This article was first published in the latest issue of the Moneyweb Investor. Click here to read the magazine in full, at no cost to your pocket.
I found myself wondering last week whether the collapse of the Steinhoff share price and subsequent revelations of financial shenanigans was something we should accept as an inevitable consequence of the capitalist system.
I was sitting through the parliamentary hearings into the drama and listening to South Africa’s financial regulators from the JSE to National Treasury, the Sarb and the Financial Services Board talk about what they had done since December 6, when the company announced its results would not be signed off by Deloitte following which CEO Markus Jooste resigned.
The MPs that were gathered had no such concerns. They were determined that something should be done – regulations should be tightened or more regulations added. I don’t think that’s the solution – we have plenty of regulation and still a massive fraud appears to have been perpetrated.
This is a story about governance gone wrong. The solution lies in better governance, not more. Futuregrowth’s Andrew Canter talks about a ‘mosaic of governance’ where checks and balances are overlaid over one another in a way that creates a robust system. In this case, these were weak and the mosaic or web, failed. One cannot point a finger simply at the auditors, or the JSE, or the Financial Services Board, or even at equity analysts who punted Steinhoff and missed so-called ‘obvious’ warning signs.
This story began, as these things often do, at the top. Markus Jooste as it turns out was a bully and megalomaniac – classic Enron style. No one was going to stand in his way. He had a hand-picked board that did not challenge him.
Questions can be asked about the board. How was the board appointed? Why was Len Konar chairman of the audit committee for ten years? And what about the internal auditors – who did they report to? In the case of Eskom, it turns out internal audit reported to Anoj Singh. Talk about the chickens reporting to the fox. Internal audit needs to report to independent directors on the board at the very least.
And why, one wonders, did no-one else blow the whistle? The company’s financials were intentionally not understandable. If it was clear to some analysts that Steinhoff played fast and loose with accounting laws, people inside the company were probably aware of it too. All companies should have clear whistle blower policies with strong inbuilt protection mechanisms. Company law could be amended to address the independence of internal auditors or the safety of whistle blowers.
The US government has set up a bounty system – post-Maddoff – where whistle blowers are rewarded and protected. Perhaps the JSE or FSB could consider similar?
The equity analysts are not off the hook either. I have a problem with this concept of ‘alignment of interests’. The theory goes that if management is invested in the company and has skin in the game then they and their investors all have the same economic interest. It also means however, that investors become willing believers. So, if the CEO you are backing is the type of character who cheats on his wife and plays the ponies, you don’t question this further because rocking the boat is not in your interests.
The equity market works like this and unfortunately it can result in a herd mentality. This is where short sellers like Viceroy come in. Like them or not, shouting publicly about a company’s failings can be a healthy market mechanism. You can bet that analysts are going to be interrogating Capitec’s loan book much more closely come the next set of results.
Steinhoff is a failure of governance and we definitely must not accept this as an inevitable consequence of the capitalist system. There are things that can be done to guard against these failures. But it will require a collective effort with no finger pointing.