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THE STEINHOFF SAGA: Part four - Five lessons we can't afford to ignore

Jul 05 2018 07:15
Stellenbosch University Business School

It's too early to say how the fall of Steinhoff will eventually play out. Nonetheless, it's possible to distil some key learning points from the Steinhoff case. In a series of in-depth features, the University of Stellenbosch Business School sheds light on Steinhoff's remarkable growth – and spectacular collapse. This is the fourth and final chapter.

The various topics covered in the case study – Steinhoff’s business vision and fast-expanding operation over the years, and the company’s approach to governance and leadership – provide some important business lessons for small entrepreneurial concerns and large corporates alike.

Lesson #1: Be true to your strategic vision and ‘stick to the knitting’

Strategy theory suggests (ref: 1) that strategy development over time is more about making wise choices initially and deepening one’s competitive position than going too broad and trying to be all things to everyone.

Although the diversity of the Steinhoff businesses might give some people the impression that the company lacks a core identity and has chased acquisitions in a somewhat random fashion, the company’s long-term vision has always been to control its various value chains, thereby moderating costs, keeping competitors at bay and striving for ever-higher levels of efficiency and market share.

This is an important element in its fundamental strategy of sourcing and manufacturing goods in low-cost countries and selling them to value-conscious buyers in more lucrative markets.

Former Steinhoff chairman Christo Wiese and the company’s executives appear at a parliamentary hearing into the Steinhoff scandal on January 31, 2018 in Cape Town, South Africa. Replying to questions, Wiese said, detecting fraud within a company was hugely difficult for board members‚ especially if the CEO was allegedly involved. (Netwerk24 / Adrian de Kock)

Although Steinhoff’s operation is today very geographically dispersed and it has progressed from being primarily a furniture supplier to a more holistic supplier of ‘lifestyle’ products, the company has not deviated too far from its fundamental business strategy and target market. In making the strategic choice to expand its product and service offerings but operate as a vertically integrated business, Steinhoff acknowledges that benefits can be derived from moving almost seamlessly into ‘adjacent market space’ using its pre-eminent position in related value chains.

Whereas a horizontal integration approach would require a business to operate alongside myriad other businesses in a ‘value chain neighbourhood’, with a vertical integration approach Steinhoff effectively ‘owns the neighbourhood’.

Lesson #2: Growth does not equate to profit or success

Organisations that deliver consistently strong performance over extended periods of time invariably practise a controlled growth strategy in which future expansion and investments are carefully planned and executed. (ref: 2) The hallmark of truly great companies is that they have the discipline to hold back and moderate their growth plans so as not to experience resource constraints and fatigue, or end up in financial difficulties during lean times when the cash they accumulated during bumper years is all but exhausted.

Steinhoff’s extremely rapid acquisition drive, particularly in more recent years, was clearly unsustainable. The nature of its investments (large, new regions and new product lines) signalled a high-risk approach which should have raised more questions from shareholders and the board about the company’s ability to sustain all the new acquisitions and ensure their profitability.

Although strong growth always seems impressive, it does not equal cash flow or profits. Such was the case with Steinhoff whose frenetic investment activity concealed highly complex business structures, high levels of debt and less-than-stellar performance within the Steinhoff group. The management team, and Markus Jooste in particular, painted a picture of a fast-growing and practically invincible corporate giant which was too good to be true, and this should have set off alarm bells among different stakeholder groups.

Lesson #3: Strong governance is not just about financial and regulatory compliance; it is a mindset

Most organisations extol the virtues of strong governance, as evidenced in prudent financial management, transparent reporting, and an engaged and accountable executive team and board. However, all too often compliance ends up being a box-ticking exercise, with the goal being to meet minimum standards only ? i.e. simply to satisfy the relevant authorities.

Basic compliance may satisfy shareholders on a superficial level but it can lead to operational mediocrity if it is not backed up by enthusiastic and committed management, which is key to sustainable profits and a satisfactory return on investment.

An important dimension of sound management is a commitment to ethical business practices which are based on values, not just rules. Values are deeply entrenched and highly personal belief systems which help people to distinguish between right and wrong and which therefore regulate their behaviour. Rules provide behavioural guidelines but are susceptible to being challenged, manipulated or ignored.

Steinhoff CEO Markus Jooste during the company’s results presentation on September 09, 2014 in Johannesburg. (Gallo Images)

At Steinhoff, weak accountability and a culture of highly creative accounting meant that many dubious investment deals, excessive debt levels and the poor financial performance of several of the businesses went undetected for a long time. Either the truth was hidden, or responsible parties (including the board) were not paying enough attention, or both. Strong governance in an organisation is heavily dependent on an accountable and capable board to exercise rigorous oversight while also motivating the executive team to follow their vision.

It is a sad indictment of the corporate sector in South Africa that a company like Steinhoff was able to perpetuate the myth of unprecedented financial success for so long. It is difficult to see how the company, given the magnitude of its financial problems and the scale of the deception, will survive in its current form. When stakeholders, and especially investors, are betrayed, trust is rarely recovered.

Lesson #4: A charismatic leader can either be very good or very bad for a company

Many people believe that if an organisation is fortunate enough to have a charismatic leader, its chances of success improve dramatically. Charismatic leaders have the ability to engage people at all levels, speak their language, keep their attention and earn their respect, which is no mean feat in an age when authority is regularly questioned.

Yet charismatic leaders are not always brimming with charm and goodwill. They can also be mesmerising in a frightening sort of way, extorting cooperation and loyalty through fear. The world has seen many brutal dictators keep their populations under control by projecting a charisma that is heavily laced with menace. Charismatic leadership is often viewed as ambiguous because the extraordinary power and influence that go with it can be used in either a positive or a destructive way.

While in one sense Jooste was the architect of Steinhoff’s runaway success in recent decades, from which scores of people benefitted in many different countries, he was also the main figure in the company’s recent fall from grace. Driven by his own self-confidence, entrepreneurial talents and adulation from people around him, Jooste became a larger-than-life CEO who took great liberties with Steinhoff’s money and seemingly crossed all sorts of ethical boundaries. Ultimately, this proved to be unsustainable.

Interestingly, many of his colleagues at Steinhoff – perhaps mesmerised by his superstar status – appeared to turn a blind eye to or were complicit in the large-scale "accounting irregularities" that were exposed in 2017, the news of which sent the Steinhoff share price into a tailspin. This is an indication of how easily many people got caught up, knowingly or unknowingly, in Jooste’s seemingly unethical business dealings and ongoing deception about the health of the company. Even when Jooste resigned as CEO, his strangely chirpy email to the staff seemed to suggest that he deserved a slap on the wrist for leading people astray, which was a weak response in the face of such a grave turn of events.

Lesson #5: Even ethical business people are corruptible

Human morality is fragile, notwithstanding most people’s good intentions. Deep-seated stirrings of envy, greed, self-absorption, arrogance or a sense of entitlement could infiltrate people’s moral fibre at any stage – even those who appear to have strong value systems and are the least likely to be swayed. To be human is to have to continually wrestle with one’s conscience when presented with opportunities to win friends, favours or influence without putting in the usual slog. It is, as Freud described it, a "tragic fate of humanity".

Of course, this does not mean that wrongdoing should simply be pardoned – particularly when, in an organisational sense, the culpable parties are savvy enough or senior enough to know better. What it does mean is that no organisation can afford to skimp on introducing the appropriate checks and balances, particularly where organisational finances are at stake.

A final word

Peter Drucker (ref:3) reminds us that: "Asking ‘What is right for the enterprise?’ does not guarantee that the right decisions will be made. Even the most brilliant executive is human and thus prone to mistakes and prejudices. But failure to ask the question virtually guarantees the wrong decision."

The Steinhoff story illustrates that business success can be attributed to numerous factors – from well-thought-out marketing and financial strategies and efficient production plants, to clear compliance guidelines and financial reporting standards. While efficient infrastructure and various management and operational tools are naturally important, the human factor stands out as being the most critical of all … and the most difficult to get right. It is largely the human element that has toppled this once-mighty company.

Whether the human element as represented in the new leadership will be able to salvage this business, remains to be seen.

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1. See, for example, Porter, M. E. 1996. What is Strategy? Harvard Business Review, 74(6), 61?78.

2. Collins, J & Hanson, M.T. 2011. Great by Choice. London: Harper Business.

3. Drucker, P. 2004. What makes an effective executive? Harvard Business Review, 82(6): 58?63.

steinhoff  |  accounting irregularities  |  fraud


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