NASTASSIA ARENDSE: Over the last few years there have been very few stocks on the JSE that have divided opinion quite as much as Steinhoff. While there must always be buyers and sellers to make any market, attitudes towards the furniture retailer have been far more polarised than most. I spoke with Iraj Abedian, who is chairman and CEO of Pan-African Research about the role of directors and executive directors in a company’s board.
IRAJ ABEDIAN: The picture as it unfolds is that there has been serious governance failure as well as accounting-executive misreporting and/or misrepresentation. However, details are yet to be confirmed, and that I’m sure the Germans regulators will get to the bottom of it.
NASTASSIA ARENDSE: A lot of the asset managers talk about the rumours, that the murmurs were there with regard to Steinhoff’s numbers, with them talking about how complicated they were to read. And even some of the asset managers, the big ones – Coronation and Foord and Sanlam – all fell for what they though the situation was. What does it say on the topic of transparency when you should be picking up the warning signs of companies like this?
IRAJ ABEDIAN: I think there are two things. One is that the asset managers are now trying to justify their own mistakes. Clearly when you don’t understand a situation you don’t invest in it, and/or you don’t advise your clients to invest. So whatever the complexities and reporting and bamboozling that Steinhoff may or may not have done, the active asset managers have absolutely no excuse to say, well, we couldn’t understand it.
If you are not into understanding, then you are not in the right business, you shouldn’t invest in it. And if you have, now you have to pay back to your clients. The asset managers are so asymmetric – when things go well they beat their chests and they are the champions, and when things go pear-shaped they are now sort of looking for excuses to justify their mistakes. That is not acceptable. That’s part of the same thing, in fact. If asset managers deny, deny and excuse, excuse, so does Steinhoff and so does Markus Jooste. So I do not buy that argument at all. We pay these guys handsomely to execute technical judgement and for professional doubt and suspicion. And if they are not…they’ve got to catch up and pay back. Very simple.
NASTASSIA ARENDSE: When it comes to the role of auditors – I’m not an auditor so I’m not quite sure what their day-to-day running is – they approve the results before they even are published. Steinhoff’s first-half numbers were approved, they went out. I remember even talking to them about their numbers for their first half, and we were expecting the full-year numbers this week. What role do auditors then play in making sure that things make sense?
IRAJ ABEDIAN: The modern financial economy cannot operate without the thorough participation of the audit companies, external auditors. So, having said that, the fact is that the audit profession is also out of sync with the modern financial instruments. By that I mean they have templatised their profession, commoditised it because it’s got a high margin. They apply it equally to a simple business as well as to a complex business. That is just not on. The day that external auditors have customised scrutiny of the business that they are auditing has long gone. That’s why we see so many failures – right, left and centre. These audit companies need to go back to the drawing board.
The second issue about audit companies is that their own governance is not up to standard. They don’t have control mechanisms within their own firms. They have constituted themselves as partnerships and they use that to bypass good codes of corporate governance and that in turn cascades to a shabby job. Steinhoff is one. We’ve had so many other cases. KPMG has not become the laughing stock of the world because of their shabby work. So there is a problem with the audit profession as we speak.
NASTASSIA ARENDSE: What alarmed me when I saw this and was looking at what constitutes the Steinhoff board – there are six chartered accountants on that board. It baffles me that they would miss R100 billion. So either they were lied to about what exactly was going on there with the company, or we are not getting the full picture and the full story as to the role these board members played, especially knowing that when you look back at their history they’ve played roles in other corporate companies.
IRAJ ABEDIAN: Yes. Then to complicate it further, these experienced and distinguished chartered accountants sitting on the board didn’t give an [proper account of] to some of their major assets, for example PSG, which is one of the major operators. They seem to have either [been?] lied to – not just by their own executives, but also by the management and the boards of the major subsidiary assets – such as PSG.
So this complex Steinhoff debacle needs to be unpacked at three levels, at least. Did the executive, Markus Jooste and his team, lie to his board? If that is, yes, then the board has some excuse. But even then there have been over the past seven months independent reports about problems at Steinhoff. The board have fiduciary responsibility and legal responsibility to take some of these reports seriously and call the executives into account.
The third one is obviously, as I mentioned, the third level of investigation. That needs to be done on clarity. What needs to be put on the table is what happens to the major underlying assets? What happened to the relative assets with this debt that has landed the company here? Who has led whom and who signed off on the debt, because the executive cannot take so much debt that is way ahead of its underlying assets. So those are complexities that need clarification before we know who exactly did what. My suspicion, however, is that all of them are guilty.
NASTASSIA ARENDSE: Does this leave an option to lay criminal charges if there is serious wrongdoing here, because I assume as an executive or non-executive director you are appointed on a board to do work and not look pretty on websites. I know the German authorities are not going to waste time trying to throw Markus Jooste into jail. What do we do with the executive and the non-executive directors?
IRAJ ABEDIAN: Well, I think not only is there a case for criminal pursuit – but if they don’t do it, it’s criminal. So if FSB doesn’t launch at the same time and if the Institute of Directors don’t launch their parallel investigation into the suitability of these directors to be directors, based on what we know all of them should be disqualified to ever sit on any other board. In other words they should be declared delinquent directors. That’s on the directors’ side.
On the FSB side they should move fast and furiously to lay charges, as well as major shareholders such as the PIC, which acts on behalf of the pensioners, the workers and so on. So I think there are so many channels and such a no-brainer case for launching a criminal case against Jooste, against individual and collective board members of Steinhoff, as well as subsidiary companies.
NASTASSIA ARENDSE: Thanks to Iraj Abedian.