EDITORIAL: JSE needs more teeth to sanction errant companies
Dishing out token fines could undermine the faith of investors in SA’s financial system
If anything needs to change in how the JSE fights dodgy bookkeeping practices, it is the stock market operator’s powers to punish misbehaviour.
On Wednesday, the JSE handed sugar producer Tongaat Hulett its maximum R7.5m penalty for issuing misleading and false information to investors. For a company of its size, worth R739m as of Thursday, the fine is relatively painless and small change for the loss of value its former executives inflicted on investors, who are ultimately ordinary people who were exposed through their pension funds.
SA’s reputation as among the top emerging markets for regulatory safeguards has also taken a knock from this scandal and others, such as the one that almost destroyed Steinhoff, once Europe’s second-biggest furniture retailer.
Shares in Tongaat, an icon past of SA industry, have dropped more than 97% from a R174 per share peak in 2014, when the group was worth more than R23bn. Since 2018, the year the company revealed questionable accounting practices that overstated sales and assets, about R17bn has been wiped off.
If it were just an honest hash made by managers misjudging the business cycle and pumping money into loss-making investments, the value destruction would remain just as scandalous. But 10 former executives, including former CEO Peter Staude, were allegedly instrumental in putting out false financial information, and these numbers were signed off by the board as an accurate reflection of the company’s health.
For scrutiny in the review of financial disclosures to be upgraded, it would help if a company’s board members were aware that the JSE could slap a crippling penalty on the company, or on themselves as individuals. It would be even better if the SA Police Service, the Hawks and the National Prosecuting Authority (NPA) were quick off the mark in apprehending and prosecuting individual directors responsible for such financial scandals.
It has been eight months since Tongaat’s relatively new leadership team, which is doing a good job in cleaning up both the balance sheet and the image of the company, launched a civil suit to recover the bonuses and benefits paid to executives who played a role in the scheme, which involved revenues being recorded earlier than they should have and expenses being logged as assets.
Staude, the subject of a scathing report by an Investec analyst questioning his stewardship of the company, was paid R176m in the decade to 2018.
The NPA still has to charge anyone in relation to the huge fraud at Steinhoff, even after an internal investigation found that a group of executives used complex transactions to hide financial losses at underperforming subsidiaries.
By contrast, German law enforcement authorities arrested Markus Braun, the former CEO of Wirecard, within days of the disclosure of a $2bn fraud at the online payments company once seen as one of the hottest prospects in Europe. On Wednesday, police and prosecutors raided Wirecard headquarters and other offices as they widened their investigation.
Among Tongaat’s shareholders, who were deceived into investing billions in the company, the JSE’s limited powers to punish financial misconduct, and lack of progress by the police, will rightly dent faith in the system.
Meanwhile, investors who are still holding on to Tongaat can take solace in the commendable job being done by CEO Gavin Hudson, who immediately instituted an investigation into past practices in a bid to restore the former blue chip’s fortunes. Under Hudson, Tongaat has embarked on a revival strategy that includes slashing its R13bn debt by about 60%, tapping shareholders for about R4bn, and selling assets after weak operational performance coincided with the allegations of dodgy accounting practices. Shares in Tongaat have gained just more than 13% since resuming trade in early February — not bad for a company weighing whether to issue more stock.
But with the JSE handing out token fines and SA authorities showing a lack of urgency to prosecute financial crime, the hard work by Hudson and that of others elsewhere trying to clean up governance failures could be in vain if a lack of faith in regulatory safeguards undermines SA’s capitalism.
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