bid by Spanish Group ACS*3, and the hostile the A$42 million payment was portrayed as necessary by the management due takeover was eventually successful*. The stage was set for a new wave of power to security concerns in Iraq. The evidence suggests that the Board approved the struggles within Leighton, with Hochtief engaged in a takeover bid to increase its project without further inquiry despite knowing that the deal was carried out in a stake in Leighton from 58.8% to 74%36. corruption-prone country. It was also revealed that a six-month audit in early 2011 had prompted Board members to "examine bribery-prone practices with With five out of 10 seats on Leighton's Board already controlled by either Hochtief necessary details", but this appeared to have been responded to with inaction?. or ACS, the threat of a potential overhaul arising from the takeover was very real . According to former Chief Financial Officer Scott Charlton, the Board's preoccupation with its internal struggles could have hurt governance and placed issues of potential corruption low on the agenda?.In addition, the Board had been facing a flurry of changes to its pool of directors. ASIC also defended that they had to wait until the Police referred the case to An examination of the composition of the Board indicates that the Chairman of them, and that the Police faced constraints as well, since there were laws in place the Audit Committee changed every year between 2009 and 20113. Further, in to prevent the Police from sharing information with ASIC4. It was only until 2 Financial Year 2011, David Stewart held the post of CEO for a mere nine months, April 2014 that ASIC confirmed its launch of a formal investigation allowing them and then left along with six other directors. Clearly, the Board had pressing to exercise the powers of the Star Chamber to question the witnesses and also changes to deal with?" demand for documents. Upon hearing this, the Australian Senate criticised ASIC for their delayed efforts of investigation, claiming that formal investigation came two In 2014, Hochteif ousted CEO Hamish Tyrwhitt and CFO Peter Gregg and replaced years late from the time ASIC had first known about the allegations in November them with M Fernandez Verdes, CEO of Hochtief and former ACS executive, 2011". Consequently, questions have been raised if Leighton corruption could further cementing ACS' control over Leighton and its Board40. have been mitigated if ASIC had stepped up on its investigations earlier. Upon pressure by the media and politicians, ASIC and AFP have since begun to Regulatory bodies with weak foundations find better ways of working together, starting with the signing of a memorandum of understanding" between both parties in October 2013. Furthermore, a proposal "I would be surprised if the federal police or ASIC have the expertise or to the Senate has also been drafted to allow parallel inquiries to be conducted technical knowledge to undertake investigations of this nature." - Former and there has also been a call for legislative reform to allow the AFP to share top executive Stephen Sasse, in an interview with Fairfax Media* information with ASIC for such offences The AFP and the Australian corporate watchdog, the Australian Securities and Investments Commission (ASIC) were also in the spotlight, with numerous reports published by Fairfax Media alluding that the AFP and ASIC had been slow to Investors scramble for the emergency exit conduct thorough investigations. It was highlighted that "almost two years have Leighton's share price dipped when shareholders caught wind of its work in Iraq; passed since the AFP agents were first called in and they have still not spoken to this was the first piece of public information received by investor community key witnesses and suspects"*2. Similarly, ASIC had also been reported to not have regarding the possibility of a breach of ethics and laws?. had reached out "to even a single witness" The share price fell a further 10.4% in a day when the reports were published The AFPwas overwhelmed by the case, due to reasons such as a lack of experience, by Fairfax Media, wiping A$688 million from its market capitalisation. Hochtief technical knowledge, funding and manpower, and their "lack of urgency" was said Group's share price fell 7.9%, its largest single-day share price loss in more than to "stem from resourcing issues"*, as revealed by former Leighton officials during two years. The following day, Leighton's share price fell another 4.6%, resulting in interactions with the federal police. a cumulative total loss in market capitalisation of almost A$1 billion. Further, it was estimated that the legal and reputational damage resulting from this scandal could ASIC was also under fire for not proactively fulfilling its duties as the corporate amount to as much as A$562 million, as Leighton faces possible fines under the watchdog. In a bid to defend themselves, Greg Medcraft, Chairman of ASIC, told Commonwealth Criminal Code and losses of future contracts or cancellations of Federal Parliament's economics legislation committee that the agency was working existing ones. to improve the handling of foreign bribery cases". They also asserted that ASIC's enforcement record had always been "solid"*. However, media reports referred to past instances of ASIC's tardiness in handling whistleblower information, including a poor handling of serious misconduct within Commonwealth Bank's financial planning division"?.In an unusual turn of events, on 20 February 2014, Leighton declared profits for the year 2013, up 13% from the previous year. Investors reacted positively to this earnings announcement, with the share price going up by 6.5% - or by A$1.0755 - as Leighton was profitable even against the gloomy backdrop of a mining sector downturn. However, the share price of A$17.48 was still slightly shy of the almost A$20 pre-scandal share price. Leighton's former CEO Hamish Tyrwhitt remarked that "to get investor confidence back Leighton really needs to resolve those [corruption] issues*56 Epilogue In an attempt to distant themselves from the corruption allegations, the construction group's new Spanish owners, ACS, decided to change Leighton's name to Construction, Infrastructure, Mining and Concessions (CIMIC). Even so, the stock price has only risen to around A$20, still far from its former glorybe