Steinhoff – where is the independence?

So, we have all watched with fascination and a little bit of anxiety this last week as the value of the Steinhoff business has shed approximately R 200 Billion (USD 14,5 Billion), knowing that due to the small size of the South African listed market and the significant size of Steinhoff that most of us are exposed to this slide in value through our own investments (short and long-term).

The vast majority of international governance recommendations insist (more and more loudly) that a significant level of independence is becoming more and more essential at board level. This is not an independence that is aimed at muting business growth, or creating unnecessary inertia and bureaucracy – but an independence that keeps the ‘best interests of the company’ ‘front-and-centre’ of any and all decision making. This is what boards (and individual directors) are legally obliged to align their decision making against as well as ensure remains the key factor in their decision making.

How does this relate to Steinhoff?

I think there are two key questions to ask (1) where is the independence? and (2) how has this board defined ‘best interests of the company’?

The first one question is easier to address – in the second question we have to make some assumptions about (assumptions that unfortunately appear over the last week to have be verified or validated)

(NB: I have simply used search engines to explore and uncover what is available online – where possible I have checked dates and how current the information is).

A cursory look through the board membership of Steinhoff is interesting reading (this is publicly available information and features on a number of current news sites). This shows the board composition – the individuals who make up the board and their ‘profile’ and mix of ‘profiles between executive, non-executive and most importantly independent. (14 or 15 members – depending on how one reads the Steinhoff site and distinction between Management Board and Board of Directors – on their site Markus Jooste has already been removed – I am counting him in to the 15). Of the 14 (or 15) people only 4 of them ‘appear’ to be Independent (I have looked at shareholding, previous involvement, relatedness (both juristic and natural) as my guides). Another point worth noting is that (at least) 6 or 7 of these board members are qualified CA(SA).

Even of these who could be seen to be ‘independent’ I have a few questions. These include representing possible banking or insurance relationships (and hence an indirect interest or concern as a shareholder/shareholder representative) as well as holding down too many directorships. Even as a professional director one needs to manage the number of directorships one can responsibly hold. Some of these directorships (of other companies) are also long-term – over 9 years according to King III(tm) and King IV(tm) need to be examined with regard to independence.

So what is so critical about the concept of Independence anyway?

Governance, at one level, is actually all about the responsible ‘management of interests’. It is recognised in both law (South African Companies Act) and governance recommendations that one of the biggest challenges in both governing and managing companies (of any type – public and private, big, small and in-between) is the existence of ‘default’ conflicts of interests. These exist where people sit in the seat of both (or represent both) shareholder and director – or shareholder and manager – or all three. Conflict of interests exist where individuals or groups can benefit externally by decisions that are made internally – and over which they have a level of say, influence or control.

If every business is, at its most fundamental level, all about making and implementing decisions – any and all factors that impinge upon or influence decision making must be properly managed and taken into account in every decision.

The challenge with conflict of interest, independence and the ‘best interests of the company’ is that the board of directors has to understand the interest landscape of the company – and ensure they act ONLY and ALWAYS in the best interests of the company! Too few boards take a step back and properly define this – clearly, deeply, tangibly and visibly. If the best interests of the company are not defined in all four of these ways then other interests, that are often more clearly defined, exert a deeper influence on the decision makers themselves, have more tangible or measurable benefit and are more visible will overwhelm those interests that are not!

We have to assume – given the evidence emerging with the Steinhoff debacle – that the other interests, and not the ‘best interests of the company’ influenced (and most likely overwhelmed) the decision-making processes!

The role of independent directors is to ensure that the interests of the other people ‘around the table’ are kept in their proper place (i.e. outside the boardroom) and when these interests are evidently part of the decision that they are appropriately taken into account as part of the clearly defined ‘best interests of the company’ – against which every decision must be tested or bench-marked.

This story has a long way to go – both for the company and for the directors involved! We will continue to watch with interest (and fascination).

This is a topic of Culture, Ethics, Purpose, the role of companies in society and the larger economy.

Boards HAVE TO talk more and more about these things as a matter of URGENCY!

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