The Steinhoff debacle showcased the state of moral failure in business leadership and its implications for South African society, writes Willie Thabe.
When Sherron Watkins and Mimi Swartz wrote their book, Power Failure: The Inside Story of the Collapse of Enron, little did they know that similar maladies would affect other companies in other parts of the world. Nor that the impacts of these seemingly obtusely corrupt actions would reverberate for more than two decades.
The reality is that unethical behaviour has led to the catastrophic collapse or weakening of long-standing companies. Arthur Andersen, Lehman Brothers, BP, GlaxoSmithKline and HSBC all serve as good examples.
What stands out in the Enron account is how Watkins – who was vice president of corporate development at Enron at the time – was vilified within Enron for being the incessant harbinger of bad news that Enron was in financial trouble. Enron Corporation was an American energy, commodities and services company based in Houston, Texas.
In the case of South Africa, the most dramatic collapse was Steinhoff International.
Since its incorporation in South Africa – when it was structured as an integrated supplier that manufactures, markets, warehouses and distributes household goods and timber-related products – it had a close-knit team that were single-minded in their pursuit of profits and the internationalisation of the business.
The desire to sustain an ever-increasing share price pushed Steinhoff to do an unbelievable number of international acquisitions in a short space of time. The modus operandi was utilising what is colloquially called "P/E magic" (P/E is the price to earnings ratio and the practice of P/E magic being the use of a highly-rated share price to acquire companies with lower-rated share prices).
This pursuit of international acquisitions developed into a hubris and arrogance that did not relent even when reports surfaced that German authorities were investigating the company's accounting practices.
There was a complexity to understanding what the raison d'être of Steinhoff International was and how it accounted for its phenomenal acquisition, that had unprecedented turnaround results almost always – a sure telltale sign of all organisations with ethical lapses with an intention to obscure realities.
A close similarity between Enron and Steinhoff is the focus on profits, which were priority number one above all other considerations. However, Enron had a Watkins, the whistleblower, and Steinhoff had no recorded internal conscientious dissenter.
This silence at Steinhoff is resonant of the concept of "groupthink", which was developed by Irving Janis, a research psychologist at Yale University in the mid-1970s. Professor Cavaiola, a professor of counselling psychology at Monmouth University, elucidates this concept in one of his articles, saying the reasoning behind "groupthink" is that in highly cohesive groups, an esprit de corps dynamic often develops in which everyone adheres to the party line and anything to the contrary is viewed by the group as being derisive and designed to diminish the group's power.
In Janis' book, Victims of Groupthink, he cites many examples and gambles by different American governments that resulted in defective decision-making similar to Steinhoff's financial decisions, which led to its disastrous losses and the potential of legal prosecution for the leaders cited in a PwC report.
In Janis' examples, there is a point in an organisation where groupthink dynamics seem to take over the decision-making process. There is also an uncanny sense of invulnerability that seems to prevail, obfuscating the consequences of actions taken.
A further characteristic of groupthink dynamics is that dissenting voices or alternative strategies are met with opposition and those who voice such views are often silenced or dismissed, much like Sherron Watkins was at Enron.
While accuracy may not be easy to prove, the losses amounting to more than R100 billion – exceeding, in 48 hours, the amounts associated with the Gupta scandal, accumulated over a period of a decade as reported in the media – remains unprecedented.
To think of the Government Employees Pension Fund losing R12 billion in this one incident is quite difficult to fathom.
Perhaps the real difficulty of this collapse is the significant losses incurred not only by institutional investors and rich South Africans but millions of ordinary people. There is also a reputational loss on business leaders, employees, pensioners and other members of the world community.
The fall of Steinhoff brought to the fore a fundamental fallacy that moral lapses are mainly in the domain of government and the public sector. It also sent an uncomfortable signal that there is the possibility that not all wealth associated with the private sector is free of unethical practices.
Lessons from Steinhoff
So what are the lessons to be learnt from the Steinhoff scandal? The fact that absolute power corrupts absolutely, the stewardship of running an organisation is premised on things that cannot be commoditised, such as character and moral responsibility.
The personalities running the corporations should have a moral compass and demonstrate ethical leadership at all times so they never place profits above everything else. Nor should a firm emphasise its product or service without any consideration of the values that drive the organisation.
Steinhoff also clearly demonstrates that the voice from the top matters, what captains of industry see as important filters down to the ordinary worker and forms the rubric of what the organisation is made of.
Above all else, in most organisations where there are unethical practices, there seem to be a perversive culture of bullying that makes junior employees not speak out whenever they have a sense that there are unsustainable unethical practices that are buttressing the company's performance.
Perhaps the most advantaged group who were victims of their own brand of "groupthink" were institutional investors, who in pursuit of investment performance overlooked the undergirding fundamental analysis required for both value or growth-oriented investing.
There was only one institution recorded to have gone against the unintended "herd instinct" that is more reflective of comparative performance than a fundamental analysis of sustainable value, that is reflected by the company's ratings. Neither did they strongly use their shareholder activism to call the organisation's leadership to account given the importance they held as major shareholders. What was forgotten was that from a values perspective the means with which an end is achieved must both be justifiable and justiciable.
Perhaps, at some level of our consciousness, we should constantly evaluate what values drive our desired outcomes, especially in our responsibility of running profit-oriented enterprises.
In South Africa, as demonstrated by the fall of this behemoth, there is general "power failure" in the whole system and we need to recalibrate our ethical conduct as a matter of urgency.
We should also be cognisant of the fact that ethical decisions are taken by powerful individuals at a more personal level where corporate systems and structures designed to underpin ethical conduct can be bypassed without any reprisals for the individuals involved.
In the words of Queen Rania Al Abdullah of Jordan, "Whatever title or office we may be privileged to hold, it is what we do that define who we are."
- Willie Thabe is an independent private equity practitioner and a practicing business ethics consultant