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Did Steinhoff’s board structure contribute to the scandal?




Steinhoff International Holdings

The global retail group Steinhoff is reeling under allegations of accounting fraud. Since the allegations surfaced last year the CEO of the multi-billion-dollar business, Markus Jooste, has fallen on his sword and the company’s stock has been hammered, at one point losing about 90% in market value in a few days.

Observers are calling for harsh punishment, including jail, for the culprits.

READ MORE: Steinhoff scandal points to major gaps in stopping unethical behaviour

Early reports suggest that Steinhoff was involved in massive accounting fraud, including the overstatement of the company’s financial position.

The company is listed on both the Johannesburg Stock Exchange in South Africa as well as the Frankfurt Stock Exchange in Germany. With a primary listing in Frankfurt and an Amsterdam corporate address, Steinhoff follows the Dutch corporate governance code.

Consistent with this code, Steinhoff has a two-tier board structure. This is made up of a management board (comprised of four top executives) and a supervisory board (comprised of 9 non-executive directors).

The point of the two-tier board structure is to ensure that the supervisory board is independent from the executives who sit on the management board. The management board accounts to the supervisory board, which accounts to the shareholders or to the company.

The two-tier board structure is favoured in western Europe. The US and UK prefer the one-tier – or unitary board – structure, as does South Africa for historical reasons.

It appears that Steinhoff’s decision to opt for the two-tier board structure may have contributed to its undoing. Natural holes in the structure, the biggest one being the fact that the management board doesn’t always keep the supervisory board in the loop, combined with Steinhoff’s corporate culture which was anchored by a dominant personality, appear to have created accountability holes.

Two-tier versus one-tier structure

There are pros and cons to both systems.

One of the good things about the one-tier board system is that executive directors and non-executives directors sit together on a single board. Traditionally there would be two or three executive directors (the CEO, chief financial officer and the chief operating officer) sitting alongside a majority of non-executive directors.

This means that there’s a seamless flow of information between executives and non-executives. The executives can be asked questions with the entire board present. This closes any information asymmetry. In addition, it can also facilitate quicker decisions.

On the downside, the unitary board structure has been criticised for its propensity to compromise the independence of the non-executive directors. This dilutes their oversight role.

For its part the two-tier system seems to have more checks and balances built into it given that the management board is subject to oversight by the supervisory board, and the supervisory board has to answer to shareholders.

But the two-tier structure is often criticised for information asymmetry between the management board and the supervisory board. In other words management knows a great deal more about the business than the supervisory board. This can lead to operational challenges developing without the board noticing until it’s too late.

Steinhoff’s board structure followed the two-tier system. In 2016 its management board comprised three members, Jooste (CEO), Ben La Grange (Chief Financial Officer) and Danie van der Merwe (Chief Operating Officer and now acting CEO). As is normal under the two-tier system, none of the three members of the management board sat on the supervisory board.

Some analysis of the Volkswagen emissions scandal apportioned blame to the two-tier system combined with a corporate culture that was anchored by dominant personalities.

A similar case can be made for the Steinhoff saga.

READ MORE: South African Billionaire’s Fortune Plunges More Than $2 Billion In A Day Amid Accounting Scandal

Flaws in the Steinhoff structure

Did the two-tier structure give the CEO too much leeway to take decisions that in the end led to the near collapse of the company?

This may indeed have been the case. Take, for example, the fact that some believe the company grew too quickly.

The danger of companies expanding too rapidly was highlighted decades ago by author and corporate strategy guru John Argenti who came up with a model that considered factors leading to corporate failure. Two of the higher scored factors were expanding too fast (referred to as overtrading) and high levels of loan borrowing.

Steinhoff seems to have suffered from both. And yet the supervisory board appears to have failed to raise the red flag when it comes to large transactions. An example of it failing to fulfil its oversight role was when it decided to not make public Steinhoff’s $1 billion transaction with a related company. Even if the supervisory board didn’t legally have to make this public knowledge, ethically it should have made the disclosure.

The functioning of the audit and risk committee didn’t help the situation either.

Audit and risk committee

Steinhoff had three standing committees of the supervisory board – audit and risk, human resources and remuneration and the nominations committee. The committee structure had two weaknesses.

The first was that too few of its non-executives actually served on the committees – only 5 of the 11 supervisory board members. And given that the then chairman Christo Wiese and Claas Daun only sat on one, it begs the question how only three members of the supervisory board could have been expected to carry the real responsibility of the standing committees.

The second flaw was that audit and risk were wrapped up in one committee. This is the norm under a two-tier governance structure.

South Africa’s corporate governance structures might have helped to address both these problems.

King IV stipulates that the risk governance committee should be made up of a mixture of non-executives and executives (the majority being non-executives). And the governance guidelines warn against audit and risk being under one committee. Its advice is that a company should only combine them if it’s able to devote enough time to dealing with risk related issues.

For a company of Steinhoff’s complexity, it seems inconceivable that the audit and risk committee could have devoted the necessary time to undertake its responsibility.


The Steinhoff case highlights weaknesses in the governance structure the company had chosen to operate under. That said, the rules have worked perfectly well for thousands of other companies. The lesson therefore is be alert to the warning signs such as dominant directors who don’t heed the rules. They can pose a grave risk to any company. – Written by Owen Skae, Associate Professor and Director of Rhodes Business School, Rhodes University

This article was originally published on The Conversation.

The Conversation


A Country On A Roll




The tiny country of Rwanda is now producing factory-fresh Volkswagen cars from its rolling hills. Next up are ride-hailing and public car-sharing services by the German carmaker.


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The Heroes Among Us




Heroes exist in history, on celluloid, in pop culture or in these digital times, at the forefront of technology. These are the mighty who shine on the front pages of newspapers, as the paradigms of victory and virtue. But every day in public life, surrounding us are some of the real stars, the nameless, the faceless we don’t recognize or celebrate. In the pages that follow, we look at some of them, exploring the exemplary work they do, from the war zones to your neighborhood streets. They are not flawless, they are not infallible, but they are heroes.


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The Power, Humour And Anger Of Mandela



It is a century since Nelson Mandela came kicking and screaming into a world that he would change.

In one hundred years, his name has been spoken with pride from the paddy fields of Vietnam, through the savannahs of Africa to the smoky steak houses of New York. His legacy appears more contested with every passing year.

I was fortunate to have a front row seat in the Mandela years and saw the power, humour and anger of the man. I used to feel 10 feet tall at press conferences when he used to greet my questions with: “Mr Bishop, how are you?” Once I was walking to a TV interview with him, at an African Union summit in Harare, the day after I had ruptured my knee playing football, he noticed I was hobbling far behind – something he was not used to. He turned and inquired of the cause of my pain.

“May I suggest you take up boxing, it’s safer!” says the old man with that million dollar smile. I shall take the warmth of that smile to my grave.

Make it clear, I am no Mandela worshipper. He was no saint and certainly didn’t want to be one: he could be angry and petulant with the best of them; his past was chequered by domestic troubles; a man of the people, yet distant from his own family, according to many close to him. A man who promoted press freedom, yet like many of the lesser politicians who followed him, wanted his picture on every page of the morning newspaper. Mandela drew the line at the sports page – he joked that he didn’t want to risk being associated with losers.

The greatest fear Mandela had was that his ideals – not his name – would be forgotten after his death. Not for Mandela the greed of rule, nor the trappings of power.

Yet it is very fashionable these days to run Mandela down as something akin to a sell-out. Those who claim, erroneously, that Mandela sold out his people. They say he didn’t stop poverty overnight nor right the wrongs of the past with the wave of his wand. They need to talk to those who were there in the negotiations for a new free South Africa.

“People say we gave up too much in negotiations yet we had nothing to start with,” Denis Goldberg, a man who faced death with Mandela at the Rivonia Trial in 1964, once told me.

READ MORE: Mandela Through Their Eyes

The negotiations with an entrenched elite – that held most of the cards and only grudgingly acknowledged Mandela and his comrades – were difficult to say the least. Mandela’s African National Congress (ANC) could not even threaten to go back to war because the depleting arms of its military wing posed little or no threat to the state.

Even so, a deal was hammered together somehow. In the next two years, in the run-up to the 1994 elections, Mandela won his leadership spurs as he steered South Africa away from the civil war that many feared was inevitable. He flew to Durban and told bloody-thirsty faction fighters to throw their weapons into the sea and they listened. When revered freedom fighter Chris Hani was gunned down on his front drive, in 1993, many were ready to take the law into their own hands.

Mandela barged into the SABC studios in Johannesburg that night and made a broadcast to the nation to calm down and put its weapons away. He wasn’t even in Parliament then and I wonder to this day how many lives that broadcast saved with this canny display of leadership.

Then, when into power with a virtually bankrupt Treasury, Mandela steered the National Development Programme that built millions of homes and schools; electrified the homes of legions of poor people and rolled out roads to connect the nation. Yet, the money was never going to stretch far enough and millions still have no roof over their heads and too many schoolchildren attend classes under trees.

It is fashionable these days to say the majority of South Africa must rise in a civil war in which the nation will be cleansed of its past, restored of its land on the path to righteousness. It probably sounds even better after a few drinks.

READ MORE: Celebrating Mandela From Where It All Began; Soweto

I say this is bunkum and anyone who has ever seen or smelt a civil war will agree with me. How a vile, stinking trail of dead fathers, raped women and children, destruction and disorder, can lead a country to the light beats me. Those who scream for war have clearly never seen it.

The first time I clapped eyes on the great man, at the Harare Agricultural Show, on his first foreign visit to Zimbabwe in August 1994, he walked alone, without a security man in sight. I didn’t ask for a selfie – they didn’t exist then, anyway – I was tongue-tied. We merely smiled at each other in passing.

So when people in political circles told me that South Africa’s new president Cyril Ramaphosa didn’t care for wealth and power – he merely wanted to put his name up there with Mandela – I smiled like I did on that August day in Harare.

This does seem feasible as President Ramaphosa – a millionaire in his own right – was the man who stood next to Mandela, holding the microphone, on the town hall steps in Cape Town, on February 11 1990, during his famous address on release from 27 years in prison.

“I stand here before you not as a prophet but as a humble servant of you, the people,” said Mandela to deafening cheers on that bright summer’s day.

Clearly this humility and willingness to serve rubbed off on President Ramaphosa on that fateful day in 1990. In his first 100 days, he has made manful attempts to stop the rot in South Africa by merely enforcing the rule of law. A course of action he made no secret of even before he took power on February 15.

“There are no holy cows. Anyone who is caught doing wrong things will end up behind the bars of a jail,” says Ramaphosa, with microphone in hand and humble service in mind at the World Economic Forum in Davos, Switzerland, in January.

True to his word, Ramaphosa cut swathes through the corruption of the past. Former president Jacob Zuma ended up in the dock on corruption charges something that many – including me – thought they would never see in their lifetime. He removed the rookie finance minister Malusi Gigaba and replaced him with the people’s choice Nhanlha Nene who has staved off more downgrades of the economy. A clean-up of the state-owned enterprises and the institutions is underway and many who thought they were invincible six months ago have been cut down to size.

I am sure the old man, who must have been spinning in his grave over the last few years, would approve.

“Never, never and never again shall it be that this beautiful land will again experience the oppression of one by another,” says Mandela at his inauguration at the Union Buildings in Pretoria.

As we mark 100 years since his birth, it is time for cool heads and clear thinking to make sure this utopian ideal of liberty and tolerance lives on after his death. Our grandchildren will judge us harshly if we don’t.

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