Part 2: The rise of Steinhoff: A Lazarus like return...

Following on from the recommendations to re-build the board culture and restore reputational damage, listed in the previous article: "Part 1: The Fall of Steinhoff: The Board that looked the other way...", the part 2 of the discussion analysis the Lazarus like return of the retailer. The embattled Steinhoff board is climbing its way back to recovery, with executive management proritising the optimisation of the corporate business strategy, complying to regulating bodies, good corporate citizenship practices and settling?€943 m in litigation claims. How far have they come along with the restoration of governance practices and board culture? And is the road back to riches paved with good intentions?

Current Board Structure and Composition

There has been no significant change to the board structure since the resignation of Markse Jooste. The current Steinhoff Board still maintains a dual or 2 tier board structure comprising of a supervisory board and a management board. In a 2 tier structure the supervisory board is responsible for general over sight of the company and for the management board. The management board is responsible for day to day management of the company. The King Report 2002 fully supports the transparency of a unitary board structure as opposed to a dual board structure. In a unity structure, there is only one tier comprising of both the supervisory board (Non-Executive or Independent Directors) and the management (Executive Directors) board. Due to the transparent face to face interactions of all board members, compliance can easily be reinforced and oversight can be conducted.

Since the resignation of Markse Jooste, there has?been an improvement in the strive for independence and neutrality on the board. The Supervisory board nominated Louis du Preez as Commercial Director and Managing Director on 19 December 2017. He was then appointed a CEO for a period that runs with effect from the conclusion of the AGM on 25 March 2022 until the close of the Company’s annual General Meeting to be held in 2026.

Louis is an attorney by background and has strong corporate and commercial oversight. He has also served in an non-executive director capacity of Pepkor holding prior to his CEO appointment.

Heather Sonn, daughter of Franklin Sonn, whose appointment as previous Steinhoff board Chair reeked of nepotism, abruptly resigned from her role under a cloud of of suspicion in 2020 due to a conflict of interest. She was listed as a major shareholder in a company, Gamiro Ventures, who completed a transaction with Geros Financial Services that was funded by Steinhoff. Ms Sonn informed Steinhoff that she was unaware of the transaction at the time and encouraged forensic investigations to investigate the transaction.

Moira Moses, new Indepedent Steinhoff Chair, Image rights: Steinhoff International

Former Non- Executive Director of the Supervisory board, Moira Moses was appointed as Independent Chair of Steinhoff Investment holdings. Moira comes from a full-time executive role, has held multiple Non-Executive Director roles and has strong governance and over sight skills in the audit and risk areas. She brings an aura of independence to the Board. The appointment of 2 females on the executive board does boost the gender gap at board level, and is an improvement from the previously all white male dominated board. However, the board still has an all white team with no representations from the african, indian and coloured cultural groups.

?Current State of business and settlement of litigation claims

The new CEO has certainly taken on a mammoth task of resurrecting the business. He has achieved an unprecedented milestone that few other CEOs of fraud ridden organisations have done. Louis has settled legal claims against Steinhoff for accounting irregularities, paying out 20 c for every rand claimed thereby settling R136bn of legal claims for R31.5b [1]. There is still real value in the business. Steinhoff owns 58.9 % of Pepkor?business valued at R47 bn. In Europe, Steinhoff owns 78.8 % of the Pepco Group which is valued at R70 bn. The mattress firm made an operating profit of € 237 m from the previous year. To generate additional cash flow, Steinhoff did sell shares in Pepco and Pepkor. In 2019, Louis launched lawsuits of R870m to claim back money from Jooste and R272 m lawsuit to claim back money form former CFO Ben la Grange. In 2019, SA financial sector Conduct Authority (FSCA) fined the company R1.5 bn for releasing misleading financials but the fine was reduced to R53 m. In 2020 the JSE fined Steinhoff as well for R13.5 m for breaching its listing requirements and Jooste was fined an additional R122m by FSCA for insider trading.?In early 2021, Steinhoff’s former auditor Deloitte agreed to pay R1.3 bn to Steinhoff but refused to not admit any liability for auditing irregularities [1]. The corporate sale strategy and road to economic recovery of the share price has been well thought off by the C suite team. For the September 2021 the group reported a significant improvement in performance with a 14% increase in revenue ( €9.2 billion) and an increase in EBITA of 29%. Similarly the operating profit for material non-operational items increased by 57% to €728 million.

?There and back again: The share price climbs…

Progressive increase in shareprice since market crash in 2017. Image rights: Bloomberg?

The current market capitalization of Steinhoff is €1.2 billion (R24 bn)?opposite the debt level of €8.5 billion (R190 bn). This is less than what is was last year at 30 September 2021 when group debt amounted to €9.7 billion. Some of the debt becomes due in December 2022 but Steinhoff’s lenders will most likely grant a payment extension to 2023, with the option to seek a further six months extension to 31 December 2023, subject to the approval of a simple majority financial creditor consent. This strategy will also buy management time to reduce its shareholding in various subsidiaries. Until the company’s debt level is under control, the CEO is not considering any further acquisitions [2]. This is a good conservation strategy to employ taking into account the current debt levels as opposed to the previously wild mergers and acquisitions stragey used by ex CEO Markus Jooste.

Since the plummeting of the share price in 2017 down to an all- time lowest of R1.06, leaving shareholders high and dry, the share price had steadily climbed back up to ca R 4.00 – R5.00 per share on JSE. The increase in the share price have certainly boosted investor confidence in Louis du Preez and his team. They have considered all options for the economic recovery and Louis has multiple back- up recovery plans in place to counter any further litigation claims. To date, Louis has shown great tenacity, resilience and agility in his executive duties, which is clearly evident by the current state of business.

The company still actively operates 8611 stores across the world including Pepco in the UK, Mattress Firm in the USA and Ackermans and Pep stores in SA. Upon completion of the restructuring process, Steinhoff can essentially become a holding company for retail investments and the executive board may consider re-branding the company. Rebranding Steinhoff post economic crash of the share price will bring a fresh and attractive outlook to investing in Steinhoff, with shareholders sleeping soundly at night in the comfort of knowing that the Executive Board is now working with good corporate citizenship practices and operates under the ever watchful eyes of multiple industry regulators

?Social media : Restoration of reputational damage

Image rights: News24?

In the words of Warren Buffet, “ It takes 20 years to build a reputation and five minutes to destroy ruin it. If you think about that, you 'll do things differently’. Reputation is essentially an evaluation of an organisation’s attractiveness to stakeholders over time and lies in the eye of the beholder. Personal reputation cannot be separated from the organizational reputation. The name of?ex- CEO, Markus Jooste, still resonates with shareholders?as a bitter after taste after his resignation and the 2017 plummeting of the Steinhoff share price.?Delinquent behaviours of leaders are easily and immediately detected and social media spread these non-compliance behaviours like wildfire.

Reputation is built on trust and when trust is broken, it takes time to rebuild and restore faith in both the leadership team and the organization as a whole. Rebuilding the Steinhoff reputation starts with its executive leadership team. The new CEO and his team have certainly performed many magic tricks to keep the Steinhoff ship afloat. The fact that Louis is working by the book and is transparent in his transactions to regulators have re-instilled investor confidence in Steinhoff. The media has had extensive coverage of all of Louis’s corporate defense strategies to keep litigations at bay, manage debt levels and restore investor confidence. There has been widespread reporting on all social media channels by investigative journalists of the market crash, appointments of new C suit team and management of legal claims. Due to this high degree of transparency in the remediation work post the market crash, it was difficult for the Executive Board to hide any non- compliance practices. The current status of business rescue and remediation processes have boosted an increase in share price from its all- time lowest value of R 1.06 and does speak to a restoration of faith and trust both in the organization and in the leadership team.?The return road back to riches is certainly paved with good intentions.

The Steinhoff corporate fraud saga arguably one of the largest cases of South African corporate fraud, provides valuable learning experiences to shareholders. Shareholders are encouraged not to take an organisation’s reported performances at face value, to question and justify any significant increase in share price over a short period of time, and to conduct research and other due diligence practices before making significant investments into any organization.

?References

1. ?Is Steinhoff back from the dead? R. Rose, Business Live publication, 10 February 2022
2. Embattled Steinhoff is slowly clawing its way back, S. Planting and T. Cohen, 31 Jan 2022

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