LUMKILE MONDI: Institutional integrity could salvage SA

The alleged accounting fraud at Steinhoff has been likened to state capture by those defending the corrupt South African state. Those sympathetic to the captured state have accused those concerned about corruption in the Zuma presidency of double standards for not voicing their discontent with Steinhoff.

Parliament voiced its concern by inviting senior executives to the House, while the JSE and the Financial Services Board have launched separate investigations relating to disclosure and fraud.

But how does an alleged accounting fraud in a single firm get compared to a failing state whose grade 4 children cannot read in their own language and where 13-million children live in poverty, 27.7% of South Africans are unemployed and inequality is widening because of the state’s policy choices and inaction?

Seen through the eyes of political economist Joseph Shumpeter, the situation is characteristic of a capitalist society where turmoil signifies economic progress.

Going inside the firm itself enables us to ask questions about its organisational capabilities, patterns of knowledge accumulation and governance structures.

There is no disputing that Steinhoff — a global retailer with more than 40 local brands in more than 30 countries — "knows how to do things".

It is Steinhoff’s capabilities and competencies with the know-how that have enabled it to shape its destiny including profitability and growth — and its probability of survival given the accusations of accounting fraud. Such is the nature of firms with dynamic organisational capabilities.

Organisational theorist David Teece suggests the boundaries of the firm, the degrees of diversification and coherence should be understood in terms of (a) learning, (b) path dependency, (c) technological opportunities, (d) selection environments and (e) the firm’s endowments of complementary assets. It is these complexities, particularly the selected environments with multiple compliance authorities, that create asymmetries of information that incentivise fraudulent behaviour.

Nobel laureate Richard Thaler and the behavioural economics revolution have highlighted the significant effect of widespread counter-to-self-interest behaviour that was heretofore unnoticed, ignored or dismissed by economists.

However, as powerful as these contributions have been in explaining this behaviour, they have been much less successful in altering it.

So how does society respond to these challenges?

In a recent paper, Werner Erhard and Michael Jensen presented a case for the inclusion of integrity in the appointment of managers, executives and boards in private and public institutions including political office. They define integrity as "the state of being whole, complete, unbroken, unimpaired, sound, in perfect condition". Integrity could provide a platform for South Africans to build a new social contract for inclusive economic growth, eradication of poverty and reduction of inequality.

For this to happen people, groups and organisations including Steinhoff, the state and the ANC, need to show up, be seen and be understood in a radical new way. In Erhard and Jensen’s words, integrity must occur for people, groups and organisations such that:

• Out-of-integrity behaviour actually shows up for them as being out of integrity;

• The damaging consequences of that behaviour, whether immediate or long term, show up for them in present time right along with the behaviour; and

• The damaging consequences show up for them as being caused by the out-of-integrity behaviour, rather than by some merely plausible explanation.

• Mondi is a senior lecturer in the Wits School of Economic and Business Sciences.