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.
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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