One of the reasons I left full-time journalism was that I wanted to “do”, not just analyse or interpret. Building and running a business is hard! The experience I’ve garnered over the past three years – and the distance from the daily news cycle – has helped me consider things more deeply, add often-missing context more easily and, simply, analyse them better.
As a Steinhoff shareholder (probably just less than 10% of my portfolio, before the dramatic plunge yesterday), I’ve obviously been paying close attention to the “smoke” over the past few months. To date, the company, executives and chairman Christo Wiese have all publicly rubbished the allegations and investigation.
In time, we shall know the truth. But Markus Jooste’s resignation overnight on Tuesday/Wednesday turned smouldering embers into an inferno.
Two curious things in Jooste’s letter
There are two curious parts to Jooste’s very brief ‘goodbye’ letter to Steinhoff staff. What’s more, there is no real reason why he should’ve sent communication to staff… certainly without it being passed through a legal review and probably run by a crisis communications professional. Given the style in which the note is written, the language and its tone (I’ve interviewed Jooste a number of times previously), this was almost certainly not run through either of those processes (something which may yet come to haunt the company).
This was always going to leak, and quickly. But, in moments like these, emotions tend to trump logic and human beings tend to act in haste.
“I made some big mistakes and have now caused financial loss to many innocent people.”
Here, Jooste seems to confirm that there are many “mistakes”, and that they are significant (or, charitably, not insignificant).
“Please continue to live the Steinhoff dream and I must make it very clear none of Danie [van der Merwe – COO], Ben [la Grange – CFO], Stéhan [Grobler – executive Group Treasury and Financing] and Mariza [Nel] – Corporate Services, IT & HR] had anything to do with any of my mistakes.”
This is the stranger part of the note. Here, Jooste is attempting to draw the distinction between the “mistakes” he has (admittedly) made (including the very serious and very public issues around audited financials for 2017) and these four, named individuals whom he contends had nothing to do with said “mistakes”.
The problem is that, when it comes to “accounting irregularities” or “auditing issues” or “fraud” or even just “mistakes” and the inevitable forensic investigations and restatement of prior financials that follow, it is impossible for these in any organisation to have been entirely one person’s doing. Anyone who has sat on an exco or on a board knows this.
More to the point, Danie van der Merwe and Ben la Grange are COO and CFO, and executive directors of the company. Their duties (fiduciary and otherwise) and responsibility as directors cannot be magicked away in an email.
Finally, what of the 11 other group exco members not named? Why only these four? Very strange.
How does Christo Wiese’s executive role help?
The nameless, faceless Viceroy Research published a detailed 37-page report in which it constructs a case arguing that Steinhoff management “used off-balance sheet related-party entities to inflate earnings and obscure losses”. Central to this report – the contents of which remain untested and unproven at this stage – is the role of companies linked to nine “individuals of interest”, including Jooste and Christo Wiese. Wiese’s chairman role was made executive (interim) as of Tuesday. He is also Steinhoff’s largest shareholder (which poses all number of conflicts). Wiese’s continued involvement – especially in an executive leadership role – ought to surely be questioned?
His role will not be passive, or even focused on simply steadying the ship. While the investigations into “accounting irregularities” continue, the company makes the point that “Dr Wiese and the board will supplement the management team and will embark on a detailed review of all aspects of the Company’s business with a view to maximising shareholder value”.
(A side note on Viceroy: This “group of individuals that see the world differently” have published investigations into a number of companies on the exchanges including ASX, Nasdaq and TSX since December 2016. Most, however, have been published since May of this year and have been centred on Nasdaq-listed MiMedx. The Steinhoff report, while compelling reading, seems to have been rushed out given Wednesday’s news, with some placeholder footnotes and values/references missing. However, beyond the factual accuracy of the report, the motives of the authors should be questioned. Short-sellers made billions – probably tens of billions – on Wednesday.)
The thing about ‘accounting irregularities’
At its core, investing is about confidence. That means trust. Anyone could put any number on a piece of paper and argue that it is real. When it comes to transfer pricing, taxation, goodwill and valuing intangible assets, there is generally a grey area and often the “value” is open to interpretation. This is why auditors exist.
Right now, we don’t know what numbers are real. We don’t even know which are under scrutiny. In the past 24 hours, in between the understandable hysteria, I’ve seen a dozen different valuations of SNH based on a number of what-ifs. What we don’t have right now is much in the way of facts. Based on the amount of “told-you-sos” on Wednesday, however, many analysts and fund managers are, seemingly, all experts in hindsight.
Markets thrive on certainty. There hasn’t been much of that since those reports surfaced in the German press a few months ago. Given that this is likely to be a highly complex investigation, investors can’t expect much certainty for some time yet.
At “best”, audited numbers will be available relatively quickly, with “some” restatements.
At “worst”, the Viceroy report is only the start.
Either way, confidence and trust in Steinhoff International and its executive team is all but shot and it will take years to recover.
What must former Shoprite chief executive Whitey Basson think about all of this? We know – at least we think we do – that he was vehemently opposed to the whispered merger of Steinhoff and Shoprite. These things don’t happen in a vacuum. There must’ve been countless meetings, countless arguments and countless debates about everything. And then some.
- Hilton Tarrant works at immedia. He can still be contacted at firstname.lastname@example.org.
- He holds shares in Steinhoff International, first acquired in September 2010.