Even more mindboggling than the apparent fraud that was committed by a small group of people within Steinhoff are the current court cases claiming compensation due to the fraudulent activities. It is not only that the amount claimed, north of 60bl Rand is 6 times the current market capitalisation, but that the people suing are the shareholders of the company. In effect the owners of the company (the shareholders) are suing their own company. Obviously, this is too simplistic, and there are various claimants arguing different cases.
The biggest of them all is that of Christo Wiese, who claims that he swapped the ownership of his very successful businesses for shares in Steinhoff under false pretences. This might be true, but then again it is up to everybody in business to do their own homework and do proper due diligence. And since he became the biggest shareholder in Steinhoff, he was also the (very well paid) Chairman of Steinhoff. As the top Director of a company it would be his duty to make sure that everything is above board, and that the shareholders funds are protected. As a Chairman he would also have the ability to immerse himself into the operations of Steinhoff, and would have surely noticed abnormalities like the unrealistic high property valuations. Isn’t that what a Chairman is paid for?
The most recent shareholder who claims a right for compensation is Coronation Fund Managers. That is absurd. They are very highly paid professionals who consistently claim that the exorbitant amount of fees they charge their clients is rightful, because of their in-depth analysis of the companies they invest in. But yet they bought massive amount of Steinhoff shares even though one of the most basic measures of the performance of a company, the “return on capital” has always been poor, between 8% and 14%. One wonders if they have really been doing that much investigative financial analysis, or if they simply followed the lead of Christo Wiese (and ignored early warnings such as the raiding of the Steinhoff offices just after they listed in Germany by a specialised police force).
There are various others, who lost vast amount of money due to the 96% plunge in the share price who are suing Steinhoff. There are two problems though, and one certainty. First the problems with the claims:
A company has got shareholders, directors and various related parties like staff, creditors, the taxman and the society as a whole. For our purposes the first two are the most interesting. The shareholders are the legal owners of the company. The directors are nominated primarily to look after the interest of the shareholders as well as the other related parties. They act as the guardians of the assets of the shareholders. The executive directors are the actual “operators or day-to-day managers” of the company, while the non-executives primary role is to make sure that everything is above board. In this case it seemed that the CEO was the centre of the fraudulent activities, involving a close circle around him. The non-executive directors (two of them were from Coronation) had the power to ask the really tough questions, which they apparently failed to do. The Chairman would have the ability to do something about any allegation of mismanagement, which he failed to do. So shouldn’t the shareholders sue the directors, in particular the CEO?
The second problem is the following: What is a fair compensation? A share price is only the current reflection of the price of the company. It is not a scientifically calculated price, but more driven by sentiments. We know that companies can be very overvalued, in fact it is not uncommon for a share price to half in value at some point in a 10-year time horizon. I thought Steinhoff was very expensive at R47. If investors bought in at R60 should they be compensated for the losses they had measured to their average purchase price, even though, according to some the share price was already very overvalued?
What is for certain though is that with all the lawsuits going on, the likelihood that Steinhoff will need to file for bankruptcy has increased rapidly. No lender would want to give money to a company with such clouds hanging over it. No supplier would want to give credit, and the most talented employees search for better opportunities elsewhere. I assume that most of the lawsuits are aimed at getting to the front of the queue when Steinhoff does face bankruptcy.
Only level-headed judges who look after the interest of all related parties would dismiss these cases. Of those we have too few, because money buys the best lawyers with the most persuasive arguments who drive for a narrow-minded judgement. That is the world we live in.