We all have heard of too big to fail, but what about too complex to understand?
The restated 2017 annual report into the collapse of retailer Steinhoff shows that board chairman Christo Wiese and his companies earned R28-million in 2017, including from related-party transactions, raising questions about whether Wiese was acting in his own interests or those of all shareholders.
But, Wiese defended his role at the apex of this giant swindle. He told the Mail & Guardian that all of his business interests had been disclosed. The annual report was prepared in compliance with the requirements of Dutch law because Steinhoff has its headquarters in the Netherlands. Wiese said under this law “there is nothing like a related party. It doesn’t exist”.
Referring to Steinhoff’s ownership of Pepkor, Wiese told Bloomberg: “It shouldn’t surprise anyone that I was in a number of related-party transactions with Steinhoff.”
He told the M&G that when he invested in Steinhoff, “I invested R60-billion”.
When asked whether his companies’ contracts with Steinhoff had prevented him from seeing the fraud or aspects of it, he answered: “These little contracts you refer to were €1.7-million. See it in that context. How could that prevent me from seeing the accounting fraud? It now appears the fraud originated more than 10 years ago before I had any connection with the company.”
Many investors put their money into Steinhoff because Wiese, one of South Africa’s all-time most successful entrepreneurs, was heavily invested.
Wiese said it had taken 18 months for PwC, with seven partners and 100 associates, to unravel Steinhoff’s affairs. Even the German forensic investigations firm, FGS, hired by the Steinhoff board to investigate the allegations, could find no trace of irregularities, he said.
“How do you expect a non-executive director, who attends four to five board meetings a year, to pick that up [the fraud at Steinhoff] after everything has gone through the necessary gatekeeping, the internal auditors, the statutory auditors, the component auditors, the bankers, the regulators?” Wiese asked.
The restated Steinhoff 2017 annual report found the company had manipulated its earnings and reported a loss after a forensic report by PwC earlier this year found that a clique of executives inflated Steinhoff’s profits and assets by €6.5-billion between 2009 and 2017.
The annual report, over and above restating Steinhoff’s finances, detailed possible conflicts of interest with regard to Steinhoff’s then supervisory board chair Wiese and companies controlled by him.
According to the restated 2017 annual report, these are the Wiese-controlled companies that had contracts with Steinhoff in 2017:
- Titan Financial Services Pty Ltd, which provided Steinhoff with office management services and premises to the value of €150 000;
- Toerama Pty Ltd, which provided business class travel for senior Steinhoff management for more than €800 000 on its Boeing business jet B737-72U;
- Grene Properties, which provided services to the directors of Steinhoff for €300 000;
- Chaircorp Pty Ltd, which offered management services to Wiese as Steinhoff chair worth €497 237;
- Invicta Holdings (controlled by Wiese and his son Jacob) sold its building company BSG to Pepkor (an indirect subsidiary of Steinhoff Africa) for R645-million. Jacob sat on the Pepkor and Invicta Holdings board as a director, making him both the seller and the purchaser in the contract; and
- Thibault and Shoprite. Steinhoff Africa subscribed for preference shares issued by Lancaster 102 to the value of R4-billion in order for Lancaster 102 to purchase Thibault’s shares in Shoprite holdings. Both Thibault and Shoprite are owned by Wiese. Thibault subscribed to buy preference shares in Steinhoff Africa to the same value of R4-billion.
Both sets of shares were transferred to Lancaster 102, owned by Lancaster 101, which is controlled in part by former Steinhoff supervisory director Jayendra Naidoo, a trust and the Public Investment Corporation, which holds a 50% stake.
The annual report suggested that through outsourcing travel arrangements and management services, Wiese’s companies benefited from his and his son’s senior positions at Steinhoff. Most of these contracts ended when Wiese and Jacob resigned from Steinhoff on December 14 2017.
But, €33.3-million of a €47.4-million loan that Wiese gave Steinhoff through Upington Investments, remains outstanding. Wiese has a 90% controlling share of Upington Investments, and according to the annual report there is no record that the loan was approved by the Steinhoff supervisory board in the minutes to the board’s meetings. Neither the current managerial nor supervisory board expressed an opinion on this finding, stating that this transaction will need to be investigated further.
With a company such as Steinhoff operating in multinational jurisdictions, there are no universal legal or ethical frameworks for corporate governance. There are, however, universal principles, said chief executive of Pan-African Investment and Research Services Iraj Abedian.
“Thou shalt not defraud the company. Thou shalt not do secret or clandestine transactions with related parties,” he said. Abedian believes that not even these universally agreed principles were acquiesced to.
Because there is no universal framework, Abedian said, “gaps are created for some shrewd and unethical players to exploit”, which leads to transactions taking place in specific jurisdictions as a result of different requirements regarding disclosure.
“It is increasingly becoming clear that globalisation and financialisation has happened without prior uniformity in terms of the absolute necessity for a universal framework for the regulatory side. This is why investors are taken for a ride.”
In terms of corporate governance best practice, Futuregrowth investment analyst Tarryn Sankar said that directors should disclose the conflict of interest and recuse themselves from any decision such as issuing tenders to a company in which the director may have a stake.
Steinhoff has clothing, food and furniture retailers under its banner and until 2017 was in the process of acquiring more companies. It operates across multinational jurisdictions. Each company in Steinhoff has its own board and auditors.
Big, complex and with fraudulent financials, Steinhoff lost 91% of its value (R210-billion) in just one week in December 2017. Its major shareholder, Wiese, lost almost R50-billion — a loss so great he fell from the Forbes list of the wealthiest business people. Markus Jooste, former Steinhoff chief executive and allegedly the chief architect of the grand deception, lost a paltry R3-billion.
A lack of transparency in governance, fictitious balance sheets and an abuse of trust are some of the reasons for the puffed-up behemoth’s fall.
For the company’s former chair, who had been consolidating his assets into Steinhoff, the collapse was unexpected. “As far as I was concerned, Steinhoff’s governance had all the structures in place [and] corporate governance was adhered to. The fact that it appears something was off, it has now come to light,” Wiese said.