QUESTION 4

CASE STUDY

Read the following case study and then answer the questions.

A market darling falls to Earth: The EOH Meltdown

Background

EOH was listed on the JSE in 1997. Over the next twenty years it grew to one of the largest technology businesses on the African continent.

By 2017 it operated in 36 countries in Africa and internationally. It had grown its annual turnover to R15,4 bn rand and was generally viewed as a highly successful company. In 2016 the share price peaked at R177 per share. Because of its performance, EOH shares were included in most investment portfolios, including that of pension funds.

However, within a mere four years, EOH's market value has collapsed, falling from a peak of R20 billion in 2016 to just R3 billion at present. This is reflected in the 92% plunge in its share price, from R174.83 to R14.61. So, what has caused this massive sell-off?

The first cracks begin to show

In 2016, EOH was thrust into a corporate scandal after allegations of compliance and governance irregularities emerged, involving various government departments such as Defence, Water and Sanitation, as well as the South African Police Service and eThekwini municipality, among others. The rumours in the market almost instantly translated into a massive loss in shareholder confidence.

The management of EOH tried to quell the market fears with the following statement:

"The combination of the macroeconomic environment and the adverse, unfounded media coverage that EOH received, temporarily affected the group's position in the market. Despite these market conditions all areas of the business coped very well."

For the time-being, the management could hold things together. By the time the 2017 Annual Results were finalized the performance of the company did not reflect the negative market perceptions. But the rumours persisted, and this prompted the company to launch an internal investigation into public sector contracts.

Unfolding events

In May 2017, EOH announced that its founder and chief executive Asher Bohbot, will be stepping down at the end of June 2017 after 19 years as the CEO. Zunaid Mayet who previously worked as chief executive of the EOH Industrial Technologies division replaced Bohbot as Group CEO. Bohbot then became the chairman of the Board.

In March 2018, EOH announced that it would split its business into two new operating entities. Rob Godlonton was appointed to head the new EOH subsidiary and the EOH CEO Zunaid Mayet was relinquishing his role as group CEO to take the reins at the newly created subsidiary Nextec. This created room for a new CEO.

In June 2018 Africa News 24-7 reported that the National Homebuilders Registration Council and the National Treasury placed EOH on a database of restricted suppliers. It was believed that the Registration Council requested for the company to be blacklisted after a contract was breached.

It was further announced that two non-executive directors will resign from the EOH Holdings board with effect from 1 July 2018: Lucky Khumalo and Johan van Jaarsveld, and that four executive directors: Brian Gubbins, Rob Godlonton, Ebrahim Laher and Jehan Mackay, will relinquish their positions in the Board to focus on their executive roles in the business.

These resignations cleared the way for a new "more balanced" independent Board to be appointed.

In September 2018 Stephen Van Coller was appointed as the new CEO. This was followed by the appointment of several other people to establish a new management team.

In February 2019, the software giant Microsoft served EOH with notice that they will terminate their channel partner contract with the EOH after an anonymous whistle-blower filed a complaint with the United States Securities and Exchange Commission (SEC) in November 2018. They alleged misconduct and corruption in relation to a R120 million contract that was concluded with the SA Department of Defence. Notice was served whilst Microsoft launched their own investigation.

It was estimated that the loss of the Microsoft contract would wipe several millions off the profit line of the company. In response to this news EOH's share price fell a further 4.3% to R13.46. This meant that the share had lost 71% of its value in the preceding 12 months and 90% in the preceding three years. Also, in February 2019, EOH founder Asher Bohbot, announced that he will be stepping down as the Board Chairman in the interest of improved governance. At the same time two other longstanding members of the Board also stepped down namely Rob Sporen, a non-executive director and founding member of EOH, who has been with the group for 20 years, and Tshilidzi Marwala, another non-executive director who had served on the board for 11 years.

In the very same month (February 2019) the Board of EOH requested a law firm; ENSafrica (ENS), to conduct a comprehensive investigation into EOH contracts in order to identify any wrongdoing or criminal conduct in the acquisition, award or execution of those contracts.

Further developments and remedial actions

In June 2019, Dr Xolani Mkhwanazi, was appointed as the new Chairman to the Board.

In July 2019, the ENS report was released. Several senior executives had handed in their resignations prior to the release of the report.

Although the report was not released to the public, EOH announced that the investigation by ENS had found evidence of serious governance failings and wrongdoing at the company. These included unsubstantiated payments, tender irregularities and other unethical business dealings primarily limited to public sector business run from its head office as well as EOH Mthombo, a division of the company.

EOH announced that they have terminated the employment relationships with individuals who have been directly implicated in the identified wrongdoing and indicated that it had reported the concerns and the details of those implicated to the Directorate for Priority Crimes Investigation, known as the Hawks.

In August 2019 it was announced that two more directors resigned from their positions.

What does the future hold?

In October 2019 during an interview, Van Coller (the new CEO) indicated that the corruption that has tainted EOH related to contracts entered into between 2014 and 2017. It involved eight people and approximately 20 suppliers. Action had been instituted against those implicated.

He further indicated that the Board was busy developing a comprehensive remedial plan, with a number of measures, some of which had already been implemented. The recent appointments of a new board chairperson and three independent, non-executive directors were important milestones for the group to enhance and complement leadership capability and governance oversight.

He also indicated that audit firm PWC assisted the company with setting up an internal audit function while ENS had helped implement an anti-bribery programme based upon the International Standard for Anti Bribery Management Systems.

One question however remains, can a company such as EOH survive this ordeal and will the remedial actions be enough to steer EOH to more peaceful waters? Only time will tell.

Adapted from various newspaper articles.

4.1 Explain why the events leading up to the appointment of a new CEO and Chairman to the Board of EOH can be seen as a breakdown in corporate governance. (4)

4.2 Identify/name four (4) stakeholders of EOH and indicate how their interests were compromised by the unfolding events and the drop in the share price. (8)

4.3 Identify and describe four (4) principles listed by King IV which should have guided the Board of EOH, but which was somehow compromised. This could relate to mistakes or failures by the board or management of EOH. (8)

4.4 Will the shareholders of EOH have a possible claim or legal recourse against the Board members who served between 2016-2018 for the fact that the value of their investments was destroyed? In other words, can the Board be held liable? (5)