Steinhoff’s FarSight Rating revealed weaknesses in its reporting on corporate governance and raised questions around the depth of its business relationships
By Rob Worthington-Smith
06 December, 2017
Sharp-shooting gunslingers opened up the American Wild West. For some, their flames burned bright, but all too briefly; and many an East Coast financier lost his shirt gambling on the promise of easy-to-come-by riches. Investors of today are no less attracted by the sharp-shooting feats of the modern gunslinger, the disruptive entrepreneur. Finding, or creating, and then exploiting, hitherto undiscovered markets, products or geographies is their particular skill. Successive generations of the technology sector offer fertile ground, but so too do emerging markets for more traditional industry sectors, such as old-world retail and property development. Such markets are often characterised by under-developed regulatory regimes, enabling fast movers to dictate their own terms for doing business.
There is a time and place for the swashbuckling hero of the Wild West. Investors in Steinhoff had, for years, put aside concerns around corporate governance; instead finding more obvious reasons to be well-pleased with CEO Marcus Jooste and his ability to grow the Steinhoff business from a small trading operation into a multinational conglomerate.
Growth of the scale and the scope demonstrated by Steinhoff, particularly when it is acquisitive in nature and leveraged using complex financial engineering, inevitably exposes companies to emerging risks. In the absence of robust governance cultures, structures, processes and policies the ability of individuals to engage coherently with the expanding operating context becomes diminished exposing them to disruption from from across the stakeholder spectrum.
The question investors have been asking for years now is “how long can this extraordinary growth last?” What clues in the business’ fundamentals, or in the behaviour of its leaders, may have signalled the impending arrival of the sheriff and his posse of forensic auditors? Well, the countries of Western Europe have their sheriffs, and they were properly awake to the arrival of Christo Wiese and the Sundance Kid.
Clearly, not every business leader can make the transition from extraordinary growth to sustainable growth successfully. What leadership characteristics are required to make this transition? And can we find leading indicators for long-term company performance?
FarSight, working in association with Legae Securities, seeks to answer these questions with its analysis of leadership maturity of prominent businesses across various sectors on the JSE. Leadership maturity, as defined by the FarSight model*, is a rating of how leaders respond to the most ‘material’ issues facing their companies. These are issues that society cares about enough to raise as challenges for the business, especially in the long term. For a retailer such as Steinhoff, the most material issues are categorised under Governance, Ethics and Customers (for a miner, issues of highest materiality would fall under Labour, Society and Environmental categories).
FarSight analysts then interrogate publicly available communication from the company, most critically the annual Integrated Report, for the maturity of the leadership’s response to these issues. Negative scores are given for value-destroying behaviour, such as dismissing issues as being trivial, or deceiving shareholders through lack of transparency and unbalanced reporting. Positive scores are awarded for engagement with societal concerns. For a retailer, relevant issues would include how it treats its customers, or complies with product labelling regulation (amongst others). Leaders that show accountability for their actions and can make clear links between the challenges they face and their business strategy, are awarded the highest ratings.
In May of this year (2017), FarSight applied its analysis to 11 companies in the retail industry: Shoprite, Pick n Pay, Woolworths, Spar, Clicks, DisChem, Foschini, Massmart, Mr Price, Truworths and Steinhoff.
Amongst these, Steinhoff was rated by far the worst for leadership maturity. FarSight’s report on Steinhoff’s leadership concluded: “the lack of organisational culture and ethical foundation, as well as the near complete absence of reporting on the building of value-creating relationships with its stakeholders, raises concerns, given its rapid acquisitive growth across multiple regions. Steinhoff may not be able to fall back on its relational capital, should any missteps cause the tide to turn against the company.”
At FarSight we are all too aware that such characterisations of company leadership may fly in the face of tearaway financial performance. Indeed, investors acting on our views of Steinhoff’s leadership ten years ago would have lost out on significant shareholder value. Nor do we pretend to know exactly when the point of “unsustainability” has been reached. All we can do is allow the company to speak for itself through the FarSight lens. It is up to the company’s stakeholders – regulatory authorities, customers, suppliers and other interest groups – to redirect the company’s actions toward a more sustainable course, or at least call the company’s leadership to account well before the point of maximum societal damage is reached.
* Rob Worthington-Smith is the founder of FarSightFirms.com. The FarSight model analyses leadership maturity based on the IIRC’s Integrated Reporting Framework, an international guide designed to standardise the way companies relate their value creation story.