Spar Group is hunting for a new CEO to clean up the image of the food and building retailer, which admitted to irregular lending activities, and to restore investors’ confidence after years of underperformance compared to its peers.
The group, which operates in several countries in Africa and Europe, has been hit by allegations of issuing irregular loans and inflating prices of loss-making stores sold to unsuspecting franchisees. Amid this and other corporate governance issues CEO Brett Botten resigned this week and chair Graham O’Connor quit last month.
New chair Mike Bosman, who joined the board in December, said on Friday the group is in discussions with potential internal and external candidates for the CEO position.
“We do want to move quite quickly. In terms of Spar’s memorandum of incorporation, we have to have two executive directors on the board and in the event one leaves we have to find a replacement within three months. Our time frame is dictated by our memorandum of incorporation,” he said.
Bosman said the candidate must be able to relate to the Spar culture and its entrepreneurial environment, build teams, understand the South African landscape and address issues of diversity and gender.
“The candidate does not necessarily have to be a retailer because we have three competent CEOs that run three regions and they are all good at what they do. What we need is someone that will co-ordinate these teams and drive strategy.”
Corporate governance issues in South Africa seem to have become more regular and perhaps management is not being held accountable to the extent that it should
— Casparus Treurnicht, analyst
Bosman, who is also chair of Spur Corporation and on the board of a number of listed companies, including AVI and MTN, said Spar has strict financial controls in place to ensure what happened five years ago does not happen again.
This week Spar admitted that three fictitious loans amounting to R11m were authorised and have since been reported to the Independent Regulatory Board of Auditors (IRBA). It said the loans happened five years ago.
In a Sens statement Spar said: “A written loan agreement was entered into between a willing lender and borrower through a commercial bank, at normal interest rates with fixed terms of repayment. However, the board concluded that the loan did not seem to have served any real commercial or economic purpose and should not have taken place.
“This arrangement is not Spar practice and there is no evidence to support any allegations of accounting irregularities with any other loan transactions. Spar’s auditors are satisfied that this was an isolated matter and is no longer taking place, and adequate steps have been taken for the prevention of any loss as a result thereof.”
Spar was also accused of racism by black entrepreneurs. According to the findings of an investigation by law firm Harris Nupen Molebatsi, the allegations of discrimination towards any retailers were unfounded.
Casparus Treurnicht, portfolio manager and research analyst at Gryphon Asset Management, said it was “extremely disappointing” that another South African firm “ran into irregularities if you can call it that. Corporate governance issues in South Africa seem to have become more regular and perhaps management is not being held accountable to the extent that it should.”
In recent years JSE-listed retailer Steinhoff and sugar producer Tongaat Hulett were found to have committed fraud amounting to billions of rands.
“You can bet on it that there will still be a payout to outgoing CEOs, and this needs to change. Spar have also made a few strategic mistakes over the past few years and this all explains why they are underperforming other South Africa-based retailers. Their focus has shifted,” said Treurnicht.
Spar announced that Botten will retire at the end of this month while O’Connor will leave the group in February.
Independent investment analyst Chris Gilmour said Spar “really needs to show the market that they are serious about presenting a clean image”.
Treurnicht said getting an outsider as CEO would “reset the company’s prospects and ensure that all existing and potentially remaining problem areas will be identified and addressed”.
He said the new CEO would be in a better position to make decisions about underperforming segments of the business and “focus on what always mattered” — its core business in South Africa. About 75% of Spar’s profit before tax is from South Africa, though it is 65% of its turnover.
Ricardo Micheals, equity analyst at Denker Capital, said the Spar management changes were “definitely welcome given the corporate governance concerns we had, but for now we will wait and see if more information comes out regarding the allegations”.
Spar have also made a few strategic mistakes over the past few years and this all explains why they are underperforming other South African-based retailers
— Casparus Treurnicht, analyst
The investment community has raised issues around the appointment of O’Connor as chair in March 2021, a month after he retired as CEO. This was seen as against the King Codes of Good Practice, which recommend a cooling-off period for a CEO before becoming chair.
“We had some concerns regarding the previous chair/CEO serving on the board when Brett Botten was appointed CEO. We think the new additions to the board bring some knowledge that might be needed but we are still curious to see who takes the CEO post. The group is doing the right things now, but they should have done this a long time ago.”
Micheals said whoever takes over from Botten should have the skill set to get the group back on steady ground. “They need knowledge about the offshore markets and local market dynamics so they can find the best way to unlock value in the business. If that person is an outsider, then they should get the best candidate possible.”
Micheals expects investors to “be more cautious until we can get comfort around what the new strategy of the business will be (assuming they change a few strategic plans). Investor confidence needs to be restored after a few years of underperformance.”
He said the new CEO faced a number of challenges and had to make decisions about the loss-making Poland businesses, reducing group debt and getting the core South African grocery business back to growth and competitiveness.
In its full-year to September last year, Spar Poland terminated contracts with a group of retailers and restructured the distribution centres, a move that hit its performance.
Spar expects Poland to break even in 2024 but analysts have said Spar should cut its losses and focus on its core local business.
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