In what is referred to as SA’s biggest corporate scandal, the reasons for Steinhoff’s and former CEO Markus Jooste’s fall from grace need to be analysed in the context of the Steinhoff International Holdings 2016 annual report.
It raises issues of concern about governance across multiple jurisdictions and indicates that dual-listed South African companies should be required to more formally abide by the principles of the King Code of Corporate Governance.
The King IV code became operational in November 2016 and some of the principles and practices would not have been applicable but they are illuminating in raising several red flags, which might result in better governance outcomes in the future should they be applied.
Since December 2015, Steinhoff’s primary listing has been Frankfurt, with the secondary listing in Johannesburg, which it retained since first listing in 1998. Its registered office is in Amsterdam and its business office in Stellenbosch. The company abides by the Dutch Corporate Governance Code.
During 2016, Steinhoff changed its financial year-end to September 30 and had a 15-month financial year. Nowhere in the annual report is any reference made to the King III code, which prevailed at the time, raising questions about the status of the code for dual-listed companies, especially ones that consider their business office to be in SA.
Consistent with the practice in Germany and the Netherlands, Steinhoff has a two-tier board structure with a management board (comprising the executives) and the supervisory board (comprising the nonexecutive directors).
This is not the practice in the US, UK or SA, where there is a one-tier, or unitary, board. Although the management board is subject to the supervision of the supervisory board in the two-tier structure, it is often criticised because of issues of accountability by executives, information asymmetry and operational challenges. The King committee is not in favour of two-tier boards.
The annual report further notes that the two boards are accountable to shareholders, something that is contrary to South African common law, the Companies Act and the King code, where the board is accountable to the company. This raises the question as to how Steinhoff’s boards measured their accountability.
In 2016, the management board comprised three members — Jooste (CEO), Ben la Grange (chief financial officer) and Danie van der Merwe (chief operating officer and now recently appointed acting CEO) — with none of them sitting on the supervisory board.
An executive committee, comprising 14 members including the three management board members, assists the management board. Seven members of the supervisory board including the chairman and deputy chairman, regularly attend executive committee meetings as invitees.
This raises many questions about the effectiveness of this arrangement. For instance, what authority do the chairman and deputy chairman have as invitees? When management issues are discussed, does this not create potential conflicts of interest as a nonexecutive director when decisions made by the executive committee are discussed at supervisory board level?
The supervisory board comprises nonexecutive directors. At the end of the financial year to September 2016, there were 11 members of the supervisory board, of whom six were designated independent. The chairman, Christo Wiese, is not independent and the deputy chairman, Deenadayalen Konar, is designated lead independent nonexecutive director.
There are three standing committees of the supervisory board: audit and risk: human resources and remuneration; and nominations.
David Brink retired from the supervisory board, so only five of the 11 supervisory board members sat on these committees — Konar (all three committees), Marthinus Lategan (audit and risk and chairman of human resources), Steve Booysen (chairman of audit and risk and human resources), Wiese (chairman of nominations committee) and Claas Daun (nominations committee).
Wiese and Daun serve only on one committee, raising the question of how it is expected that only three members of the supervisory board can carry the real responsibility of the standing committees. King IV states that the company should combine only the audit and risk committee if it is able to devote enough time to dealing with risk-related issues. For a group of Steinhoff’s complexity, it seems inconceivable that the committee could have devoted the necessary time to this.
While Wiese was not a member of the audit and risk committee, consistent with recommended practice insofar as the audit committee is concerned, the fact that the lead independent nonexecutive director, Konar, was a member should raise some questions.
While King is silent on this, it seems appropriate that in the light of the fact that Wiese was not deemed to be independent, the fact that the lead independent (and deputy chairman) is a member of the audit committee goes against the spirit of why the board chairman should not be a member of the committee.
King IV is of the view that a risk governance committee should be a mix of nonexecutives (the majority) and executives to ensure risk governance is properly interrogated.
Steinhoff was also short of one committee: a social and ethics committee, which is a legal requirement. The real fallout from Steinhoff is still to come. Parliament is seeking answers, as are the Financial Services Board and the JSE. Once again, the role of the audit profession is under fire.
The fact that the supervisory board, management board and executive committee were stacked with South Africans is a concern. Can it be said that the board members fully understand the dynamics of a two-tier board? Quite simply, no.
Steinhoff grew too quickly. The danger of this was highlighted decades ago by John Argenti in his A-score model, which considered factors leading to corporate failure, including expanding too fast and high levels of loan borrowing.
Steinhoff’s two-tier board structure gave Jooste too much leeway to pursue this growth. The supervisory board did not fulfil its oversight role and the functioning of the audit and risk committee must be questioned.
How is the King Code of Corporate Governance applied to dual-listed entities? Insufficient attention is paid to this and the regulators should take urgent steps to consider the risks.
First published in Business Day on Monday, 15 January 2018.