8 April 2018

South Africa: Steinhoff's Board Behaved Badly. Why It Needs to Be Held to Account

analysis

It's becoming clearer by the day that the rot that caused the corporate scandal at furniture retailing giant Steinhoff International goes much deeper than one man - the CEO Markus Jooste - who has come to represent the crisis.

The company is accused of overstating its earnings among other accounting irregularities in a case describe as an Enron type company failure.

The accounting scandal, which caused a more than €10 billion collapse in Steinhoff's share price, has focused blame on Jooste while executives around him have dodged responsibility. Surely Jooste could not change accounting entries without help?

The behaviour of the Steinhoff board, since the scandal exploded in December last year, confirms my early suspicions. The rot runs deeper. This is clear from the appalling manner in which the board has managed the unfolding crisis. It's been four months since Steinhoff was enveloped by the accounting scandal. And there's no resolution in sight, let alone a proper diagnosis.

The board has called an annual general meeting but the shareholders will not receive financial statements before the meeting. Naturally it is a legal obligation to call an annual general meeting, but similarly the publication of financial statements is also a legal obligation.

It's really hard to imagine that a serving board of any company can claim that it had no insight in its financial affairs and trusted only in the judgement of the CEO. This makes the board redundant. Such a lack of insight must also be a breach of company law, as the legislation clearly states that the board is responsible for the financial statements.

And to add insult to injury the AGM's agenda included a proposal for some directors to be paid an additional amount, ostensibly for extra effort in managing the crisis, that is to clean up their mess. Public pressure forced the company to withdraw this strange remuneration proposal. Simply suggesting such a payment in the first place shows that the board members in question lack the required insight and intelligence to act at this level and to appreciate the depth of the crisis at hand.

South Africa's biggest corporate failure

Steinhoff grew out of South Africa to have a sizeable representation across sub-Saharan Africa, western Europe, Australasia and the US. At its peak it had amassed market valuation of about €20 billion with revenue of about €10 billion. About half of that market value was wiped out when the scandal of accounting irregularities surfaced in December last year and subsequently much more has been wiped out. This makes Steinhoff the biggest corporate failure in South Africa's history.

When the scandal broke, Jooste fell on his sword. And so did a couple of other board members. Jooste has taken some personal responsibility in a vague letter of apology to Steinhoff employees.

He's since gone to ground, even rejecting a call to appear before a parliamentary enquiry into the debacle in South Africa. The remaining members of the board have pleaded innocence.

But they should be held to account and not let off the hook.

Poor board behaviour

When the scandal came to light the board resolved to suspend the release of financial statements for the 12 months ended September 2017. The reasons given may have been reasonable. They included the fact that accounting firm PwC had been appointed to conduct a forensic investigation following allegations of accounting irregularities. And it was almost a certainty that previous financial results, from 2016 going back, were going to be restated.

And so the group announced that it could not release the 2017 financial statement in expected time. Regulation demands that financial statement of listed companies be released within three months of the financial year end.

The Steinhoff board recently announced scheduling of the next annual general meeting for shareholders on the 20th of April 2018. But there's no mention that financial statements will be tabled at the meeting. This must be read with section 30 of the South African Companies Act which stipulates that financial statements must be presented to the first shareholders meeting after the statements have been approved by the board.

This raises the question: Is there any sense in hosting an annual general meeting without financial statements for the shareholders to consider, despite legal stipulations for a meeting of shareholders to be called?

Insult to injury

Granted, the odd remuneration proposal has been withdrawn. But its still a worthwhile exercise to zoom in on it.

It was a proposal to extend to some members of the board a further once-off payment to cover additional work undertaken during the period since the accounting irregularities were identified in December 2017. The fact that anybody at Steinhoff considered this a sound proposal shows that the board and executive management of the company have lost touch with the reality of shareholder anger and of the duties of board members.

According to this proposal board member, Steve Booysen and Heather Sonn were to be paid an additional €200,000 and Johan van Zyl be paid an additional €100,000.

The notice stated that the unfolding scandal made it necessary for the board members in question to do extra work, thus deserving extra payment. This is ludicrous. These board members were in the first instance responsible for the crisis. It therefore boggles the mind that these directors had any expectation to be paid extra for dealing with the crisis that they are to be blamed for in the first instance.

At the same time Steinhoff announced that an Independent Committee comprising some of its board members, inter alia, ... focused on establishing a sound governance structure. This was a board function before the collapse, but was clearly seriously lacking before the crisis.

It's clear that these board members of Steinhoff live in a different reality where shame does not exist.

In my mind the election and remuneration of board members can be dealt with simply and elegantly: remaining board members who served during the period of value destruction should quietly "disappear". And they should also do the honourable thing and repay board fees that they clearly did not deserve, given that they didn't discharge their responsibilities.

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