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A Steinhoff lesson: Don’t neglect board diversity

The best individuals don’t necessarily make the best board.
Companies and shareholders need to be more critical about whether they are truly getting independent input from their independent directors. Picture: Shutterstock

Since Markus Jooste resigned as CEO of Steinhoff due to concerns over financial irregularities, a number of questions have been asked about the role of the company’s board. Where were they in all of this? Shouldn’t they have known if something was materially wrong with the financials?

In these discussions, one point that has been made repeatedly is that the calibre of the people on the Steinhoff board is exceptional. They include the former CEOs of Absa, Sanlam and FNB’s corporate division, a member of the King Committee on Corporate Governance, and six CAs.

Individual for individual, it is arguably one of the strongest boards of any JSE-listed company. Yet something appears to have gone horribly wrong that the board didn’t pick up.

This is just very hard for investors to understand. The board of directors, essentially, is there to protect the rights and interests of all shareholders, and it would have been perfectly reasonable for anybody to put their faith in people of this standing. And yet, whichever way you put it, they have been let down.

That this could have happened should lead to some broader introspection in South Africa’s corporate sector about how company directors are selected, and how boards are put together.

It’s not about being politically correct

In a recent radio interview, Professor Nicola Klein from the Gordon Institute for Business Science pointed out that despite the “fine minds” to be found among Steinhoff’s directors, it was not a diverse board. For an international company in particular, it was very noticeable that the majority of Steinhoff’s directors are white, male, Afrikaans-speaking South Africans.

One might ask, “so what?” If they were the best people for the job, then what does it matter?

The point, however, is that diversity on a board is important not for the sake of political correctness. A company needs directors with different points of view, varying expertise, and competing opinions. Vitally, it needs people who are both prepared and able to be critical of company management.

A senior South African businessman suggested to me this week that it is quite possible for a board to miss something. Directors are given board packs that are compiled by the management team, and so they only ever see what management wants them to see. A management team wanting to hide something from the board could, therefore, theoretically do so.

This argument is however only valid up to a point. Even if a board is only receiving certain information, its members still need to be asking the right questions to determine that it is both accurate and complete. Those are hard questions to ask, and even harder when your relationship with the management team is comfortable.

Directors who have been in their seats for many years, and have long-standing friendships with their fellow board members and the management team are simply less likely to challenge what is presented to them. They will be more ready to allow the management team to get away with saying ‘you can trust us’, when they should be asking for full disclosure and full accountability.

It’s notable that at Steinhoff’s most recent AGM the three directors who were up for re-election to the board all attracted some opposition. These were chairman Christo Wiese, Steinhoff’s founder Bruno Steinhoff, and Claas Daun.

Shareholders who opposed their re-election had two main concerns. The first was the length of tenure, given that Steinhoff and Daun have both been members of the board since 1998.

The second issue was their independence. As shareholders in the company – and in Wiese’s case the biggest shareholder – could they be truly independent?

It’s who you know

The broader concern this raises is how people get onto company boards in the first place. Parmi Natesan, of the Institute of Directors for Southern Africa, says that this is a problem that they frequently come across.

“The process of appointing directors is something we pick up on in board evaluations we do in both the public and private sectors,” she says. “You don’t really see a transparent process of opening up a vacancy. It’s rather about who knows someone around the table, and that’s why you get similar people sitting on most boards.”

Of course directors will be more comfortable with appointing someone they know and whose expertise they trust, but that’s unlikely to do much for diversifying opinions and raising the level of independent scrutiny placed on the management team.

A board might be stacked with outstanding individuals, but it can still be a weak board if the dynamics between them are not right, if they are too familiar with each other, and too similar in their views.

That is why companies and shareholders need to be more critical about whether they are truly getting independent input from their independent directors. They should ask more questions about how names are put forward for board seats and what process has been followed in identifying them.

It may be impossible to prevent what has happened at Steinhoff from ever happening anywhere else ever again, but the risk can certainly be mitigated. And thinking more critically about board appointments is a good place to start.

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COMMENTS   7

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Good article. But I think that you are being way to generous about the ability of the board. Konar, van zyl, lategan and booysen have at best made fools of themselves and shattered their reputations. This was a club having a complacent and inept time playing director of a global company. They were unable to reconcile cash generated to accounting profit. They also did not have adequate checks and systems in place to prevent accounting fraud. Worst the german tax investigation was not managed seriously nor was the transfer of sa income on the star loan by way of interest. Prima face case to declare the entire gang delinquent on the basis of gross negligence in terms of section 162 of the company act. Worst though is van zyl chairing an investigation. ..of himself? The judgement of the man!

Good stuff Patrick. I trust business schools are following this saga closely for the wealth of material it presents for serious study. I’m speechless at van Zyl chairing an investigation!! This must surely be fake news!

LOL – need diversity – there are female and darker skinned people on the board!!!

Remember this is an international company – address in Amsterdam and listings on many stock exchanges.

Look at the typical american company boards – they are also “white and male” !!!!!!! Are facebook, apple etc also lacking black disabled females?????

Definitely spot on…you get appointed by who you know…which school you hail from etc. Potch…Stellenbosch…very short list. Not limited to Stenhoff and other corporates unfortunately…Banks included.

Needs diversity: Liberal journalists have weaponized the diversity card against white Afrikaner males. Pitty you lot are too much of a bunch of cowards to call the diversity card when Parliament is in session or is the mismanagement there due to some other factors?

The sensor board at moneyweb comments section also needs diversification

Really? A “diverse” board would have seen through everything.. of course.. just like out SOE boards. Seems a bit spurious. No. It is a combination of experience, honesty and professionalism. Since the experience seems to be extensive, it makes me question the two remaining factors; honesty and professionalism. Either it was hidden very well from them, in which case the honesty of management and some of the directors is in question. Or, after their illustrious careers, they have become lax and comfortable in their positions and are not doing their jobs in a professional manner.

End of comments.

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