Identify 5 Key Board structural issues that are cited as possible causes of the problems at Steinhoff.
Introduction
The 5 key-board structural issues that were highlighted in the case of Steinhoff include (1) dominancy personality, (2) few numbers of standing committees as expected of the listed company, (3) less number of independent non-executive directors saving of the standing, (4) the structure of entire board being two-board did contribute to the fall of Steinhoff and (5) lastly having audit and risk under one committee.
(1) Dominant personality
Some analysis of the Volkswagen emissions scandal apportioned blame to the two-tier system combined with a corporate culture that was anchored by dominant personalities. A similar case can be made for the Steinhoff saga. A two-tier structure gives the CEO too much leeway to make decisions that in the end led to the near-collapse of the company, Other examples of companies that failed due to dominant personality in South Africa include Randgold and Exploration Company Limited and JCI Limited.
(2) Few numbers of standing committees
Few committees for a listed company like Steinhoff are another structural issue that possibly led to the problems faced in Steinhoff. The case stated that the company had three standing committees, however, the recommendation of King IV Report stipulates that a listed company should separate the audit committee and the risk committee, in addition to this, based on the public interest score, as stated in the Companies Act of 2008, Steinhoff should have created a social ethics committee. The case stated that another flaw in the board of Steinhoff was the wrapping of the audit and risk committee, which is a general norm of a two-tier board structure. The complexity of this organization did indeed needed a separate risk and audit committee.
(3) Few independent Non-executive directors serving on the standing committees
The case clearly states that there were few non-executive directors who actually served on the committees, and went on and said that only 5 of the 11 supervisory board members did participate in the activities of the committees, while chairman Christo Wiese and Claas Daun only sat on one. This implies that only non-executive directors were available for the audit and risk committee and the human resource and remuneration committee. This leaves the 3 members with a lot of work, given that they are supposed to meet the minimum number of days for attending the board meetings and the standing committees’ meetings.
King 111 Report argues that each director requires at least 16 days per year reserved for a board meeting, and another 16 days reserved for audit committee issues, given the fact that, the 3 members had to sit on the human resource and remuneration committee, which might also require 16 days, allows one to ask if these members were given sufficient time to the issue of Steinhoff board. The high probability of insufficient time could have contributed to the weakness of the audit committee and the board as a whole, and thus lead to the failure of the company. This is attributed to the fact that most non-executive directors do often serve on other boards or are executives of other companies and organizations, where most of their working time is spent.
(4) The structure of the entire board being two-board did contribute to the fall of Steinhoff
It appears that Steinhoff’s decision to opt for the two-tier board structure may have contributed to its undoing. Natural holes in the structure, the biggest one being the fact that the management board doesn’t always keep the supervisory board in the loop, combined with Steinhoff’s corporate culture which was anchored by a dominant personality, appear to have created accountability holes. Dominant personality is another issue that does deserve attention and explanation on its own.
From the case, it appears that the management board was not being accountable to the supervisory board as expected of the two-tier board and thus could have contributed to the downfall of this big company. Seems there was information asymmetry, as the management board was not keeping the supervisory board updated on the critical issues of the organization, this is one of the concepts of conflict of interest under corporate governance. Conflict of interest occurs where management or board members restrict the smooth flow of information for their own benefit, and in many cases, it leads to the failure of the organization. As stated in the case in the statement that follows. But the two-tier structure is often criticized for information asymmetry between the management board and the supervisory board. In other words, management knows a great deal more about the business than the supervisory board. This can lead to operational challenges developing without the board noticing until it is too late.
(5) Having audit and risk under one committee
The cases clearly stated King IV stipulates that the risk governance committee should be made up of a mixture of nonexecutives and executives (the majority being non-executives). And the governance guidelines warn against audit and risk being under one committee. In which case, the two-board structure of Steinhoff allowed the two to be combined. King IV encouraged that a company should only combine them if it’s able to devote enough time to dealing with risk-related issues. For a company of Steinhoff’s complexity, it seems inconceivable that the audit and risk committee King IV stipulates that the risk governance committee should be made up of a mixture of nonexecutives and executives (the majority being non-executives). And the governance guidelines warn against audit and risk being under one committee. Its advice is that a company should only combine them if it’s able to devote enough time to dealing with risk-related issues. For a company of Steinhoff’s complexity, it seems inconceivable that the audit and risk committee could have devoted the necessary time to undertake its responsibility. As a result, one would conclude that this is among the reasons why Steinhoff failed.