by Professor Owen Skae, Director of Rhodes Business School


In relation to the Steinhoff debacle, I’ve been thinking about Yale historian Timothy Snyder’s book on tyranny. In his preface he makes the point that history does not repeat, but it does instruct.

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Steinhoff’s share price plummet has sent a shockwave throughout the country in one of South Africa’s biggest corporate failures ever. There are people working very hard to turn the situation around, and the company does have strong brands but the fact that this could happen makes me wonder whether history does in fact instruct. Steinhoff’s board completely failed to be instructed by the many examples of corporate failure throughout history.

It completely failed when measured against how King IV defines corporate governance, notably ethical and effective leadership, through instilling an ethical culture, good performance, effective controls and legitimacy. While much of the finger pointing has been directed at the former CEO, Markus Jooste, my view is that while Jooste is directly implicit, so too is every member of its board. And therefore, every member of its board should be compelled to explain what they knew was happening so that we can hopefully all be instructed in how to avoid going through anything like this again.

We want to know what the board members were thinking at the time of the Steinhoff exposure and, going back to 2015, when German investigators raised the first red flags. The company simply denied any wrongdoing and we need to know whether the board members made any effort to investigate whether there was something to be concerned about. We also need to know why so many of the non-executive directors were glaringly absent from any of the standing committees when we all know that that is where you learn more about what is going on in the company.

To get to the heart of this corporate disaster, I am dusting off lessons on management decisions and corporate failure from the past because the same issues keep repeating themselves. Work done by researchers like John Argenti is as relevant then as it is today. This includes his 1976 book Corporate collapse: the causes and symptoms, and numerous articles on predicting corporate failure and how to avoid it through solid corporate planning – known as the Argenti System of Strategic Planning.

One of the strong examples of things going very wrong in that era was when Rolls Royce was declared bankrupt in 1971. Referred to as a major national tragedy, the collapse put at risk thousands of jobs and remains one of Britain’s largest-ever corporate failures. The question is: “What did Rolls Royce’s directors know about the bribery scandal and other mismanagement issues, but failed to notify the serious fraud office?”.

We have these darling companies and Steinhoff was one of them, and yet there is a general blindsiding until it is too late. The day before Steinhoff’s share price fell by 62% after Jooste resigned, as an article in Moneyweb explained, eight analysts were saying “it’s a buy” and only two were saying, “it’s a hold”. How does this happen? And I don’t believe for a moment that Jooste’s resignation happened because he suddenly woke up and felt guilty or sorry about what had happened. We’re seeing too many repeats of people resigning because they’ve been caught, not because they have an ethical awakening or deep remorse. Are they sorry for what they did or sorry that they got caught?

This led to me to a deeply insightful article on business failure crises first published in Management Decision, 1994, titled ‘Understanding the Causes of Business Failure Crises: Generic Failure Types: Boiled Frogs, Drowned Frogs, Bullfrogs and Tadpoles’, by Bill Richardson, Vol. 32 Issue 4, pp. 9-22, Sonny Nwankwo and Susan Richardson.

As the title suggests, they distinguish different business failure types into four types: boiled frogs, drowned frogs, bullfrogs and tadpoles. In my reading Steinhoff predominantly fits the drowned frog, defined by rampant managerial ambition, hyperactivity and arrogance.

The article describes the drowned frog as follows: “…a particular type of frog which is, itself, the creator of pond turbulence because of its insatiable need to be in many parts of the pond at more or less the same time, and because of its desire to create a position of ‘king of the pond’. … Eventually, this often worn-out frog drowns in a whirlpool of his own making”.

They further distinguish between the small and the large firm, and the smaller and bigger drowned frog, Steinhoff being the latter:

“… This organizational leader is an expert ‘contacts’ man – he forges working relationships with people who can help him to make growth happen. This bigger drowned frog moves – and manipulates – in boards of directors, financier and political circles. Growth, in his, often global, business context, is achieved through acquisition and the putting together of ‘financial packages’. This bigger drowned frog, too, has altogether grander power aspirations than his smaller counterpart. These often extend to include the role of influencer at national and international governmental levels.

“… The ‘drowned frog’ manager exhibits arrogance based on the belief that his early, and often remarkable, success, can be reproduced, time after time, notwithstanding the new and increasingly different and bigger contexts in which success is sought.”

The article highlights the drowned frog trajectory, which can be from four to 14 years, from good to excellent to fantastic to plummeting off the precipice. The authors reference Argenti for a number of specific causes of the drowned frog failure, including:

“(1) One-man rule. The drowned frog leader is an overambitious, super-salesman type who is so set on hyper-successful performance that he ceasesto believe in the existence of failure. These people are noticeable for their outstanding personalities. They are leaders of men, loquacious, restless and charismatic. The scale of their ambition is almost pathological. They never accept advice, they ‘know it all’.”

The most significant of Argenti’s remaining defects of management structure are presented below as additional causes of the drowned frog failure syndrome:

“(2) Non-participating board. The board of directors in the drowned frog organization tends to work for rather than with the drowned frog autocrat. Often its members seem to exhibit little interest or influence in the decisions, which get taken at board level. It is common for the ‘drowned frog’ to be both managing director and chairman (although this was not the case at Stenhoff).”

It is sadly the human condition of believing in your own infallibility and surrounding yourself with people who don’t challenge you.

There are further distinctions in the different frog definitions, where, for example notorious British media tycoon Robert Maxwell is the ‘bullfrog’ type, a show-off, inflated entrepreneur. Jooste was not the founder of Steinhoff, yet in certain ways he behaved like a bullfrog, acting as if the company and its assets were his.

What he and Jooste have in common is their lavish lifestyles, sometimes very public, as in Maxwell’s case, and sometimes not as public, as in Jooste. Jooste was more low key but his lifestyle is extravagant; centred on racehorses and horseracing.

Another characteristic of the bulldog is that they fail to separate their business expenditure from their private expenditure. If we look at Mayfair Holdings there is an allegation of fraud and improper use of assets.Even Christo Wiese, the Chairman of Steinhoff was caught offguard. Wiese was the biggest shareholder, yet he was caught in a vicious margin call as a result of Jooste’s unchecked behaviour on many levels, which led to the shares going into the death spiral, with every pension fund and investor in Steinhoff, large and small, badly affected, and a huge number of employees at risk of losing their jobs.

In my opinion, the entire Steinhoff board has failed in its fiduciary responsibility. If you are a participating board, when red flags are raised, they have to be investigated and acted upon, without fear of favour.

I further urge that every single board member of any company read or re-read the corporate failure models lining the management bookshelves, and make sure they are well versed in the clear financial indicators and warning signs that all is not well, and scrutinise the behaviour of the CEO. The board is responsible for setting proper policies and establishing the benchmarks of good governance, and therefore the board is complicit when things go wrong.

In Steinhoff’s case, the people of South Africa have the right to know what happened from every single board member because it is very difficult to prove their liability in court. They can recruit the best lawyers to defend them and it can take years to unravel what went on.

And that is precisely why King emphasises that boards have to take responsibility from the outset and not allow a situation to develop where people, like Jooste, do what they want over a protracted period while everyone else takes their eye off the ball until everything goes horribly wrong.

I end with a question for all boards to ask of themselves: are you a participating or non-participating board? If you are participating, how are you participating? If you are not, start participating immediately at all levels. Hopefully history will instruct. 

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