Ripping out Leighton's boardroom insulation

The obvious conclusion to draw from Friday’s revelation of a boardroom stoush within Leighton Holdings is that independence is a flexible concept.

For the independent directors, three of whom, including the chairman, resigned on Friday, the protocols that Leighton’s majority shareholder, Hochtief of Germany, publicly committed to enshrined an independent majority within the boardroom and meant that the independents ultimately had the decisive say in the group’s affairs.

For Hochtief, those protocols were informal and non-binding principles which it was free to reconsider at any time if it chose.

The independents saw Hochtief’s rejection of their preferred candidate to fill a casual vacancy within the independents ranks of the boardroom and its nomination of a candidate of its own as a breach of the protocols, one that was exacerbated when Hochtief told the chairman, Stephen Johns, that he no longer had its support and that he should consider resigning.

Hochtief, for its part, doesn’t see its attempt to nominate its own independent director or its withdrawal of support for Johns as undermining the independence of the board. It appears to believe that it can, given its 54 per cent shareholding, nominate as many independents as it wants without breaching the protocols as long as they aren’t directly associated with Hochtief. It also doesn’t appear to see anything inappropriate in rejecting the view of a majority of the board.

One might well ask – and clearly Johns, former Reserve Bank governor Ian Macfarlane and Wayne Osborn asked themselves – about the value of the protocols when a majority of directors can be overruled by the Hochtief chief executive, Marcelino Fernandez Verdes and their chairman essentially can be told to pack his bags if he doesn’t follow instructions.

It is worth noting that all four independent directors – including new chairman Robert Humphris and new deputy chairman Paula O’Dwyer – signed a letter to Verdes unanimously objecting to his “suggestion” that Johns resign and describing him as an “exemplary” chairman who had their full support.

The independents did suggest to Verdes that, given Hochtief’s unwillingness to recommit to the board protocols that have been in place since 2000 and which Hochtief recommitted to in 20120 after Spain’s ACS gained control of the troubled German group, they and Hochtief should agree on a replacement set of legally-binding protocols. Not surprisingly, Hochtief wasn’t interested in the concept.

Hochtief made much of that suggestion in its own weekend statement but the suggestion from the independents came after the divergence of views on the choice of a new independent director, Hochtief’s withdrawal of support for Johns and its refusal to recommit to the existing undertakings.

While the appointment of Humphris as chairman appears to have calmed the share market, which retraced most of the big losses on Friday, the impact of Friday’s events on the future governance of Leighton is clearly an unresolved issue.

While Hochtief said neither its withdrawal of support for Johns nor the dispute over the vacant board seat related to any attempt to undermine the independence of the board it is self-evident that a refusal by Hochtief to accept the majority view of the board renders the existing protocols (“informal and non-binding governance principles,” according to Hochtief) worthless. If Hochtief, rather than the independents, effectively chooses future independent directors, are they truly independent?

Hochtief’s 54 per cent shareholding in Leighton does, in the absence of the undertakings (or, more correctly, in the absence of a willingness to abide by the spirit of the undertakings) give it the absolute ability to direct Leighton’s affairs.

Given the stressed state of both Hochtief and its own majority shareholder, ACS, that is a concern for Leighton’s minorities and lenders.  The notion that the boardroom was independent only until Hochtief decided it wasn’t was clearly unacceptable to the two directors who resigned with Johns on Friday.

The Leighton shareholding is easily the best and strongest and most valuable business within the ACS group and there have been suggestions in the past that Hochtief saw a potential path towards its own stability in a merger with Leighton. Even the hint of that kind of agenda would alarm Leighton shareholders.

Hochtief said at the weekend that it would work with its “fellow board members” to appoint a new independent chairman, which it has now done, and two replacement independent directors as soon as possible.

The remaining appointments will be closely scrutinised but Hochtief has effectively already shown its hand by demonstrating that it can and will – despite the protocols and the previous majority of independents in the boardroom – exercise control whenever it wishes. It will be interesting to see the candidates for “independent” seats within a boardroom in which the majority view doesn’t necessarily prevail when it collides with the majority shareholders’ agenda.

As the majority shareholder, and given that the protocols don’t appear to be legally enforceable, it is Hochtief’s right to exercise control and create whatever boardroom it likes.

It shouldn’t, however, pretend otherwise. It should publicly tear up the protocols and make it clear to the market that the perceived protections for the minorities and Leighton’s insulation from the affairs of the broader debt-laden ACS group are no longer in place – and wear whatever consequences there might be in equity and debt markets.