Leighton corruption hits profit

Leighton's weak defence on corruption allegations has sent investors scurrying for the exits. It could also see customers abandon the group.

The allegations have been doing the rounds for the past 18 months.

But despite Leighton's (LEI) best efforts this morning to sweep them under the carpet, arguing the reports of widespread corruption and illegal kickbacks already are under investigation, the troubled construction group's defence was weak, sending investors scurrying for the exits with the share price down 8.6% to $17.90 in morning trade.

The company's major shareholder Hochtief was hammered on European markets overnight, slumping around 8%.

While the corruption reports are damning enough, the stunning lapse in corporate governance – where kickbacks allegedly were sanctioned at the highest level  – could impact the company severely in two ways.

The first is through fines and legal action from rivals and foreign governments. And the second is the reputational damage that could inhibit the company's attempts to win new business.

This all comes at a time when Leighton has encountered cash flow difficulties. Its underlying business is weak and cash flow has become a problem with following a large lift in receivables. Morgan Stanley recently postulated that cash flow could even turn negative.

Leighton has only just emerged from a chaotic three year period of destablisation at a board and senior management level, with infighting between the German based Hochtief and its major shareholder ACS sending seismic shock waves through what once was a cash generating powerhouse.

For years, until the early 1990s, Leighton refused to operate in Asia and the Middle East, precisely because it wanted to avoid the corrupt practices required to win business in those regions. But having made the leap, it would appear the company embraced the practice with gusto, if the allegations have substance.

Almost every company that operates in these regions faces these same pressures as local custom involving cronyism and corruption is starkly at odds with the legal requirements of modern western democracies.

Direct involvement in corrupt practices often is avoided by the use of intermediaries. In China, for instance, a vast network of " consultancies" exist to facilitate deals between major western corporations and domestic officials and firms, thus providing an arm's length between the parties. Nevertheless, both BHP (BHP) and Rio Tinto (RIO) have been accused of corruption in China and elsewhere in Asia.

Leighton, however, appears to have dealt directly with officials and outlaid stunning amounts of cash to win contracts.