Leighton’s boardroom woes

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Following the shock resignations of chairmen Stephen Johns and two independent board directors, Leighton Holdings Limited (LEI.AX) will have spent the weekend choosing new members to fill the gaps.

The three executives resigned suddenly following a corporate governance “stoush” with the company’s largest shareholder, Hochtief, according to The  Australian Financial Review, giving corporate watchdog Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX.AX) reason to examine any further developments the company makes.

Despite a slowdown in the mining industry, the company’s FY12 report pleased investors with a net profit of $450.1 million, as compared to a loss of $285.5 million in FY11. Following these results, Leighton’s shares hit a 12 month high of $24.29.

Within the last month however, the shares have slumped 17%, including a 6.9% loss on Friday following the news, reversing any gains made.

Currently, corporate governance arrangements prevent Hochtief from having control of more than four of Leighton’s 12 board seats, however, signs are suggesting that these arrangements are breaking down, and Leighton’s board losing its independence.

Mr. Johns has alleged that Hochtief interfered in the appointment process of a new independent director for Leighton’s – an argument which led to the shock resignations. Mr. Johns believes that the appointed director will swing corporate power more in Hochtief’s favor, giving them more power over the company.

As investors express their doubts over Leighton’s current and future position, many are turning their eyes to competitor Downer EDI Limited (DOW.AX), whose shares are up 46% since the beginning of December. Downer reported a 17.8% increase in revenue for the half year, and a 10.8% increase in net profit after tax (NPAT).

Foolish takeaway

Based on Leighton’s reputation for appointing non-executive directors as chairmen, it is expected that Paula Dwyer – chairman of Tabcorp Holdings (ASX: TAH) – will be given the responsibilities. Regaining the confidence of investors will likely be a difficult task for the new board of Leighton’s. In a volatile mining industry and management uncertainty, it is vital that Leighton’s continue to report impressive results to keep in the good books with investors.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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