Steinhoff's red flags show effective leadership has a bigger role than governance codes
How could the Steinhoff accounting scandal have happened after governance codes were tightened and additional emphasis placed on auditing after the Enron collapse and the 2007-08 financial crisis?
Former Steinhoff chairman Christo Wiese says he would like to learn how these controls can keep a check on a committed fraudster. "You cannot run a business if the directors have to check the books. No matter how many codes and gate keepers there are — if there is a committed, talented fraudster you have a huge difficulty. I would like to learn how to overcome this."
Wiese says Steinhoff complied with all auditing, stock exchange and governance regulation. He acknowledged in an interview with the Financial Mail in May that, "I don’t know what I would do differently.
"All the right [reporting] structures were in place, and the auditors signed everything off … all three members of the audit committee had doctorates in accounting."
Yet the warning signs at Steinhoff were evident to some. In 2007, JPMorgan flagged the company’s aggressive accounting, poor disclosure and spate of acquisitions. Analyst Leonard Kruger of Allan Gray cited Steinhoff’s issuing shares to buy companies, which spiked debt and intangible assets, impairing the return on equity.
The Public Investment Corporation and thousands of other asset managers and investors were also seduced by Steinhoff’s great results.
In April BizNews quoted Bobby Snodgrass, who holds about 100,000 shares, as saying "… investors were misled by a charismatic leader and everyone listened to him. Those that saw red flags were at the trough and didn’t want to upset the apple cart."
The auditing profession is meant to "guard the guards" and ensure high standards of corporate governance.
Instead, as Jonathan Ford says in his review of Richard Brooks’s book The Bean Counters, "they give too much latitude to high-paying clients to conjure whatever numbers suit their books or pay out the best under the boss’s long-term bonus scheme".
Brooks points out that over the past decades there has been "an epidemic of rule-softening, liability and overt regulatory arbitrage that reeks of impunity. The idea that auditors should exercise prudence has been diluted to a tick box mentality with the aim of narrowing the scope for litigation. Innovation such as fair value accounting drives a coach and horse through traditional prudential disciplines that should underpin balance sheets."
Conscience, courage, resilience, responsibility, interrogating one’s reactions and feelings as well as listening to other people are critical to business leadership and consequently underpin people’s natural capacity to assess and mitigate risk. These traits can only be inferred — never seen or measured — and are immune to the governance rules and codes of conduct that define modern corporate governance.
Leadership development is highly effective in honing this capacity; the critical success factor being able to confront and work with the messy reality of the noncodifiable and immeasurable human condition. But this demands that one eschews gimmicks and ruses, peddled by so-called governance experts, which promise to sanitise or reduce human reality to what seems like controllable variables.
The economic value a person has contributed — rather than assumption-laden abstractions about adherence to espoused values or the future value of a deal — should form the basis of how bonuses are calculated.
Statistical abstractions and leadership or governance surveys, so popular with corporations and failed parastatals, are poor and often misleading substitutes for what one can and should glean from getting to know people.
Yet, a growing industry of experts offer to "convert" shallowly derived scores on individuals’ characters and other subjective value judgments into management data; some even translate such scores into financial rewards via fancy formulae.
These schemes are essentially rent-seeking rackets that encourage and reward executives to fool others and create an internally focused reality that makes them feel entitled to get rich at the expense of ordinary investors and pension fund members who trusted them to represent their interests.
The economic value a person has contributed — rather than assumption-laden abstractions about adherence to espoused values or the future value of a deal — should form the basis of how bonuses are calculated. Incentives should be informed by honestly learnt lessons and thus on business leaders’ ability to deal with the embarrassment of being proven wrong.
The religious high-mindedness that businesses attach to so-called governance codes encourages suppressing doubts and criticisms about governance systems, King III codes of corporate governance and the like, reinforcing the unproven assumption that compliance with codes will improve ethics.
In spite of the added cost of doing business, the red tape and the time and effort it takes to comply, anyone daring to question the moral sanctity of King III and other governance codes is regarded as heretical or up to no good.
Clever people can rationalise to get around rules, but only effective leadership and good judgment can ensure good governance. Codes are exercises in box ticking requiring little discussion, and board and leadership effectiveness surveys conceal more than they reveal about real ethics and other risk-mitigating human qualities.
• Yudelowitz is joint MD of YSA and author of Smart Leadership.