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Steinhoff: Is the entire board tainted?

They ought to have known.
Benguela Global Fund Managers says it finds it 'unbelievable' that the Steinhoff board and its chairman Christo Wiese did not know about Markus Jooste's 'mistakes'. Picture: Waldo Swiegers/Bloomberg

Steinhoff International’s share price closed on Friday almost 90% down from where it opened just a week earlier on December 1. It was quoted at R6 per share, which is an awfully long way from the R95 per share it traded at between April and June last year.

Investors are understandably asking a lot of questions about who is responsible for this massive value destruction. In a letter to staff written last week, former CEO Markus Jooste appeared to try to take individual responsibility for whatever had gone wrong at the company, but many shareholders and observers have been unwilling to accept this line of argument.

In a note to its clients on Thursday, Benguela Global Fund Managers made it clear that it does not believe Jooste could have acted in a vacuum.

“While Markus Jooste has resigned and made to look like the only person involved in the so called ‘mistakes’, we find it to be unbelievable that the board and particularly the chairman didn’t know a thing about them either,” Benguela noted. “Our position is that the whole board is tainted either for complicity or incompetence and should accordingly be forced to resign. We thus currently no longer view the stock as ‘investable’, even if the potential for upside could be significant, it is the potential downside to zero that is becoming more real.”

Business Unity South Africa (Busa) did not state things quite so bluntly in a press release it put out on Friday, but it also made it clear that the board as a whole cannot escape responsibility.

“The recent revelations of suspected accounting irregularities at Steinhoff International have once again demonstrated the urgent need for companies to embed ethical behaviour at all levels of businesses,” Busa noted.

“Shareholders and the individuals who serve in boards of directors need to bear the responsibility of ensuring that executives maintain the highest ethical standards and accountability,” Busa CEO Tanya Cohen added.

Fiduciary responsibilities

Parmi Natesan, senior governance specialist at the Institute of Directors Southern Africa, points out that, in law, all company directors have fiduciary responsibilities as individuals. These are that they must act in good faith towards the company by ensuring that they always act in the organisation’s best interests, and that they have a duty of care, skill and diligence.

“Those are the two main directors’ duties that we have in South Africa, but apart from directors’ duties in terms of the law, we also have King IV, which is the governance code for South Africa,” Natesan says. “And King IV is very clear that the board, as a collective, has a responsibility.”

She points out that the King IV codes puts the responsibility for ensuring compliance with laws and standards, such as accounting standards, squarely with the board.

“Whilst the board is not operationally involved, and wouldn’t see every contract that is signed and every accounting entry that is made, it’s still the board’s responsibility to ensure that they are correct,” Natesan argues. “They are there to ensure that these things are done properly.”

While there is still not enough information available about what occurred at Steinhoff to make an absolute judgment, Natesan believes that if there are material financial irregularities one has to question how the board audit committee could have allowed them to occur.

“The audit committee is supposed to be an independent body, elected by the shareholders, largely because we want the shareholders to have confidence in the financial reporting coming out of the organisation,” she says.

Checks and balances

Natesan adds that one of the corporate governance practices recommended in the King codes of conduct is combined assurance. This means that boards must establish the integrity of the information they receive by having it scrutinised at a number of levels.

“If the CEO did something wrong, the question is how was he allowed to do something wrong,” she says. “If there were material financial irregularities, how did nobody pick them up in the whole cycle between the CFO, the board, the audit committee, the internal auditors and external auditors? It’s just general best practice. The reason that you have these checks and balances is to be able to pick these things up.”

Ensuring that this combined assurance framework is in place and is effective is, collectively, the board’s responsibility.

“The question we always ask is not whether they knew what was going on, but whether they ought to have known,” says Natesan. “Because they have that fiduciary responsibility, should they not have been looking into these things and asking these questions to have uncovered this? I can’t imagine a material financial irregularity that the CFO, or the chair of the audit committee couldn’t have known about, or at least shouldn’t have known about.”

Moneyweb requested a response from Steinhoff’s board to Benguela’s assertion that the entire board and the chairman are tainted, but the company declined to comment.

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COMMENTS   28

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Very sensible article, Patrick.
Now the reporting is evolving, the right stones are being turned over and the fat spiders will start to scatter.

Excellent article. The board should resign! Van zyl, Lategan and Booysens were clearly to incompetent to read the board papers and see the risks

Prima facie a good case to declare them delinquent under section 162 of teh Companies Act-gross negligence.

Resign? The Board should be fired.

It is interesting that while Deloitte South Africs were lead auditors the accounts were merrily signed off and only now that Deloitte Germany have taken over the fraud has been “discovered.” There is a lot of rot here.

Patrick – good article – asking the right questions.

Even if Jooste operated in a ‘vacuum’ as is postulated (I doubt as Wiese kept his people on a tight leash), then the board are tainted because they allowed him to operate as such, over a long period of time and without questioning him and reporting to the statutory auditor.

becoming a non-exec director in UK fin serv co, I had to spend many hours of questioning and scrutiny by two of their officials – they posed many questions as to “what would you do if…..”

No, the board members are mostly CA’s and ought to have known and therefor should be liable.

I trust a ‘class action’ is boing prepared to take on board and auditors and lets not forget the ‘advisors – who are also professional people (Attorneys and accountants) who earned big fees from shareholders who – as far as I am concerned, are deemed to have knowledge and if not were negligent.

Hey if it bleeds it leads. All well to slam them with king code, but once you put all the responsibilities these people have to take it becomes unmanageable to perform everything. Just look at the world competitive survey at how much regulation there is in SA in relation to other countries.

Just to be clear I’m not justifying anything. I’m merely approaching the situation from another angle.

And yes still a good article. 🙂

Agreed. Excellent article. Question: How could it be possible that C.A.’s employed by the larger investment advisory firms, could not detect that something was amiss ?

Or do they not bother ?

Is not only possible but highly probable to a racing cert that CAs would miss it.

CAs appoint other CAs, they trust other CAs – blindly- and the so-called qualification has ben in decline for nearly 20 years. A CUFU timebomb.
It simply had to happen. Seems most have forgotten Leisurenet that had as I recall 5 of 6 directors as CAs.

A major problem is that CAS are dominant in numbers to the exclusion of other qualifications. SAICA forever boasts and adverises this. In SA we blather on and on about socialist constructs such as race and gender diversity (both illogical and highly damaging to business) but do not have diversity in finance qualifications.

Go figure.

Too true. Along with the general public, even CA’s believe the marketing tripe of SAICA. Business leaders my foot. You let one in onto the board, they hold open the back door to let the others in. They seem to feel safe only with each other.

I disagree with one thing “so-called qualification””; it is one, but hardly professional any longer. The biggest problem is the preponderance of accountants on our boards in SA – as SAICA rightly claims -far more than anywhere else. At least in UK, where there’s a far lower percentage of accountants on the boards than here, those accountants mostly seem to have a proper education before CA, ACCA, CIMA.

I cannot agree more. I see this as an overconfidence in their own qualifications and in themselves. “We have many CAs here. One of us CAs must surely pick up any anomalies.” So they all assume someone else will, none of them does, because none can be bothered to make the effort. Case of having too many overqualified in the same field.

I would say “YES”. But not only them, but including them fund managers. I wonder what these fund managers check when they are analysing the balance sheets and financial statemenets for these corporates. When they do the ratios, aren’t these issues picked up? Being a pedestraian investor i purchased some unit trusts “equities” with one financial house, and have held these for 6 six years now. and through the 6 year term i have been paying them management fees. Now when i checked my balance, it had dropped severely in the past week. Went to check the the shares that make up the fund, and walla, there was Steinhoff seating in the basket. Now i’m really pissed with the fund managers. Did they not see this disaster looming in the horizon? What sort of analysis do they perform on these companies or they juss go by intuition?.

Fund Managers and the Fees they charge are a particular gripe of mine as well. An interesting exercise to see would be an analysis of how much value for money these managers render in exchange for their fees. Using a passive index fund as a comparative, who gains more? The fund managers with their fees or fund investors with the “improved performance”. We know that many funds are not even able to out-perform the passive funds. That would be a good indicator for which fund mangers to follow. Sadly Fund Fact Sheets are very shy with such information. The information fact sheets give is generally complicated, inconsistent, often meaningless and minimal which generally makes comparisons difficult for the layman.

Gives a whole new meaning to active and passive fund managers, seems the active managers are all showing their slips

Careful all yee Passive advocates … Steinhoff was a BIG chunk of many of the Index tracker funds – so included simply because it was there. Many active managers did NOT hold Steinhoff – while those who did mainly held less than what the “index” required.

Why rock the boat when huge board fees are are to be collected . Konar , for example, sits on multiple boards just for a wink and nod .

The six CA’s has been my main concern – they should have picked up that the Liabilities were understated, as at least R 100 billion worth of loans wasn’t revealed/picked up etc.

Which begs the question : Due to fact that they all failed their fiduciary duties – should they not all be declared ” Delinquent Directors”?

Which makes me think about all the CA’s:

”He writes like a Pakistani who has learned English when he was 12 years old in order to become a chartered accountant”

John Osborne (1929-1994)

CA’s.. a made up profession that forces people to pay them millions for their opinion , which is tainted by audit fee values.

everyone has a price, CA’s are just a bit more expensive than the rest

There will probably be some kind of disclaimer on the audit opinion which will exonerate the audit firm.

all of the directors new about this, it has probably been discussed off the record at every board meeting. Would be interesting to read the audit management report for notes on the debt of the balance sheet and also the responses from Mr Jooste and his gang

*knew*

I agree; these so-called “CA’s” did their profession – not the the oldest but with the oldest in reputation these days – a massive disservice. I am a little cynical and it would be interesting to know what these CA’s did with their shares etc since 2015. I have a nasty feeling quite a lot of money may have been squirreled away in dark holes by people near the top of Steinhoff.

CA’s are not as invincible as they would have you believe. Quite frankly CA behaviour in SA of late has been appalling: KMPG and Steinhoff are a appalling examples.

Sadly a corporate arrogance has developed in the private sector alongside dishonestly and ineptitude on the state side.

When your professional body constantly tells you, and the public, just how brilliant you are for becoming a member, its difficult to argue with (and easy to accept) “facts” like that!

At one stage it looked like the accounting profession would not fall into disrepute. Well along with all state intuitions and services the accounting profession has also fallen.

I also find it rather interesting that there is such an obvious Stellenbosch thread here. Who would have thought…?

Hi Patrick
I read somewhere that Mr Wiese took a ‘collar option’to protect his steinhoff share value awhile back.
Could you establish if this is indeed true,and my apologies if I have the terminology incorrect.
If it is true ,is it not mandatory for a transaction such as this ,by any director ,to be reported on the company sens
Thanks for your reporting.

All the above comments acknowledged.

The thing about boards of directors of mammoth companies, irrespective of the qualifications, experience or previous success of such individuals, are that over time most of them become lazy fat cats, complacent, ignorant, know-all egoistics, untouchable, high flyer free-riders, abusive delegaters and eventually deaf and blind to the obvious and to their fiduciary duty and responsibilities.

It’s unfortunately a natural human flaw of mankind. That’s why directors should be rotated every three to five years to ensure fresh and vivid minds attend to the utmost responsibility of the larger listed companies.

What is needed in a director, is very specific personality traits such as being a good listener, being irritatingly inquisitive, of righteousness, unwavering ethics, high moral standards, honesty to the point of being detrimental to their personal financial welfare, straight forward shooters, with a very awake and quick brain and a strong self believe and strong enough personality to stand up against the CEO, CFO, Chairperson or even the whole board of directors when so required. That more than anything else will ensure better oversight and compliance.

The outdated and failed belief that any one with a certain qualification or from a certain occupational background are the super-bred for directorship has failed miserably.

Ask yourselves how that experienced board could validate the purchase of Mattress Firm US which seems to have been tainted with fraud in their real estate business. Anyone you talk to with knowledge could not justify the size and amount of stores, but yet, Steinhoff with all its experience did not seem to pick up on this

Agreed – good article
But before we all shoot the messenger – we do not know what Fraud occurred and when – from what I can see – it was the old executives – Mr Smidt et al and Marcus that did the round tripping – Also the thing about Fraud if that is what has happened – is that nobody knows until it is discovered – teh whole idea of Fraud is to ensure the Board and Executives don’t know about it. Time will tell

End of comments.

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