Steinhoff Bankruptcy: Organisational Structure Lessons

Looking back, what lessons did you learn from an organisational structure point of view that can leave a business at risk? I think the structure of an organisation can encourage some bad behaviour from CFOs or senior executives. What major lessons did you learn from Steinhoff in that sense?

I think there were several. Let’s talk about what one didn’t see, rather than what one did. What one didn’t see was the traditional senior management focus on sales and profit growth. I mentioned earlier that when you take on a business, you look at that business, you establish what the pluses and minuses are, where is it that we need to change things, do things, spend money, save money, recruit people, et cetera. There wasn’t this very aggressive stance on improving the operational standing of the business. So the sort of stuff you see now in the UK, you know Mike Ashley takes over House of Fraser and immediately you see changes in management, investments in some areas, all of that turnaround activity. I’m not putting Ashley up as a paragon of it, but just as an example.

That isn’t what you saw within Steinhoff. What you largely saw was the business being managed in order to move money into areas where there were relatively low tax opportunities, low tax regimes and move money and profit out of areas where it was highly taxed, so, at worst, manipulation of tax around the business. But probably no different to what you would see at Starbucks, Amazon, Apple. Multinationals are quite good at this. And the investors certainly didn’t mind it.

Who actually saw the cash generation because I think you mentioned there were stand alone P&Ls, but no one really saw or had control over the cash generation at an operating subsidiary level, therefore it gave those CFOs or financial directors at the centralised Steinhoff entity control of the cash?

Basically, all of the cash operations, financial management took place in South Africa. So, each of those countries themselves wouldn’t see the total balance sheet, if you like, the consolidated balance sheet of their full operation showing cash costs. You only had your operational balance sheet. Therefore, when we got back, just over a year ago, everything blew up. Overall, there were reported cash surpluses, €2.5 billion cash surplus, which was inexplicable at country level. So when I was doing the calls just over a year ago for yourself and some of the other companies, with the analysts, with the capital management companies, one of their questions was: “Where is all of this cash?” No one person could actually answer that. Whether it’s me or Stephen Campbell and there were other people having the same conversations, nobody could talk it through. The only people who really knew were in South Africa. Again, if you follow it through now, you probably know that the PwC were appointed in order to do the forensic accounting and they’re still doing it. It should have been answered by now, it’s been put back to April 2019. To give you some idea of the complexity and the web of operational, financial gearing that was taking place across the Steinhoff operation.

Doesn’t that structure encourage that though?

Very much so. Going back to behaviour and people, overall, one would almost say, there was a conspiracy in order to run the business in that particular way. We used to refer to it inside the business ourselves. At worst, it looked like an elaborate Ponzi scheme, where money was being moved around overall that didn’t really exist in order to support businesses. And then, if you underlie all of that with what was a fairly opaque annual reporting of their information, with very few like for like comparisons to be able to be made, often with acquisitions that seem to be sort of third quarter of a financial year. I remember, in 2014/15, we actually moved the financial year by three months, which was absolutely horrendous.