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Steinhoff remuneration sure to raise the ire of shareholders

CEO receives a cool R62.2m for the year, in cash.
Having ended up as CEO by default, Louis Du Preez is probably being paid as a financial engineering expert. Image: Dwayne Senior, Bloomberg

In what could be interpreted as an indication of the extreme precariousness of Steinhoff’s existence, the retail group’s remuneration committee defines ‘long term’ as just one year.

It is because of this unique perception of ‘longevity’ that CEO Louis du Preez’s annual bonus and one third of his long-term incentive are paid out in the same year. And are paid out entirely in cash.

In 2020 Du Preez’s accrued annual bonus and a portion of the long-term incentive, awarded at the beginning of that financial year, amounted to €1.5 million. It accounted for 44% of his total remuneration package of €3.4 million (R62.2 million).

That’s an increase of 26% on his 2019 package of €2.74 million (R49.4 million).

These figures are not going to go down well with long-suffering shareholders who, the remuneration committee notes, were concerned about the “size of the compensation packages in relation to the decreasing size and scope of the company”.

That concern was part of the reason the advisory vote on the remuneration policy was not passed at last year’s annual general meeting.

Shareholders were also concerned about the “lack of an equity-based compensation component with a sufficient long-term character, and the limited level of share ownership among executives”. It wasn’t just a matter of no long-term-based equity compensation, it was no equity compensation at all for the top executives. Shareholders might be inclined to assume that Steinhoff’s remuneration committee doesn’t believe the group has a future, even a 12-month-long future.

Shareholder concerns ‘considered’

According to the recently released annual report, the remuneration committee considered shareholders’ concerns, then went ahead anyway and did what it had planned to do.

Which is to pay the key executives huge packages of cash with not one share-based award in sight.

To be fair to Steinhoff’s remuneration committee, it is faced with a unique set of circumstances.

Du Preez, a long-term legal advisor to the company, ended up in the CEO position by default and is trying to rescue the company rather than run it. So he is probably being paid as a financial engineering expert rather than a business manager.

Read: Steinhoff promotes commercial director to CEO, shares leap (Nov 2018)

This may be why the remuneration committee also chose to ignore shareholders’ concerns about Steinhoff’s remuneration packages being comprised entirely of cash – no share-based awards have been given.

This makes sense as Du Preez is likely to jump ship as soon as the rescue process is completed. His interest in how well Steinhoff’s operations are doing is likely to be restricted to its immediate impact on the rescue process. Solid performances from the operations make that process so much easier.

Conflict avoidance

In addition, given the current very low share price, any share-based awards granted at this stage would have to be substantial in number. If post-rescue Steinhoff proves to be profitable, generating huge returns on any shares awarded to Du Preez, the remuneration committee would be open to all sorts of charges of conflict of interest. They’re almost faced with a lose-lose situation.

Arguably Du Preez’s remuneration should be seen as part of the advisor costs.

These, shareholders will be pleased to know, were reduced significantly during 2020. In its message to shareholders, the management board, led by Du Preez and CFO Theo de Klerk, said every effort was, and is, being made to limit the costs relating to the various restructuring and legal processes. In 2020 the bill came in at €58 million – which, while still significant, was substantially lower than the €158 million notched up in 2019.

“If the litigation settlement proposal is successfully implemented during 2021, we expect the total costs to be further reduced after the 2021 financial year,” said the management board.

Settlement proposal

While much of the narrative of the 2020 annual report appears to assume that the proposed settlement is on track, recent developments suggest that things remain precarious.

Read:

Hamilton, which is managing a class action on behalf of over 25% of Steinhoff’s shareholders, said in late February it would challenge the proposal on the grounds that ordinary shareholders are set to receive a substantially lower payout rate than shareholders who had a contractual relationship with Steinhoff, such as entities related to Christo Wiese and GT Ferreira.

This challenge, which has the potential to tip Steinhoff into liquidation, could at the very least delay plans to complete Step 2 of the group’s 3-Step “future pathway”.

Step 1, the creditors’ arrangement, was completed in the final months of financial 2019, and enabled the implementation of the group’s debt restructuring plan.

Step 2, the litigation settlement proposals, attempts to find a solution to the widespread litigation the group is facing.

It will lead on to Step 3, which is a restructuring of the group “with a view to reduce the debt and financing costs”.

Du Preez and De Klerk believe the best way to protect value for stakeholders is by addressing Step 3.

“This will be our clear focus in the period ahead. The ongoing asset realisations and restructures are already in support of this Step 3.”

Pace of progress

The supervisory board may also have been a little too optimistic about the pace of progress on the “future pathway”.

In its message to shareholders it said it was encouraged by the progress made with implementation of the Litigation Settlement Proposal – “and by the potential thereafter to focus on the final phase of our three-step key management focus”.

Meanwhile management has to continue dealing with the “legacy accounting issues” uncovered in the aftermath of the December 2017 events.

The good news is that although the audit report is still qualified, the supervisory board notes that there has been a reduction in the uncertainties created by this accounting legacy.

Steinhoff share price

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Even during its glory days, Steinhoff never really understood the importance of having the optimal capital structure. Their fateful assumption; ‘increasing debt will somehow not have any bearing on the risk perception of investors.’ That is the very source of their perpetual agony.

An organisation’s capital structure runs parallel to its liabilities. You cannot as a firm accrue tens and tens of billions of rands in debt and fail to reciprocate what is due to the lender. They knew how to allocate capital very well but used a fatally skewed structure in raising it and most importantly, TO ACCOUNT FOR IT!

Creditors take precedence over employees when you are in debt and distressed…especially when you defrauded them(creditors and equity holders).

Louis has Oom Christo to thank for this appointment – whether by accident or design – so, why is anyone still surprised by the preferential action Wiese is getting?
I wonder if they have considered the “undue preference” rule which, I believe still applies in SA Law for insolvent companies.
Also, trading whilst insolvent is also an offence – or used to be when I was involved in SA COrp law.

And he deserves every cent. They’re so close to getting this ship turned around. No one would want that job.

They always needed a lawyer for this phase. Louis will step down and they’ll get an actual retail guru as soon as settlements are reached.

I’m still in the red on this stock, but makes me happy that job losses likely won’t be realized.

Can we please let markus and ALL others rot in jail.

Lol anyone that’s worked an honest say in their lives or started their own company knows this amount of money is never justified, it literally cant be. It’s this same stupid “boomer” thinking that got us in the mess in the first place.

Rather pay your general employees more not only will it stimulate the economy but it’s the morally right thing to do. If not for good then do it for greed

Anyones that started their own company or has worked a day in their lives would never type such nonsense

There is no other way to describe this as the nest of the thugs that dont care about the shareholders. Same and similar to the ANC regime. You can replace any position with another within the network and the arrogant entitlement just continue. All the nice words used in the King report is shown by these individuals as being worth nothing as is the case of the shareholders they dont care what they do wih the value. All should be at Nkandla with Zuma. There they all will feel at home, baking in the sun whilst thinking how they disregard shareholders, taxpayers and all citizens of South Africa

CEO’s are feeding at the trough, just like African politicians.

Hard to understand how a company that has cost investors so much money can consider paying so much

No different to any of the looters in the ANC. The corporate bandits just attended a finishing school…and they are a little bit more “posh”

Half-way through reading this article, I was struck by how hard-hitting, blunt, yet even-handed and incisive the commentary was.

There are very few financial journalists with this rare ability to distill complicated subject-matter into simple, easy-to-understand articles like this (AND the balls to tell it like it really is!).

So I briefly wondered who this was…

Could it be …?

And, yes, it was…

Well Done, Ann!

So, if I read between the lines, Du Preez is actually trying to pull a business rescue. From my experience that action is rarely, if ever, business, or rescue. This debacle is starting to resemble a rotting carcass, surrounded by laughing hyenas and squawking vultures, tearing away at what is left, leaving bare bones to bleach in the sun. I do hope I am wrong, for there are still people believing in the Steinhoff promise, but the signs aren’t good when the hyenas and vultures turned up.

Very well written Ann. I still find it strange that Steinhoff refers to its accounting woes as being part of an accounting legacy. Wasn’t it just plain old run-of-the-mill accounting fraud?

Glad I am not a shareholder.

Totally inappropriate for a share that dropped from R60 to R1 a few years ago.

R234 900 per working day (365/12/22) – 10 hour day = R23, 490 per hour. R391 per minute. That is an ethical and moral disgrace for this mess. Considering he was previously a legal adviser to Steinhoff, he would have been privy to much of the “financial engineering” of the great genius Jooste. This stinks to high heaven!

So slipping away for a bodger and a good BDay read costs the company R2000!!

“Accounting legacy” a euphemism that trumps all euphemisms. Hahahaha!! LMAO

End of comments.

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