THE STEINHOFF SAGA: Part two - The board that looked the other way | Fin24

THE STEINHOFF SAGA: Part two - The board that looked the other way

Jun 29 2018 06:20
Stellenbosch University Business School

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 part two: how governance (or lack of it) possibly contributed to Steinhoff's now-disastrous position.

I can understand that feeling, but you must always take the facts into account and forget the noise, né? It is now a big business and it’s in lots of countries, so, of course, it will be complicated … With real due respect – I mean this – everyone’s entitled to their opinion. I like to argue with anyone because you learn, but take the last results presentation, then look category by category – now you must really not have to go to Harvard to understand the figures. - Markus Jooste, former CEO, Steinhoff International, 22 September 2017 in response to a question by Giullietta Talevi in an interview for Business Day: "Investors find Steinhoff impossible to analyse from one year to the next, given its frenzied deal-making."

I don’t know his business. It’s just a big business – furniture, clothing, whatever you wish. I like businesses like Shoprite and Amazon that stick to their core business. - Whitey Basson, former CEO, Shoprite Holdings

In this section we examine the issue of governance at Steinhoff and how it (or the lack of it) might have contributed to the calamitous position in which the company now finds itself.

When the Steinhoff share price collapsed in December 2017 following the resignation of CEO Markus Jooste, it was approximately two years since the first warning lights had flickered when German authorities raided the offices of one of Steinhoff’s subsidiaries ahead of the company’s listing on the Frankfurt Stock Exchange. During the subsequent two-year period the company’s share price remained relatively stable as institutional investors continued to hold the majority of shares in the company. In fact, within five months of the 2015 raids the share price had risen by 17 per cent before it started a slow but steady decline, dropping from R95 in April 2016 to R56 in December 2017.

Since the resignation of Jooste, many questions have been asked about the inability of shareholders and other stakeholders to have anticipated the problem – vaguely referred to as "accounting irregularities" – and to have responded appropriately. From a governance perspective the obvious question asked in cases like this is: Where was the board?

In his testimony before a parliamentary committee, Christo Wiese, chairperson of the Steinhoff Supervisory Board when Jooste resigned, said that the crisis had appeared like a "bolt from the blue." The Steinhoff board comprised an impressive line-up of individuals, yet they seemed to fail in a collective sense to govern the company. As the story continues to unfold, analysts and commentators will attempt to answer many questions, including:

1.  Was there a problem with compliance?

2.  Was there a problem with the composition of the board?

3.  Was there a problem with the structure of the board?

4.  Was there a problem with transparency?

5.  Was the board simply hoodwinked by a corrupt CEO?

6.  Can the company’s operational integrity and reputation be salvaged?

Corporate governance has been defined as the system whereby business organisations are directed and controlled. This definition – originally articulated by Sir Adrian Cadbury in the early 1990s and later adopted by the OECD – neatly conveys the inherent dilemma faced by any director, i.e. the need to drive the enterprise forward while keeping it under prudent control. The tension between performance (driving forward) and conformance (prudent control) provides a useful framework for analysing the corporate governance system of any organisation. At the same time, the degree to which the fundamental governance principles of accountability, honesty and transparency inform board processes is extremely important. It is generally accepted that "independence of thought" and "care, skill and diligence" are among the key capabilities that directors need to bring to the boardroom.

Steinhoff had a primary listing on the Johannesburg Stock Exchange until 2015 when it secured a listing on the Frankfurt Stock Exchange. The company was therefore subject to the King Reports on Corporate Governance until 2015. The King Code of Governance Principles for South Africa 2009 (King III) can therefore be viewed as the most important governance standard applicable during the period in which the problems at Steinhoff started to unfold.

1. Was there a problem with compliance?

As was the case with Enron and other scandal-ridden corporations over the years, Steinhoff appeared to comply with all legal and listing requirements in its various jurisdictions. This created a (false) sense of security for both investors and other stakeholders. Whether there was indeed full compliance will become clearer as the investigations into alleged accounting irregularities start to yield results. Yet it does point to the risks associated with ‘tick-box’ compliance systems that are not underpinned by an ethical commitment to respect and abide by relevant rules and regulations. It also raises the spectre of lip service merely being paid to the importance of compliance. Steinhoff was very clear about its stance on corporate governance. For example, the 2013 Integrated Report states the following:

"Steinhoff’s board of directors and entire management team are committed to sound governance and good corporate citizenship. We accept that good governance practices are fundamental to creating, protecting and sustaining shareholder and stakeholder value, especially within the current volatile economic environment. Our governance structures are in line with King III and the Companies Act 71 of 2008."

The wording of this extract makes a distinction between practices and structures. There is a difference between action and intent, and the question can be asked whether Steinhoff applied the guidelines of the King Report in any way other than mindlessly ticking the boxes. Even if Steinhoff were to be given the benefit of the doubt in terms of intent (which does not seem to be warranted based on current evidence), the company clearly did not translate this intent into the proactive detection of potential risks.

In its 2006 annual report, Steinhoff states:

"All stakeholders and, more specifically, directors and employees are required to observe the Steinhoff Code of Ethics to ensure that business practices are conducted in a manner which is beyond reproach… This requires commitment by management to acknowledge and ensure that our long-term sustainability is based on delivery to all stakeholders."

Yet the board’s attempts to provide ethical and effective leadership, and more specifically to ensure that the company’s ethical character is subject to close scrutiny (Principle 1.3 of the King III Code), seem to have been ineffectual over the years. For example, in the 2011 corporate governance report the following comment is made: "Steinhoff has not established a formal process for obtaining assurance on ethical awareness and ethical compliance throughout the group" (Corporate Governance Report, 2011: 4). In the same report the chairman states that Steinhoff "keeps its performance and core governance principles under constant review" (Corporate Governance Report 2011: 3).

One would therefore expect to see some progress in this regard in the 2012 report. However, in the 2012 Integrated Report the following is simply restated: "Steinhoff has not established a formal process for obtaining assurance on ethical awareness and ethical compliance throughout the group" ? this despite another expressed commitment to ongoing compliance and a preamble that states that the report presents "progress being made towards compliance".

Closer inspection has revealed that Steinhoff used the same comment relating to Principle 1.3 in all its company reports between 2011 and 2016. This raises questions about how serious the board was in trying to ensure that the company’s ethical character remained unsullied. From the data it would seem that there was a laissez-faire attitude towards the matter, with a no-change, cut-and-paste approach being routinely applied.

2. Was there a problem with the composition of the board?

King III states the following in terms of board composition (2.18): "The board should comprise a balance of power, with a majority of non-executive directors. The majority of non-executive directors should be independent". Independence is an important characteristic of board directors insofar as it enables them to acknowledge the existence of multiple truths in the same time and space, which should be questioned on an ongoing basis. Independent directors bring to the boardroom new perspectives and views that complement and challenge the status quo.

Other board composition requirements are that the roles of CEO and chairman should be split and that the chairman should be an independent, non-executive director. Again, independence at the chairman level represents an additional safeguard against conflicts of interest at board level.

The relative independence of Steinhoff board members can be discerned from Figure 1. 

Figure 1 shows that in the period 1999 to 2007 Steinhoff complied with the independence requirement in only two years (2002 and 2003). However, from 2008 onwards the company was in compliance.

Figure 2 provides a further breakdown of non-executive directors in terms of the independence classification. 

As far as the number of independent non-executive directors is concerned, Steinhoff did not comply with this requirement at all up to 2002. The criterion used by Steinhoff to classify its directors as independent and non-executive is unclear. For example, how is it possible that Len Konar and Claas Daun, who were members of the board from as early as 1999, can be classified as independent and non-executive? The same question can be asked about the actual independence of directors with a significant cross-shareholding, like Jannie Mouton and Christo Wiese.

King III paragraph 2.18.8 states: "Any independent non-executive director serving more than nine years should be subjected to a rigorous review of his independence and performance by the board". Paragraph 2.18.9, in turn, states: "The board should include a statement in the integrated report regarding the assessment of the independence of the independent non-executive directors".

Perhaps more importantly, the position of Christo Wiese as chairman of the board should be analysed. There are very good corporate governance reasons for a non-executive and independent director to hold the position of chairman of the board, not least of which being that it ensures a level of objectivity when oversight is exercised over the activities of the executive directors. However, in the case of Steinhoff, the lack of independence seems to have been celebrated. In an interview in October 2017, Markus Jooste stated the following:

"I have the highest respect in the world for the guy [Christo Wiese] and to have him today as a chairman and anchor shareholder, together with Bruno and Claas [Daun], it’s a club of friendship and trust."

King III states (2.18.4): "Every board should consider whether its size, diversity and demographics make it effective". The King Report (paragraph 71) adds: "Diversity applies to academic qualifications, technical expertise, relevant industry knowledge, experience, nationality, age, race and gender". Figure 3 indicates that the Steinhoff board was dominated by white males in the period 1999 to 2015. Many of the board members served on the board for extensive periods of time and the possibility of a group-think culture having taken root cannot be ruled out. Group-think is a phenomenon that emerges when people – owing to their intimate knowledge of one another – lose their willingness to examine critically the decisions taken individually and collectively.

Table 1 illustrates the periods of tenure of non-executive directors in the period 2002 to 2016.

In line with King III, the board of Steinhoff did review the composition of the board on a regular basis. This was clearly done within King guidelines which require that the board make statements regarding the continued board membership of individuals with more than nine years of continued service as independent directors. At this stage it is very difficult to make a pronouncement on the tenure status of board members.

It is interesting to note that when Franklin Sonn resigned as an independent director in 2013, his daughter, Heather Sonn, was appointed. In a similar vein, the appointment in 2016 of the son of Christo Wiese, Jacob Wiese, appears to be questionable in the light of the need to foster independence and diversity. The appointment of family members to the board is reminiscent of a family business and ‘club culture’, as alluded to by Markus Jooste.

In the Steinhoff annual reports of 2011 and 2013, statements are made in terms of the tenure of independent non-executive board members.

In the 2011 report:

"The board has critically assessed and carefully considered the independence of Dr Len Konar, Dr Franklin Sonn, Mr Jannie Mouton and Mr Claas Daun, all of whom have served as independent non-executive directors for more than nine years, and has determined that each of these directors, who serve on other boards and have commitments and interests outside the Steinhoff Group, remains [sic]independent in character and judgement and that there are no relationships or circumstances which are likely to affect or which could appear to affect their judgement or independence of character and has determined that the length of service of these directors has not compromised, nor could be held to have compromised, their independence." In the 2013 report:

"The board has critically assessed and carefully considered the independence of Len Konar, Jannie Mouton and Claas Daun, all of whom have served as independent non-executive directors for more than nine years, and has determined that each of these directors, who serve on other boards and have commitments and interests outside the Steinhoff Group, remains [sic]independent in character and judgement and that there are no relationships or circumstances which are likely to affect or which could appear to affect their judgement or independence of character and has determined that the length of service of these directors has not compromised, nor could be held to have compromised, their independence."

It is interesting that the company used practically the same wording in these reports, which raises serious questions about the thoroughness of the called-for review process. It would appear that boilerplate reporting was the order of the day.

3.  Was there a problem with the structure of the board?

When Steinhoff moved its primary listing from South Africa to Germany in 2015, one of the corporate governance implications was that the company had to switch from a unitary to a dual (or two-tier) board structure. The dual structure comprises two separate boards: a Management Board and a Supervisory Board, which are comparable to having executive and non-executive directors in a unitary board. This distinction is explained by legal analysts David Block and Anne-Marie Gerstner in their 2016 paper ‘One-Tier vs. Two-Tier Board Structure: A Comparison Between the United States and Germany’: "The executive directors in the management board (Vorstand) decide about the company’s objectives and implement the necessary measures. Meanwhile, the non-executive directors in the supervisory board (Aufsichtsrat) monitor these decisions on behalf of other parties".

The Supervisory Board is appointed by the shareholders at the annual general meeting. Depending on the size of the company and whether codetermination laws must be applied, the employees can elect either one third or one half of the Supervisory Board. This is the main reason why the dual board structure is sometimes described as more stakeholder-based than the unitary board.

Steinhoff’s transition to this new board structure (from non-executive to supervisory) did not have a major impact on the board composition: Nine directors remained, three departed (Mouton, Brink and Van den Bosch) and two joined (Van Zyl and Jacob Wiese). Rather, the major impact of the transition appeared to be that there was less contact between the former executive and non-executive directors (because they were sitting on separate boards). One could therefore argue that the executive directors had more freedom to engage in unethical activities and hide these from the Supervisory Board.

Owen Skae, director of Rhodes Business School at Rhodes University, has analysed the relative strengths and weaknesses of the unitary and dual board structures. He asserts that the advantages of a unitary board are that executives can be asked questions while the entire board is present and that decisions are likely to be arrived at more quickly. However, the presence of all the directors around the same table might compromise the independence of non-executive directors. The dual board structure, on the other hand, is often criticised for encouraging information asymmetry since the boards meet separately and management has much more knowledge about the company’s operations. However, the dual board structure has more checks and balances because the Supervisory Board exercises oversight over the Management Board.

With reference to Steinhoff, most of the cases of alleged wrongdoing currently under investigation occurred before the dual board structure was implemented. Therefore, board structure should not be seen as a material factor in the unfolding saga.

4.  Was there a problem with transparency?

When evaluating the annual and integrated reports of Steinhoff in the period 1999 to 2015, it is clear that a great deal of care went into producing the reports. From the outside, these reports could be classified as ‘best practice’. The dilemma arises not from the reporting practice per se, but rather from the intent, through the reporting, to create an impression for the reader that everything is in order. This illustrates that there is a disconnect between the reporting practices in the company and the practices that are reported.

When there is a mismatch between the content of a report and the perceived performance that is reported on, the credibility of the report suffers. The board of Steinhoff received well-written documents and even audited statements. What would reasonable persons have done on receipt of such information? They would have accepted it ? unless people’s behaviour or the passing of careless or in-jest comments suggested that all was not well. Another alarm bell might have been that only positive things were said about the company. Together with the evidently solid reports was the impressive figure of Markus Jooste, the ‘can-do’ CEO who had built up a track record of prosperous growth and enduring success.

The challenge of achieving authentic transparency is not unique to Steinhoff, but is part of the global corporate reporting landscape. Indeed, the existence of international reporting standards can be both helpful and restrictive. While helping companies to measure performance against relevant indicators, they also push some companies towards standardised or formulaic reporting.

Furthermore, reporting without a sound ethical foundation will produce information that invariably raises more questions than answers. With the benefit of hindsight, this seems to have been the case with Steinhoff. The bigger question is: can ethical behaviour be legislated? While in principle desirable, it could also create a greater compliance burden and simply lead to more ticking of the boxes. Morality remains a key ingredient in a successfully constituted board and in strong governance. Yet it is a quality that is difficult to pre-check and satisfactorily monitor as time goes by.

5.  Was the board simply hoodwinked by a corrupt CEO?

Photo: Christo Wiese (Netwerk24)

I can only say that cleverer people than this board have been duped before by people committing fraud. I can only refer to many instances around the world of companies of a similar or bigger size where this has happened … To detect fraud in a company is an extremely difficult if not impossible task and it becomes more difficult when as is alleged in this case the CEO is directly involved. 

-       Christo Wiese, former chairman of the Supervisory Board of Steinhoff International, testifying before a parliamentary hearing, 31 January 2018

It should be emphasised that the alleged accounting irregularities at Steinhoff will remain just that – alleged – until the findings of the current PricewaterhouseCoopers investigation are made available and the legal process runs its course. In the meantime the release of leaked emails such as the one below will simply add fuel to the fire of speculation.

Extract from email from Markus Jooste to Dirk Schreiber (former CFO of Steinhoff Europe), August 2014:

"I have nominated Genesis Group to receive €130m commission/fee from BNP because they have facilitated the negotiation on behalf of the whole Steinhoff group and K/L for the exclusivity to provide finance to both Steinhoff and K/L when they pay and execute in Oct. You would recall 10 years ago PPR received for Confo alone €1 billion for this right.

"Can we please accrue/pay an additional fee/income of €100m from the Genesis group to Steinhoff to reduce cost of sales which will take gross profit to 40% which is in line with our plans/forecasts and pay an additional €30m on all debit loans to reduce nett finance costs to just below the previous year and makes sense because of the growth in investments and short term loans."

In Steinhoff’s 2013 Integrated Report the chairman, Len Konar, states: "Markus Jooste … continues to lead Steinhoff proficiently and I thank him for his continued loyalty and leadership over the past year". The impact of charismatic leadership should not be downplayed as it can, when not put to positive use, distract people from the reality of the situation. The topic is explored in Section 3 of this case study and therefore is not dwelt upon here. We conclude this section with the words of Markus Jooste in an email to staff on the morning after his resignation.

Email from Markus Jooste to Steinhoff staff, December 2017:

"Hi there,

Firstly I would like to apologise for all the bad publicity I caused the Steinhoff company the last couple of months.

Now I have caused the company further damage by not being able to finalise the year-end audited numbers and I made some big mistakes and have now caused financial loss to many innocent people.

It is time for me to move on and take the consequences of my behaviour like a man. Sorry that I have disappointed all of you and I never meant to cause any of you any harm.

Please continue to live the Steinhoff dream and I must make it very clear none of Danie [van der Merwe – COO], Ben [la Grange – CFO], Stephan [Grobler – Executive Group Treasury and Financing] and Mariza [Nel – Corporate Services, IT & HR] had anything to do with any of my mistakes.

I enjoyed working with you and wish you all the best for the future.

Best regards


The email to Dirk Schreiber is probably one of the mistakes that Jooste referred to in his email to the Steinhoff staff. Unravelling all the mistakes that were made will take time and will cause a great deal of hardship for many stakeholders, not only professionally but personally. Clearly, one should never take corporate governance for granted. It requires constant vigilance, a critical mind-set and a strong dose of integrity.

6.  Can the company’s operational integrity and reputation be salvaged?

On 20 April 2018 Steinhoff International Holdings N.V. held a general meeting of shareholders at the Sheraton Amsterdam Airport Hotel in the Schiphol Municipality of Haarlemmermeer, the Netherlands.

At this meeting the Supervisory Board of Steinhoff was renewed with the appointment of five new board members ? Ms Khanyisile Kweyama, Ms Moira Moses, Dr Hugo Nelson, Mr Peter Wakkie and Prof Alexandra Watson ? while Dr Stefanes Booysen, Ms Angela Krüger-Steinhoff and Ms Heather Sonn were retained on the board. Dr Johan van Zyl resigned from the board, indicating: "I have thus completed my assignment on the board and fulfilled my commitment to major shareholders of the company".

At the same meeting the Management Board was renewed with the appointment of Mr Philip Dieperink (Chief Financial Officer), Mr Theodore de Klerk (Operational Director), Mr Alexandre Nodale (Deputy Chief Executive Officer) and Mr Louis du Preez (Commercial Director). Deloitte Accountants B.V. was also retained as the company’s external auditor for the 2018 financial year.

Acting Chairperson of the Steinhoff Supervisory Board, Heather Sonn, acknowledged at the AGM that "accounting irregularities" did occur and it was a priority for the company to finalise and introduce a restructuring plan as well as the 2017 audit. "We want to uncover the truth, show the world what has happened, prosecute any wrongdoing and reinstate trust in the company," Sonn said. It was confirmed that the PricewaterhouseCoopers (PwC) forensic probe into Steinhoff had uncovered a pattern of transactions stretching back over a number of years that had led to the material overstatement of the group’s income and asset values.

Evidently it has taken a crisis for Steinhoff to renew its board. The jury is still out, though, on whether the changes in both the Supervisory Board and the Management Board will significantly influence the organisational culture and future business practices. Are we going to see the moral compass and ethical standards of the organisation being successfully re-calibrated, and management and employees being re-sensitised and subject to greater scrutiny? Or are the changes in the composition of the board actually too late – tantamount to rearranging the deckchairs on the Titanic and in doing so expecting the ship to somehow head off in a different direction?

The reality is that the crisis at Steinhoff is more than an overstatement of income and asset values which has triggered a liquidity and credit crunch. It is about the collapse in investor confidence. Bringing Steinhoff back from the brink is a possibility, but even the most skilfully executed financial engineering and restructuring plans will not be enough.

*This is part two of a four-part series on South Africa's biggest corporate meltdown which has been researched and written by the University of Stellenbosch Business School.

The authors:

Piet Naudé (Editor) is Director of the University of Stellenbosch Business School.

Brett Hamilton holds an MBA from the University of Stellenbosch Business School where he is a visiting lecturer in Corporate Finance. He is also a director of First River Capital.

Marius Ungerer is Professor of Strategy at the University of Stellenbosch Business School.

Daniel Malan is Associate Professor of Corporate Governance and Head of the Centre for Corporate Governance in Africa, based at the University of Stellenbosch Business School.

Mias de Klerk is Professor of Leadership and Human Capital Development, and Head of Research at the University of Stellenbosch Business School.

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