On Friday last week Steinhoff released its first, unaudited results since Markus Jooste resigned as group CEO last December. Market commentators have been unanimous in their assessment that any good news in the numbers was extremely hard to find.
There was perhaps some consolation in the fact that revenues were steady, and that the Pepkor businesses remained profitable. There was however little else.
A six month loss of R9.6 billion to the end of March this year revealed that, overall, this is not a great operation. The restated financials for the comparable period last year also revealed that Steinhoff had overstated its operating profit by more than €1 billion (R16.1 billion) in 2017.
The extent of this fraud is so stupendous that it is now absolutely apparent that Jooste could not have engineered it on his own.
“To foment something of that size you have to have had a lot of people complicit in the whole thing,” says independent analyst Chris Gilmour. “One guy couldn’t have done it. He required a whole legion of people.”
Gilmour also believes that nobody should be excused for going along with what was happening and then later claiming that they were just doing what they were told.
“I don’t think, ever since the Nuremberg Trials, that you can say I was just following orders,” he says. “That doesn’t wash any more. There are so many mechanisms whereby, if you suspect something is wrong, you go and you talk to your compliance officer, and if that doesn’t work you take it the next level and so forth. There is a huge degree of complicity here. There has to be.”
Speaking on the Classic Business Breakfast on Monday morning, Graeme Kerner of Kerner Perspective agreed.
“It’s just so amazing that somebody could engineer this level of fraud,” he said. “And when I say somebody, there must have been more than one person involved.”
Is the model of corporate governance broken?
Ultimately it was the board and the auditors that picked up that something was wrong. However, by the time they did, the scale of the damage was already enormous.
This asks some very tough questions of the entire investment community. How could a fraud of this size have been perpetrated in a listed company, underneath the noses of so many?
“It’s going to go down as a case study of how to prevent a corporate disaster,” Kerner noted. “I’m not only pointing fingers at the auditors, or the audit committee, or the ratings agency – how did we all allow this to happen? This didn’t happen overnight.”
The reality check is that despite the extent of the fraud, the board initially fell for it. The ratings agencies fell for it. The auditors fell for it. The investment community fell for it.
The man-on-the-street investor has to look at this and wonder if the models of corporate governance under which this could have taken place are broken. However, Rob Lewenson, head of ESG Engagement (environmental, social and governance) at Old Mutual Investment Group, believes that while investor’s frustrations are understandable, the current systems of corporate governance can, and should be, effective.
“Having robust governance control systems with effective oversight in place ought to deter most fraudulent actions,” he says. “It is our key responsibility as investors to push the companies we invest in to have these systems in place to manage effectively their environmental, social and governance risks.
“Unfortunately, one cannot rely only on the law and corporate governance codes to protect the ordinary or institutional investor entirely when comes down to sophisticated fraud,” he adds. “Therefore, the only way to approach the reporting and actions by boards of companies is with a healthy dose of scepticism.”
Will Steinhoff have to sell the crown jewels?
The tragedy, of course, is that so much value has been destroyed for shareholders. This is also far from over.
“If Steinhoff survives, and that’s a very big if, it will be in a much more streamlined fashion,” says Gilmour. “It will be a much smaller operation. There is going to have to be a monumental sale of assets. They are not going to trade themselves out of €9 billion worth of debt.”
The harsh reality for shareholders is in coming to terms with which assets these could be.
“If you look through the results, the only areas that stood out as prime were Pepkor Europe and Africa,” says Gilmour. “Conforama doesn’t look good. I know there were some special circumstances, but their profits more than halved. Australia was okay, but it’s quite small. Mattress Firm is loss-making, and Steinhoff has been in the UK for some time and is still in losses there.”
His concern therefore is that there isn’t much worth selling.
“This is not a great operation,” he says. “Everything was predicated on acquisitions.”
This means it’s possible that creditors may insist that Steinhoff sells its best assets – the Pepkor businesses.
“I think lenders are going to take a long hard look and say that they are not interested in the group keeping the crown jewels,” says Gilmour. “They may want Steinhoff to sell the crown jewels so that they can actually get their money back.”
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