The danger of darling CEOs
In a year when there has been populist rhetoric directed against “white monopoly capital” and a rise in antibusiness sentiment generally, the last thing corporate SA needed was a large and damaging scandal.
And what a scandal Steinhoff is, even though the gory details are as yet unknown. More than R150bn has been wiped off the value of the Steinhoff share this week since the company’s board announced an investigation into “accounting irregularities” and the immediate resignation of CEO Markus Jooste.
The board’s subsequent efforts to reassure the market with vague media releases about asset sales and liquidity have simply made things worse, raising even more questions about the real story of the “irregularities” and about Steinhoff’s financial position. And the longer Steinhoff takes to come clean on the details, the more value is likely to be lost not only on Steinhoff but across the equity market. The taint has infected all the firms associated with Steinhoff and its chairman, Christo Wiese, sending those share prices crashing and slashing Wiese’s personal wealth.
Few should have any sympathy for Wiese, who surely should have known what Jooste was getting up to as Steinhoff expanded rapidly in a variety of jurisdictions using debt and financial structures whose details were not shared with investors. Jooste, who admitted to “mistakes” and apologised for losing a lot of people a lot of money in a letter to staff, deserves even less sympathy. Depending on what those irregularities turn out to be, he may be facing criminal prosecution.
For investors, the rise and fall of Jooste, who built Steinhoff from a small furniture manufacturer to a global group, should serve as a lesson about the dangers of dominant CEOs who become market darlings. An enormous amount of money has been lost, much of it by pension funds and other institutions that invest the savings of millions of South Africans. Steinhoff was a top 15 JSE stock, so just about everyone had to hold it, and there was hardly a fund manager who did not have large quantities of Steinhoff shares in their portfolio. That includes the Public Investment Corporation, which manages the assets of more than a million public servants: almost R14bn has been wiped off the value of its 8% holding.
SA has had corporate scandals before, but nothing close to this scale. That it took German regulators to pick up the irregularities is disturbing. But a bigger question is why domestic and offshore shareholders, as well as lenders, auditors and ratings agencies, did not start asking questions about Steinhoff long ago.
As far back as 2013, the late David Gleason, who was then a columnist for Business Day, sent a series of questions to the company about its debt structure and received unsatisfactory replies. Some asked questions, too, about Steinhoff’s motives when it listed in Frankfurt in 2015 and whether these were more about financial engineering than any genuine need for an extra listing. But investors kept buying the shares and putting up with the company’s poor disclosure, even recently when analysts such as those at Viceroy Research started uncovering the skeletons in Steinhoff’s balance sheet (or more accurately, hidden off its balance sheet).
It’s early days yet. Steinhoff and its regulators urgently need to provide a lot more clarity about the nature of the irregularities or fraud or whatever, and how bad the financial losses could be.
But whatever the details that emerge, there are big lessons here for corporate SA about governance and the oversight that directors, auditors, shareholders and others need to exercise over the management of companies. There are lessons, too, about not falling for the spin of charismatic CEOs — and about demanding full transparency from companies in which pensioners’ savings are invested.
Even after the stock market losses are stemmed, SA’s investment community will have to do a lot of legwork to undo the damage.
THE LONGER STEINHOFF TAKES TO COME CLEAN ON THE DETAILS, THE MORE VALUE IS LIKELY TO BE LOST