• Rama Govenden - Independent Trustee

“Nothing Fails Like Success” – Lessons for Company Board Members and Retirement Fund Trustees

Since December 2017, Steinhoff has been hogging the media for the wrong reasons. Investigations are currently in progress, it is therefore premature to make any definitive pronouncements. However, it does provoke a few questions.

How did the executives, boards, CFOs and audit committees, auditors, coterie of asset managers and their research teams, consultants and big private investors get it wrong?

It shows that it is not very difficult to fool most of us. Have we developed a “conspiracy of reverence” to these companies? Are they “holy cows”?

Before we look at the lessons, what is good corporate governance?

“Good governance starts with good legislation” Anne Maher, CEO of the Ireland’s Pension Board has asserted. Elias Masilela (ex- CEO PIC) believes that good governance starts with sound integrity at individual level and transparency. “This takes us right back to basics which requires professionalism and experienced people, well defined accountabilities, defined framework for policies, conflict identification and resolution, and performance management”.

We have a great constitutional democracy enshrining individual rights. We also have a conducive legislative framework (Companies Act, Pensions Fund Act etc. and guidelines from King) and one of the best regulated stock exchanges in the world. Therefore the formal technical requirements for good governance are spelt out very well.

So how did all of these safety nets fail? What are the key lessons for corporate governance?

1. Corporate Demagoguery:

We have created rock stars in business. Let’s be fair, many of these luminaries have built strong businesses, in the case of Steinhoff a substantial business straddling Europe, US and Africa built over 5 decades with multiple brands in its markets. However, why do we embrace these entities with blind reverence? They have become demagogues that are invested with royal status. No one dares challenge this status; it is tantamount to heresy if one does! This untouchability bamboozled almost everyone including the auditors it seems; it took the German regulators in 2015 to raise a red flag!

What is the formula to achieve this status? If you have business grown meteorically, a charismatic CEO, key larger than life private investors and a constellation of stars on the board? It also becomes easier when you have a group operating in multiple jurisdictions with complex businesses. When a shroud of invincibility is created, an environment is created for CEOs and executives to think that they are above governance and beyond criticism.

Confidence turns to arrogance, ambition turns into greed. This phenomenon poses a big risk to the economy. In an over concentrated exchange where the top 7 companies constitute about 40%, and top 33 about 80% of total market capitalization, this should be a major concern.

Are we able to distinguish between those that are running a good ship and those that give the impression that they are?

The key question then becomes, are there other Steinhoff’s? Definitely! The object of the piece is not to identify the likely candidates, but to ensure that proper processes and protocols are applied in assessing businesses and investment portfolios. These robust assessments should be conducted all the time and not stop when companies appear to become invincible.

The vast majority of employees in SA participate in defined contribution retirement fund arrangements where they take responsibility for their own investment return outcomes. This is an onerous responsibility. Regulation 28 of the Pensions Fund Act prescribes investment of retirement monies (currently maximum of 25 % outside the country, it has been increased in 2018 budget). Therefore, corporate demagoguery poses a significant risk which is exacerbated by the overconcentration of a relatively small number of assets on the JSE.

How do we deal with this ? We need to hold the auditors accountable for corporate malfeasance; it may mean rescoping their duties relating to corporate audits. We need to devise disincentives for them turning a blind eye. The investment managers/consultants also need to take responsibility in a more formal way. The investment and auditing community are paid handsomely for the work that they required to do, we need to make sure they deliver.

Does this mean that trustees will need to take a more conservative view on stocks generally? It may mean that they need to monitor and reduce exposure to the “risky” assets, namely these demagogues

2. Penetrating the “Corporate Veil”: Is it too much to ask for simplicity?

Are directors and trustees able and willing to penetrate the corporate veil? Does the CEO enable this to happen?

It is the duty of the CEO to relate to the board with integrity. Are board reports simple and lucid without the jargon? When spin becomes half-truths or lies, this could have major repercussions. Was this the case at Steinhoff? We’ll have to wait and see. This is where the directors need to have their “BS detectors” on – provided the directors understand the business well enough to unpack the issues in question. It is critical to have a proper dashboard of relevant performance measures in place which is reported on regularly. Regarding Steinhoff, there seems to be a “R100 billion hole” in accounts, how was this not picked up and dealt with properly much earlier?

All stakeholders depend on the auditors to validate the financial details of a company (assets, liabilities, expenses, income, profit etc.).Do they understand the jurisdictional parameters in each country in the case of complex, multi –national entities like Steinhoff? Is there too much scope for lawyers, accountants, actuaries etc. to stretch the parameters of the standards and assumptions used in accounting? Do the auditors understand the complex and innovative financial instruments being created all the time. We must assume that there are some people who will” take the gap” if the environment allows it.If the CEO decides to transfer certain expenses off- balance without proper approval, are the auditors able to pick these up?

Should we not have financial analysts, in addition to auditors, conduct audits in complex, multi –jurisdictional companies like Steinhoff? Can we make annual financial statements more accessible to lay people, for example the people that invest their retirement monies in these entities? Perhaps we should have 2 versions of the annual financials – the technical one for the specialists/regulators etc. and the second simplified one for the stakeholders?

For retirement fund trustees it is imperative that the investment managers/consultants are held to account. The problem is that many trustees are not familiar with the investment landscape. More should be done to expose trustees to understand the investment universe, how can we expect them to perform their fiduciary roles if this is not done properly?

Given the apparent failure of the experienced Steinhoff board to discharge its fiduciary responsibility, is it fair to expect untrained, unvested trustees to perform this role?

3. Shareholder vs. Stakeholder Approach:

Shareholders are people holding shares of the business whilst stakeholders are people and institutions affected by the operations of an entity (example employees and community). Given our levels of unemployment inequality and poverty, our business community needs to play a key role in addressing broader societal issues, not only looking at profit in a one dimensional one. There have been point solutions to address this (example narrow corporate social investment initiatives), however it requires a more systemic solution involving government, labour, business and broader society.

In South Africa, a narrow shareholder perspective is pervasive. The King Codes assert the longer term stakeholder perspectives with a shared capitalism focus. Steinhoff and the other cases have shown that business needs to get its house in order and join broader society and government to drive corporate governance and fight corruption.

4. Board Dynamics:

The relationship between CEO and Board chairperson needs to be professional with an “arm’s length “relationship with the necessary robustness to everything that is done. In Steinhoff there may have been a very unhealthy relationship of unconditional trust between the chairperson and CEO.

The board chairperson should be the wise counsel to ensure that the entire ecosystem works in smooth and meaningful way (a lot of this executed by the CEO)-management, employees, suppliers, customers, shareholders, regulators and the broader community. Is the CEO/chairperson holding everyone accountable for their respective roles? It seems that CEOs/chairpersons are too narrowly focused on shareholder interests. Do the rules of engagement underline robust discussion or tacit acceptance by an “old boys club” where unwritten rules apply? Why fix it if it is not broken, seems to be the mantra. The culture of the board is paramount to achieving optimum outcomes. King has promoted board performance reviews, should we not promote culture reviews as well? The worst scenario is where a board chairperson has been in place forever and “rubberstamping” becomes the norm.

Ray Dalio, the founder of largest hedge fund manager, Bridgewater Associates expressed it very eloquently when he said that to get fora to work you need a context for meritocracy where the best ideas see the light of day and a clear process to manage disagreements is in place.

One key concern is that there are some board members (seems to be in place in Steinhoff) who are participants in company’s incentive schemes. Having “skin in the game” is normally considered a positive re-inforcer, however in this instance does it not impact objectivity?


You can tick all the corporate governance blocks, but still be exposed. As mentioned above, integrity at a personal level and transparency are the keys to sustainability. Arrogance on the part of leadership should be a warning sign of possible failure. This calls for maximum vigilance from the fiduciaries. Success can breed arrogance. Nothing fails like success.


Rama Govenden ( B.Sc : B.Com(Hons) (IR)) , ex - HR Executive at PPS for 16 years, was Principal Officer for 6 years and trustee of PPS Retirement Funds for 10 years. He chaired and served on the board of INSETA for 10 years, and also served on the transformation, employment equity and skills development board committee of ASISA for 9 years.

He is now engaged in a portfolio career, consulting in HR and retirement fund spaces, setting up startup businesses and sitting on the board of a large umbrella retirement fund.

He writes in his personal capacity.

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