South Africa's Mr Corporate Governance, former judge Mervyn King, says the Steinhoff debacle might have been prevented if the company had been listed in South Africa instead of Germany.
The South African global retailer has a secondary listing on the JSE, but its primary listing is in Frankfurt, where a two-tier board system applies. This means that executive and nonexecutive directors sit on different boards, unlike the South African system where they sit on the same board.
King says Steinhoff's executive directors would have been exposed to more rigorous scrutiny in South Africa's unitary board system, which is not applicable in Frankfurt.
"It [the Steinhoff collapse] may not have happened because the nonexecutive directors would have been better placed to eyeball the executives and ask them about what is in the pack," he says.
The "pack" refers to the information that executive directors prepare for the nonexecutive directors. Information about operational issues, acquisitions, debt incurred, nonperforming assets - all the information the nonexecutive directors need to know to ensure that the company is being well run.
What everyone wants to know is how Steinhoff's star-studded board, packed as it was with the most experienced directors in the country including five chartered accountants and former CEOs of successful and reputable companies, could have allowed the company to collapse under their noses.
King's answer is that they would have been reliant on the pack the Steinhoff executive team put before them.
He says a key part of the Steinhoff inquiry will be what the nonexecutive directors knew and what they should have known.
There have been allegations that the information made available to them by CEO Markus Jooste was doctored.
But if they'd applied their minds properly to that information, as their fiduciary responsibility compelled them to, wouldn't they have questioned it more vigorously?
"If the allegations are correct that what was in the pack was massaged by the management led by Jooste, then you could have the best directors in the world and they could honestly apply their mind to what is put before them" and still be misled through no fault of their own, says King.
The law is not that a nonexecutive director is a bloodhound.
— Mervyn King, corporate governance expert
"Unless there is something in the pack, and this is the law, which puts them on inquiry, they're entitled to accept what is put before them."
Putting them on inquiry essentially means arousing their suspicions.
If their suspicions were not aroused, was this because they failed to interrogate more aggressively the information they were fed?
King says they were under no obligation to do so.
"The law is not that a nonexecutive director is a bloodhound. They can accept what is put in the pack before them unless there is something in the pack that puts them on inquiry. Otherwise companies can never operate."
If there was something in the reports before them that triggered in their minds the suspicion that something might be being kept from them, it would have put them on inquiry and they would have had to probe further, he says.
If under those circumstances they did not, then they would have failed in their duty of care to the company. "If anything in that pack triggers an inquiry in their mind, they must inquire."
So the question is whether there was anything in the pack before them that should have triggered doubts or questions?
"I think this is going to be a critical part of the inquiry going forward," he says.
"The Steinhoff nonexecutive directors are saying: 'We got our pack, Jooste gave us massaged information, we had no reason to doubt what was in it.' What they're saying is they had no reason to inquire.
"Nothing in the pack put them on inquiry. And so they didn't inquire. They accepted what was put before them and made decisions."
If it is found that the packs were deficient, then the executives who prepared them are guilty of a fraud on the nonexecutive directors and on the supervisory board, King says.
But if and when it goes to court, the judge will decide whether anything in the pack should have triggered queries in their minds. If the judge decides that this is the case, it would open the nonexecutive directors to civil action for damages by Steinhoff.
If they're found to have been negligent in not asking the questions they should have asked, should they be convicted of, at the very least, criminal negligence?
"Negligent oversight by a director is not a crime," King says.
Should it be?
"Then you've got to change the Companies Act."
Would he like to see it changed?
"No. It deals with it adequately, which is that if anything puts a nonexecutive director on inquiry and he doesn't inquire and something happens, then he should be ... responsible for it."
King says if Steinhoff had been operating under the corporate governance jurisdiction of South Africa, it would have been much easier for the nonexecutive directors to hold the executives to account.
"Under this system you have executives, who are also directors, together with the nonexecutive directors, so the nonexecutive directors can eyeball those executives about what is in the pack, and watch how they react, what they do. They're better placed to decide if the executives have been massaging the information or not."
He believes the two-tier board system does not allow for the same level of corporate governance as the South African model does.
"It is unsuitable and in fact it is falling into disfavour around the world."
King concedes that even in the two-tier system, Steinhoff nonexecutive directors would have been free to interrogate Jooste whenever they wanted. But nothing beats regular "eyeball contact", he says.
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