Critically discuss the one-tier and two-tier board structures in South Africa, including how the board structure impacted the Steinhoff corporate governance failure. (25)
According to Tripathi (2013), Board structures are an integral part of corporate governance. Board structures significantly influence corporate growth and are governed and regulated by the legal and regulatory frameworks in order to protect shareholders’ rights and curb malpractices. The organizational framework categories Board structures into two types: (a) Unitary or single-tier board system where the governing body is comprised of a single board is prevalent in Anglo Saxon countries such as UK, US, Canada and India, (b) Two-tier board system where the governing body is comprised of two separate boards, a supervisory board, and a management board and is found in countries such as Germany, Finland, and Netherland (Tripathi: 2013).
As stated, above King Reports recommends a unitary board which is a one-tier board. According to Kneale (2012) unitary board is just one board of directors accountable to the shareholders. In a unitary board, there is just one structure made up of executive and non-executive directors accountable to shareholders. In a two-tier board, there is a supervisory board that is responsible for the general oversight of the company and of the management board, while the management board is responsible for oversight of management issues and is led by the Chief Executive Officer. The King Report 2002 supports a unitary board.
According to Block and Gerstner (2016), The “Anglo-American” model of a one-tier board structure is largely a reflection of the neoliberal norms of shareholder primacy and free-market capitalism. The German two-tier model is in many ways a reflection of stakeholder primacy, co-determination, and managerialism. The two board structures differ a lot, in terms of size, structure, composition, norms, and duties, to a larger extent the way the boards work based on the structure picked also differs.
Tripathi (2013) went on and said that, in the various reports such as Cadbury report (UK), King report (South Africa), and Higgs report (UK) the unitary board structure was preferred to the two-tier structure. According to Kings Report, the unitary board structure provides greater interaction among all board members when dealing with matters such as strategy, planning, performance, resources, the standard of conduct, and communication with stakeholders. The Higgs report concludes that it is important to establish a spirit of partnership and mutual respect on the unitary board. This requires the non-executive director to build recognition by executives of their contribution in order to promote openness and trust.
The two-tier board institutionalizes a clear distinction and segregation between the supervisory and monitoring functions on the one hand and the managerial functions on the other hand. The unitary board combines both functions although certain governance models through various mechanisms achieve a certain degree of segregation of these functions. It is however not easy nowadays to make an exact distinction between these two board structures, as most developed countries have moved away from traditional unitary board structures in the case of large public organizations (Tripathi: 2013).
Doppia (2008) one-tier board invests both managerial and supervisory responsibilities in one unified board of directors. This single board is traditionally divided between the (1) Chief Executive Officer (“CEO”) and executives directors, (2) a Chairman or Lead Director (oftentimes the CEO), and (3) Independent Directors.4 The CEO or chief executive is now commonly the only executive on the board as a result of the movement towards independent boards and independent board committees. The other executives, such as the CFO, COO, or CLO may report directly to the board, but normally are not members of the board.
Independence of Non-executive Directors
There is a greater chance of having a lack of independence on the two-tier board as most of the non-executive directors appointed to the supervisory board are mostly the former executives of the company. This is the same with the one-tier board, however, the recommendations of King Reports suggest that at least 3 years must pass by upon ceasing the office and appointment of the former executive and joining the board he was working for before. To a larger extent, independence on a two-tier board is undermined due to the fact that most of the non-executives are representatives of the trade unions, and or company employees. On the other hand, these non-executives may be representatives of the major shareholders. As representatives of the interested parties in the affairs of the company, independence is greatly impacted.
Kneale (2012) in addressing the lack of independence as former executives are appointed to the board, stated that where there are a larger number of former executives on the supervisory board, there is a risk that the supervisory board could take a lenient and easy-going view of what management is doing. To a larger extent, this may have been a major contributing factor to the downfall of Steinhoff. According TO RelationshipScience (2020) the Chairman of Steinhoff Africa Holding Pty Ltd was previously a Group Chief Executive Officer of Steinhoff International Holding NV and Chief Executive Officer & Executive Director at Steinhoff International Holdings Ltd. (a subsidiary of Steinhoff International Holdings NV). This comprised relationship of the Steinhoff was somehow characterized by the media as the Steinhoff Mafia.
Information Asymmetry
Information asymmetry is one of the major disadvantages of a two-tier board like Steinhoff. This occurs when important information is not passed to the supervisory board by the management board, to a larger extent this also occurs under one-tier but not as much as with two-tier. According to Khumalo (2020) in what has been arguably the biggest corporate scandal, an investigation by PwC found that Steinhoff, under the leadership of its recorded fictitious or irregular transactions totaling €6.5 billion over a period covering the 2009 and 2017 financial years. Related transactions among companies in the Steinhoff Group went very much unnoticed and to a larger extent, this can be attributed to the problem of information asymmetric, which is quite a less case with the one-tie board.
To cement this Khumalo (2020) went on and said that Steinhoff in a market update said Sonn is a major shareholder in an investment company called Gamiro, which is a controlling shareholder in a company called Blake and Associates Holdings. Blake counts amongst its clients the JD Group, a company owned by Pepkor Holdings which in turn is owned by Steinhoff. Recommendation of good corporate governance principles don’t recommend related transaction like these to pass through with no shareholder resolutions, as a result, the structure of the board did contribute to the downfall because critical and important information was not being passed to the supervisory board by the management board which was exercising accounting fraud and conducting creative accounting as well as engaging in a related transaction with no authority from the shareholders.