What is the business structure utilised by Leighton Holdings and what are its main features? How does the principle of separate legal existence apply to prevent the directors, employees and shareholders of Leighton Holdings from being personally liable to external stakeholders for the impropriety that has occurred here?
\fLeighton Holdings: Building 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)16 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 projects18. 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. Leighton 19. "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 4. million compensation package in 2010, which was the year of his departure20. 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?1. 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" 15.A closer scrutiny of Leighton's remuneration structure revealed its heavy emphasis on nancial measures in its Key Performance Indicators (KPlsl. More specically. the company's protability played a crucial role in determining the amount of remuneration. Executives' short-term incentives, such as cash bonuses. were directly linked to achievement and outperformance of prot targets. while mediums term deferred incentives hinged on protability over a three-year period. Ukewise. 50% of the longeterm incentives were only achievable with substantial growth in earnings per share. which in turn depended on earnings and protability? In 2009. Kir'g's and Savage's short-term variable bonuses constituted 65.6% and 62.9% of their respective total remuneration\". This was noticeably higher than all other executives. Moreover. in 2009. performance against nancial KPls was also signicantly weaker compared to previous years. On average. key executives only obtained 53% of the maximum remuneration payable to all eligible employees\". The Board's grounds of defence Throughout Fairfax Media's numerous allegations. the Board had maintained the directors had \"at all times executed their duties with the appropriate care and diligence. and in the best interest of each company [within Leighton]? Yet. the signature of former Leighton senior executive David Savage appeared on a 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 A342 million bribe. a former director claimed that the bribe was deliberately disguised by Leighton's management as an \"onshore and security payment" to avoid raising the suspicions of the Board. He also added that there were no discussions of potential \"agency\" payments of bribes. Instead. the A$42 million payment was portrayed as necessary by the management due to security concerns in Iraq. The evidence suggests that the Board approved the project wlthotn further inquiry despite knowing that the deal was carried out in a 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 necessary details", but this appeared to have been responded to with inactiorF'. 114 Leighton Holdings; Building Bribery- In a leaked Australian Federal Police (AFP) intenriew transcript. a former top executive said that he \"never got the sense that the Board was excited by this stuff [due diligence. upholding corporate governance standards etc]. The way Leighton International had bwn managed was an absolute disaster from a commercial perspective\". Fire alarms kept silent from authorities and shareholders Despite uncovering appalling evidence of serious misconduct and corruption. the media reported that Leighton had withheld the memos and les detailing corruption and tailed to notify authorities The company had waited a year before it called the Federal Potice in 20113\". It also took a lumber three months of delay tilt February 2012 to notify shareholders that an investigation was undemay about the work in Iraq, and that the cottapany had voluntarily notied the AFP of the atleged breach of its Code of Ethics-3'. In response to these accusations. the Board has maintained that upon their knowledge 01 the matter. they had immediately reported it to the AFP, The reason that the market and shareholders were only notied in February 2012 was due to the condential nature of the investigationa. A Board facing constant shake-ups In the midst of the alleged corrupt deals in 2010. Leighton'soontrolling shareholder. the Hochtief Group. faced a takeover bid by Spanish Group A05\". and the hostile takeover was aventualty successful\". The stage was set for a new wave of power struggles within Leighton. with Hocntiaf engaged in a takeover bid to increase its stake in Leighton from 58.8% to 74%\". With ve out 01 10 seats on Leighton's Board already oontrotled by either Hochtiet or ACS. the threat of a potential overhaul arising from the takeover was very real\". According to former Chief Financial Ofcer Scott Chartton. the Board's preoccupation with its internal struggles could have hurt governance and placed issues of potential corruption low on the agenda\". 115 Leighton Holdings: Building Bribery 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 201138. Further, in to prevent the Police from sharing information with ASIC48. 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 39. 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, 201149. Consequently, questions have been raised if Leighton corruption could further cementing ACS' control over Leighton and its Board". 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 understanding50 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 offencesS. 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"42. Similarly, ASIC had also been reported to not have regarding the possibility of a breach of ethics and law52. had reached out "to even a single witness"43. The share price fell a further 10.4% in a day when the reports were published The AFP was 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*s. 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". 116 117
