Another nail has been hammered into the coffin of the notion of the ‘celebrity CEO’ as the gloss is wiped off the once shiny reputation of Leighton boss, Wal King. Yesterday, the construction group shocked the market by announcing a drop in forecast December half-year earnings by 60%, reducing the company’s half-year result by $170 million.

Only two weeks ago Leighton told the market that it “still expect[ed] an increase in revenue for 2009 of around 15% and an increase in net profit after tax for the 2009 financial year of 15%. The result is of course subject to the vagaries of the market and the impact that could have on asset values.” Meanwhile, on that same day, Wal King stated that “Leighton Group was well positioned to ride through the current financial market turmoil and emerge stronger.” (However, it appears that Leighton is better at engineering than it is at counting given that the value of its investments which led to the write-down actually increasing since the company’s 22 December 2008 profit forecast).

In case investors were wondering whether managerial decisions could be the reason for the profit downgrade, yesterday’s gloomy announcement was headlined, “Leighton announces impact of the current global financial crisis on 2009 results”. Funnily enough, as Leighton was announcing a string of profit upgrades over the past decade it never saw fit to release a statement headlined, “Leighton announces impact of debt-funded global boom and short-term China irrational exuberance on 2008 results and executive largesse.”

In fact, it appears doubtful that the downgrade is even directly related to the ‘global financial crisis’. Rather, the losses stem from Leighton’s investments in ASX-listed companies including ConnectEast, RiverCity Motorway, BrisConnections, Devine and Macmahon. One could quite legitimately note that the fall in the share price of ConnectEast was due to overly optimistic traffic forecasts, while BrisConnections (and to a lesser extent, RiverCity) have been hampered by shareholders finally sensing the foolishness of the ‘Macquarie/Bernie Madoff’ model of paying distributions from shareholder capital or debt facilities. (Leighton didn’t fully mark-to-market the value of its investments in Devine and Macmahon which would have led to a far greater earnings downgrade).

While weakening asset values were the largest driver of the downgrade, what appears to have concerned investors most was Leighton’s reduced underlying earnings forecast. Only weeks ago, Leighton was predicting a profit increase of 15%, that forecast was lowered to only 8% yesterday, despite the company’s order book actually increasing from $35.3 billion last September to $37 billion. The 11% wiped off Leighton’s share price yesterday is more likely to be related to its significant exposure to the oil bubble-ridden Middle East, increased credit risks of counterparties and compressed margins. With the company still trading on an earnings multiple in excess of ten, it certainly doesn’t appear to be a bargain.

The major victim of the profit shock appears to be the reputation of long-time Leighton CEO, Wal King. While King garnered most of the credit for Leighton’s ascent, it will be interesting to see whether the Leighton board and investors hold King equally responsible for its foibles. Last year, King was paid $16.4 million, of which $15.8 million was cash-based (and $4.8 million was ‘deferred’). In 2007, King collected $13.9 million (of which $13.5 million was cash-based). Therefore, while Leighton shareholders mourn the 61% drop in Leighton’s share price, King will continue to bask in the $48 million cash he has taken from Leighton shareholders in the past four years.

While his reputation as one of Australia’s finest CEOs is in tatters, King is clearly no dummy. By insisting on receiving remuneration by way of cash-based salary and short-term bonus payments, he has suffered almost no pain as Leighton’s share price has crashed and underperformed by the broader market by more than 20%. This represents a glowing indictment on Leighton’s board of directors, which includes former TNT chief, David Mortimer, Richard Humphris and former Qantas CFO, Peter Gregg, who failed to align the remuneration of the company’s long-term and highly-paid CEO with shareholder returns.

Leighton’s performance shows that Wal King, along with fellow fallen angels Phil Green, Eddy Groves, Geoff Dixon and Alan Moss, prove that a high profile, dominant and extraordinarily well-paid CEO is more likely to lead to extraordinarily poor shareholder returns.