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 <a href="https://www.iol.co.za/business-report/steinhoff-shares-nosedive-after-ceo-markus-jooste-resigns-12286137" target="_blank" rel="noopener">fallen on his sword</a> and the company’s stock has been <a href="https://www.sowetanlive.co.za/business/2017-12-07-steinhoff-share-price-continues-to-fall/" target="_blank" rel="noopener">hammered</a>, at one point losing about 90% in market value in a few days.
Observers are calling for harsh punishment, including jail, for the culprits.
<a href="http://www.forbesafrica.com/focus/2017/12/18/steinhoff-scandal-points-major-gaps-stopping-unethical-corporate-behaviour/" target="_blank" rel="noopener">READ MORE: Steinhoff scandal points to major gaps in stopping unethical behaviour</a>
Early reports suggest that Steinhoff was involved in massive <a href="https://www.timeslive.co.za/sunday-times/business/2017-12-14-steinhoff-accounting-woes-go-back-to-2016-as-scandal-grows/" target="_blank" rel="noopener">accounting fraud</a>, 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 <a href="http://www.steinhoffinternational.com/corporate-information.php" target="_blank" rel="noopener">Amsterdam</a> corporate address, Steinhoff follows the Dutch corporate governance code.
Consistent with this code, Steinhoff has a <a href="http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1001&amp;context=fisch_2016" target="_blank" rel="noopener">two-tier board structure</a>. This <a href="http://www.steinhoffinternational.com/leadership.php" target="_blank" rel="noopener">is made up of</a> 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 <a href="http://www.steinhoffinternational.com/leadership.php" target="_blank" rel="noopener">one-tier</a> – 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 <a href="https://www.moneyweb.co.za/in-depth/investigations/we-have-always-been-wary-of-markus-jooste-36one-founder-cy-jacobs/" target="_blank" rel="noopener">dominant personality</a>, appear to have created accountability holes.
<h2>Two-tier versus one-tier structure</h2>
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 <a href="http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1001&amp;context=fisch_2016" target="_blank" rel="noopener">criticised</a> 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), <a href="http://www.huffingtonpost.co.za/2018/01/05/steinhoff-cfo-ben-la-grange-steps-down_a_23324706/" target="_blank" rel="noopener">Ben La Grange</a> (Chief Financial Officer) and <a href="https://www.fin24.com/Companies/Retail/steinhoff-shares-rally-as-beleaguered-retailer-names-acting-ceo-20171219" target="_blank" rel="noopener">Danie van der Merwe</a> (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 <a href="https://www.theguardian.com/business/2016/jun/22/volkswagen-handling-emissions-scandal-shambles-investors-agm-german-carmaker" target="_blank" rel="noopener">Volkswagen emissions scandal</a> apportioned blame to the two-tier system combined with a <a href="https://www.nytimes.com/2015/09/25/business/international/problems-at-volkswagen-start-in-the-boardroom.html" target="_blank" rel="noopener">corporate culture</a> that was anchored by dominant personalities.
A similar case can be made for the Steinhoff saga.
<a href="http://www.forbesafrica.com/billionaires/2017/12/08/south-african-billionaires-fortune-plunges-2-billion-day-amid-accounting-scandal/" target="_blank" rel="noopener">READ MORE: South African Billionaire&#8217;s Fortune Plunges More Than $2 Billion In A Day Amid Accounting Scandal</a>
<h2>Flaws in the Steinhoff structure</h2>
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 <a href="https://www.iol.co.za/business-report/opinion/opinion-steinhoff-shock-the-warning-signs-were-all-there-12314186" target="_blank" rel="noopener">grew too quickly</a>.
The danger of companies expanding too rapidly was highlighted decades ago by <a href="https://books.google.co.za/books/about/Corporate_planning.html?id=FRMPAQAAMAAJ&amp;redir_esc=y" target="_blank" rel="noopener">author and corporate strategy guru </a> John Argenti who came up with <a href="https://accountingandplanning.files.wordpress.com/2014/12/qualitative-models-of-corporate-failure.pdf" target="_blank" rel="noopener">a model</a> 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 <a href="https://www.reuters.com/article/us-steinhoffintlaccounting-disclosure/steinhoff-didnt-tell-investors-about-nearly-1-billion-in-deals-idUSKBN1D81BZ" target="_blank" rel="noopener">$1 billion</a> 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.
<h2>Audit and risk committee</h2>
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.
<a href="http://www.iodsa.co.za/?page=KingIV" target="_blank" rel="noopener">King IV </a> 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.
<h2>Conclusion</h2>
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. &#8211; Written by <a href="https://theconversation.com/profiles/owen-skae-315237" target="_blank" rel="noopener">Owen Skae</a>, Associate Professor and Director of Rhodes Business School, <a href="http://theconversation.com/institutions/rhodes-university-1843" target="_blank" rel="noopener">Rhodes University</a>
This article was originally published on <a href="http://theconversation.com" target="_blank" rel="noopener">The Conversation</a>.
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Did Steinhoff’s board structure contribute to the scandal?

What do you read from these allegations of corporate corruption?
The Steinhoff scandal is disturbing because it points to a serious gap in the checks and balances in the investment management space. A scandal of this magnitude should not have occurred if the systems with their multiple layers were working.
It’s still early days but it seems as if a multiple of highly paid professional layers failed investors. This includes auditors, asset managers and non executive directors who in their different roles should ensure that the company’s accounts are as close to the truth as possible.
Steinhoff share price <a href="https://www.timeslive.co.za/sunday-times/business/2017-12-08-no-way-back-for-steinhoff-as-share-price-plunge-nears-90/" target="_blank" rel="noopener">collapsed</a> by more than 90%, wiping off nearly €10 billion in shareholder value in about three days following the resignation of the company’s CEO, Markus Jooste, after news that German prosecutors were investigating the company for alleged massive <a href="https://www.fin24.com/Companies/Retail/german-prosecutors-still-probing-steinhoff-for-possible-accounts-fraud-20171207" target="_blank" rel="noopener">accounting fraud</a>. Steinhoff is listed on both the Johannesburg Stock Exchange and Frankfurt Stock Exchange.
Steinhoff shares were the darling of most fund and asset managers in South Africa and across the globe. We must ask questions why these entities, which draw enormous fees, <a href="https://www.fin24.com/Opinion/magda-wierzycka-asks-hard-questions-about-steinhoff-and-asset-managers-20171207" target="_blank" rel="noopener">failed to pick up</a> the alleged irregularities when it seems like they should have done so if they were doing their jobs properly.
How big is the damage caused by this scandal?
It’s still early days but some people are already tagging this scandal as the <a href="https://www.timeslive.co.za/sunday-times/business/2017-12-08-no-way-back-for-steinhoff-as-share-price-plunge-nears-90/" target="_blank" rel="noopener">biggest corporate failure</a> in the history of the Johannesburg Stock Exchange. With more than 40 retailing brands in over 30 countries, Steinhoff was positioned as one of the largest companies by market capitalisation on the exchange. Its market value of close to R300 billion as recorded earlier this year placed it in the <a href="https://businesstech.co.za/news/business/164635/the-biggest-companies-in-south-africa-by-market-cap/" target="_blank" rel="noopener">top 10</a>, flanked by other South African corporate giants like media giant Naspers, luxury products specialist Richemont, resources giant Anglo American, petrochemicals firm Sasol as well as two big banks Standard Bank and FirstRand.
If Steinhoff’s stock doesn’t recover the capital losses of share investors who bought at inflated prices will be massive.
Steinhoff started off as a South African-based company but built itself into a global retail business with significant interests in western Europe. As a result it attracted <a href="https://www.moneyweb.co.za/news/economy/collateral-damage-who-owns-steinhoff/" target="_blank" rel="noopener">prominent</a> investors. In South Africa, these include the Public Investment Corporation which invests on behalf of the Government Employees Pension Fund among other public entities. The Public Investment Corporation is reported to hold <a href="https://www.moneyweb.co.za/in-depth/investigations/pic-reacts-to-steinhoff-implosion/" target="_blank" rel="noopener">10%</a> of Steinhoff’s total shares which means its losses reached more than R10 billion after the share price collapsed.
It is therefore of the utmost importance and in the interest of all involved – particularly direct and indirect investors – that the Steinhoff matter be brought to a swift closure. Swift closure should be followed by legal action against and punishment of all those implicated.
<a href="http://www.forbesafrica.com/billionaires/2017/12/08/south-african-billionaires-fortune-plunges-2-billion-day-amid-accounting-scandal/" target="_blank" rel="noopener">READ MORE: South African Billionaire&#8217;s Fortune Plunges More Than $2 Billion In A Day Amid Accounting Scandal</a>
How wide spread is such behaviour?
Each time a major scandal surfaces, regulatory gaps are identified and new measures are put in place to plug the apparent holes. But the scandals keep coming.
South Africa has had its fair share of corporate scandals with the most recent being a list of companies linked to the Gupta family inspired<a href="https://www.fin24.com/Opinion/the-gupta-master-plan-meticulously-executed-state-capture-20170830" target="_blank" rel="noopener"> state capture</a>. Big names like <a href="https://www.biznews.com/sa-investing/2017/12/06/naspers-links-gupta-corruption/" target="_blank" rel="noopener">Naspers</a>, KPMG, McKinsey and SAP have been caught in the extensive web of corruption allegedly driven by the Guptas who have close ties to the country’s president.
Some <a href="https://www.facebook.com/search/top/?q=tim%20cohen%20steinhoff" target="_blank" rel="noopener">commentators</a> have linked the Steinhoff saga to the broader ethical challenges facing South Africa. The integrity of some people in key positions of authority in both the public and private sectors is being questioned. This includes the country’s President Jacob Zuma who stands accused of <a href="https://www.news24.com/SouthAfrica/News/zuma-breached-oath-of-office-de-vos-20160405" target="_blank" rel="noopener">violating</a> the oath of office.
<a href="http://www.forbesafrica.com/focus/2017/12/13/anger-corporate-slippery-slope/" target="_blank" rel="noopener">READ MORE: Anger At The Corporate Slippery Slope</a>
What must be done?
Despite the best efforts, it’s impossible to regulate for integrity and ethical behaviour. The one effective way that behaviour can be changed is through legal process and by means of tough punishment.
At this point in time we are still unsure of the degree of corporate rot in Steinhoff. Numerous <a href="https://mg.co.za/article/2017-12-07-steinhoff-the-largest-corporate-failure-on-the-jse" target="_blank" rel="noopener">allegations</a> have been made, but the world now waits for the company’s delayed audit report to see the full extent of possible corporate fraud. Steinhoff must act swiftly in informing shareholders and other stakeholders about the true financial health of the company.
The board of directors of Steinhoff is responsible for the financial health and the financial reporting of the company. The problems at the company resulting in the serious decline in the share price, raise the question whether the board members should continue to hold office. Under the watch of the current board a massive destruction in shareholder value took place.
No board replacing the current one can do worse, as there is simply hardly any shareholder value left to destroy. Will the current board do the honourable thing and step aside?
If fraud is proven, I want to see Steinhoff executives serve jail terms. They have caused immeasurable harm to many people. This is the only way in which unethical and fraudulent behaviour can be out-rooted and integrity restored.
From a proper investigation of the affairs of Steinhoff, possible regulatory gaps should also be identified and eradicated. Nevertheless, no structure of regulation and supervision can replace the single most important requirement for successful business conduct: Ethical behaviour. In South Africa we need ethical behaviour at all levels, namely the government, businesses and civil society.
<img loading="lazy" decoding="async" src="https://counter.theconversation.com/content/88905/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" />This article was originally published on <a href="http://theconversation.com" target="_blank" rel="noopener">The Conversation</a>.

Steinhoff scandal points to major gaps in stopping unethical corporate behaviour

The acquisitive plans of South African retail king Christo Wiese took a hit Wednesday when Steinhoff, the retail conglomerate he chairs, said its chief executive Markus Jooste had resigned amid accounting irregularities. It’s a major reversal of fortune for Wiese, 76, and Steinhoff, which has recently expanded its business across Europe and America.
Steinhoff shares have fallen more than 60% in a day, erasing $2.3 billion from Wiese’s fortune. He&#8217;s now worth an estimated $1.49 billion, according to <a href="https://www.forbes.com/profile/christoffel-wiese/?list=rtb" target="_blank" rel="noopener">Forbes Real Time Rankings</a>. That&#8217;s down more than $4 billion from March 2017, when he was worth $5.6 billion.
Going forward, Steinhoff has tapped PwC to investigate the accounting irregularities, and with Steinhoff CEO Markus Jooste out, Wiese will temporarily become Steinhoff’s executive chairman.
Since 2016, furniture and home good retailer Steinhoff has done more than half a dozen deals, including the acquisition of US-based Mattress Firm. Steinhoff is a part of Wiese’s discount retail empire, <a href="http://www.forbesafrica.com/cover-story/2016/05/01/africas-sam-walton/" target="_blank" rel="noopener">which the South African has been building since the 1970s, as a 2016 profile of Wiese in Forbes magazine details</a>.
Wiese first joined the ranks of the Forbes Billionaires in 2011, with a net worth of $1.6 billion. His fortune rose as high as $6.3 billion in March 2015. In December 2015, Wiese moved Steinhoff&#8217;s listing from the Johannesburg Stock Exchange to the Frankfurt Stock Exchange to concentrate more on the European market.
The retail king made headlines in 2009  after U.K. customs officials detained him at London City Airport with two suitcases filled with nearly $1 million in cash. <a href="http://www.forbesafrica.com/focus/2013/03/01/the-king-of-retail/" target="_blank" rel="noopener">They seized it, suspecting illicit origins</a>. The British and South African press picked up on the incident &#8211; apparently suspecting Wiese had been nabbed for money laundering &#8211; and were further emboldened by Wiese&#8217;s stubbornness in fighting for the funds&#8217; return and his insistence that the amount was &#8220;insignificant.&#8221; (The Daily Mail&#8217;s gleeful headline: &#8220;It&#8217;s Just Peanuts to Me.&#8221;) The government ended up returning the money to Wiese &#8211; interest attached. Wiese wouldn&#8217;t talk publicly about it.
&#8211; Written by <a href="https://www.forbes.com/sites/abrambrown/" target="_blank" rel="noopener" data-ga-track="contrib block byline">Abram Brown</a>, FORBES STAFF

Tag: Markus Jooste

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Did Steinhoff’s board structure contribute to the scandal?

Steinhoff scandal points to major gaps in stopping unethical corporate behaviour

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