The world is changing fast and to keep up you need local knowledge with global context.
By Gareth van Zyl
One year, seven months and 30 days.
This is how long John King, the chief financial officer of JSE-listed IT firm EOH, was a non-executive director of three companies owned by controversial businessman Keith Keating between March 1, 2016 and October 31, 2017.
In addition, records from the Companies and Intellectual Property Commission (CIPC) show that former EOH CEO, Asher Bohbot, became a non-executive director of these same three Keating companies as of March 1, 2016. (Bohbot, 65, shocked the market in May this year when he stepped down as EOH CEO. He still retains his shares in EOH while on a six-month sabbatical.)
EOH’s current company secretary, Adri Els, is also listed under the director’s’ column for Keating’s three companies as ‘company secretary’ for this period, according to the documents that BizNews has seen.
These directorships at Keating-owned Grid Control Technologies Proprietary Limited (GCT), Forensic Data Analysts Proprietary Limited (FDA) and Investigative Software Solutions Proprietary Limited (ISS) came about after EOH received approval from the Competition Tribunal to acquire the businesses on November 25, 2015.
EOH told BizNews that the likes of John King’s appointment as non-executive director of Keating’s companies was “normal practice for investment holding companies” at the IT company.
But Keating’s involvement in a bombshell corruption scandal has put his relationship with EOH under the spotlight.
On Wednesday 29 November 2017, details emerged in a Scopa meeting in Parliament about a deep-rooted graft scandal involving the South African Police Service (SAPS) and the State Information Technology Agency (SITA) in awarding R6.1bn in contracts to Keating’s companies between 2010-2017 for products ranging from cameras, torches and other forensic equipment. Keating, an ex-cop, is also accused of facilitating kickbacks and bribes to former acting police commissioner Khomotso Phahlane via money laundering.
Further drama engulfed the briefing when Keating was pictured gatecrashing the Scopa meeting and ominously seating himself directly opposite police officials.
Days later, on Monday December 4, the Independent Police Investigative Directorate (Ipid) raided Keating’s home and his Tshwane office in relation to a corruption probe.
EOH’s ties to Keating and news of the Ipid raid sparked off a dramatic sell-off of EOH’s shares last week, with the stock plunging over 30% in several trading sessions last week. On Friday, EOH closed at R47.52 — a far cry from its closing price of R80.62 just five days earlier.
In a cautionary Sens statements on Monday morning, EOH said the “drop in the share price was triggered by the forced sale
of shares by financial institutions against equity financed transactions to various individual shareholders, including two EOH directors”. One of these directors included John King. (EOH’s full Sens statement is posted at the end of this article.)
Questions are now also being asked about whether King and Bohbot knew of Keating’s shenanigans while the pair were still directors of GCT, FDA and ISS.
Keith Keating…members object to his presence in SCOPA hearing into billions paid to his company FDA pic.twitter.com/bPDgeBnnFm
— MarianneThamm (@MarianneThamm) November 29, 2017
FDA’s Keith Keating…not going anywhere… sitting in SCOPA listening to everyone talking about his firm’s corrupt relationship with SAPS and SITA pic.twitter.com/IbraiBPUqY
— MarianneThamm (@MarianneThamm) November 29, 2017
King and Bohbot’s Keating-linked directorships
EOH, which employs 12 500 staff, has been known for aggressively pursuing acquisitions as part of its growth strategy in recent years.
From 2012 to 2017, EOH’s share price surged by 400% on the back of its growth story.
For its financial year ended July 2017, EOH said that during the period “a number of businesses joined the EOH family, including the Cornastone group of companies, PIA Solar SA Proprietary Limited and the Syntell group of companies.”
So, when EOH got the nod from the Competition Tribunal back in November 2015 to acquire Keating’s GCT, FDA and ISS, the event was hardly noticed by the market.
Yet years later, the problems with Keating are clear. And despite evidence emerging of brazen corruption involving Keating’s dealings with SAPS for seven years (including 2015, 2016 and 2017); EOH told BizNews on Friday that CFO John King only knew of these issues the month after EOH had disposed of Keating’s companies.
“Neither John King nor EOH have any knowledge of any inappropriate conduct relating to GCT. The company [EOH] first learnt about the allegations in November 2017. EOH had no reason to suspect any untoward behaviour following its standard due diligence process, which is carried out at the acquisition phase of any transaction EOH pursues,” the company told BizNews.
EOH further told BizNews that King “does not get involved in the day-to-day activities of subsidiary companies”.
EOH officially cut ties with Keating’s businesses on October 31, 2017. However, the company only revealed this detail more than a month after the exit of Keating, in a Sens statement on Wednesday last week addressing the “volatility” of its share price.
EOH didn’t mention Keating by name in its statement but referred to the disposal of his companies: “The Group has also reached an agreement with the former shareholders of Grid Control Technologies Proprietary Limited, Forensic Data Analysts Proprietary Limited and Investigative Software Solutions Proprietary Limited, to unwind the transaction effective 31 October 2017.”
EOH has previously been quoted by Daily Maverick for saying it cut ties with Keating after the likes of GCT failed to “meet targets”. This detail marks further mystery as Daily Maverick has extensively reported that Keating was billing SAPS and SITA for billions of rands while still operating under EOH’s name.
In a statement on Monday morning, EOH said Keating’s companies experienced “significant underachievement against performance warrantees”.
UPDATE: EOH CEO Zunaid Mayet told BizNews that “the quantum of the business that has been quoted in the media [pertaining to Keating’s companies] is certainly not reflective of the business that has operated as part of the EOH group over the last two years.”
Risk of legal, regulatory hangover
While EOH said it wasn’t aware of problems regarding Keating during his tenure at the company, this admission could be problematic as per South Africa’s Companies Act — especially in light of King and Bohbot having been non-executive directors of GCT, FDA and ISS.
The Act makes no distinction between executive and non-executive directors insofar as fiduciary duties are concerned, according to law firm Norton Rose in a 2002 report published on Mondaq.com.
“A director is a director, and in taking up such appointment the person concerned accepts responsibilities that cannot be abrogated to others,” said Norton Rose.
The Companies Act further says it’s a criminal offence not to report corrupt activities if these are known, according to a note by Werksmans Attorneys on claims against directors.
“In terms of section 34 of the Prevention and Combating of Corrupt Activities Act 12 of 2004 (‘POCA’), any person who holds a position of authority and who knows or ought reasonably to have known or (reasonably) suspected that any other person has committed fraud involving an amount of R100 000 or more must report such knowledge or suspicion or cause such knowledge or suspicion to be reported to any police official. A failure to do so is a criminal offence,” says Werksmans.
“Accordingly, if a creditor (or fellow director) suspects that the business of a company is being carried on with the intent to defraud any person or for any fraudulent purpose, then such creditor (or fellow director) is under a statutory obligation to report his/her suspicions to the police. As a result, the directors of debtor companies may not only be held personally liable towards to the company and its creditors for losses incurred, but may also be charged criminally,” adds Werksmans.
Added to these aspects of law, the King IV Governance Code is also mandatory for listed entities on the JSE. This means that a company like EOH has to abide by the code’s provisions as a condition to being listed on the exchange.
In King IV, the reference to “Board” from King III has been changed to “Governing Body” and the code highlights just some of the following expected responsibilities of directors:
- Members of the governing body should act ethically beyond mere legal compliance.
- Members of the governing body should take responsibility for anticipating, preventing or otherwise ameliorating the negative outcomes of the organisation’s activities and outputs on the triple context which it operates, and the capital that it uses and effects.
- Members of the governing body should attend meetings of the governing body and its committees and it should devote sufficient time and effort to prepare for those meetings.
- Members of the governing body should be willing to answer for the execution of their responsibilities, even when these were delegated.
In the meantime, the EOH scandal is just the latest to pose questions about corporate governance in South Africa in a year in which bigger global firms such as KPMG, SAP, Software AG, McKinsey and even Naspers have been exposed for questionable links to graft scandals involving the Guptas.
Amid this potent mix has been the implosion of retailer Steinhoff, which is grappling with a German probe in relation to an accounting scandal. The departure of Markus Jooste last week also sent Steinhoff’s share price spiralling down around 90% on the JSE.
Time will tell if these events will prompt further tightening up of corporate governance requirements in South Africa among regulators, lawmakers and the business community.
UPDATE: In response to questions over corporate governance, EOH sent BizNews the following explanation of how its governing structure operates:
- EOH is organized into Divisions, with each division led by a Divisional CEO, reporting to the Group CEO. The Divisional CEO’s are Executive Directors of EOH Holdings.
- Each Division has a Divisional Finance Director who reports to the Group Finance Director.
- Each Division has an EXCO of the Heads of the clusters in that division supported by Senior Financial Managers. The Clusters have Business Unit Heads supported by Financial controllers.
- The Finance function across the various levels of the business report into the Group Finance Director. This reporting line ensures for appropriate levels independence and segregation of duties.
- The delegation of Authority assigns the responsibility for strategy, leadership, business performance, management oversight, governance and risk management to these divisional leadership structures.
- Gareth van Zyl is the deputy managing editor of BizNews.com and a former tech editor and journalist for the likes of Fin24 and ITWeb. Follow him on Twitter at @GarethvanZyl.
Meanwhile, EOH on Monday morning published the following Sens statement:
EOH UPDATE AND CAUTIONARY ANNOUNCEMENT
On Thursday, 7 December 2017, extraordinary volumes of EOH shares were traded. EOH has established
that both the high volumes as well as the substantial drop in the share price was triggered by the forced sale
of shares by financial institutions against equity financed transactions to various individual shareholders,
including two EOH directors.
EOH confirms that the directors affected did not voluntarily sell their shares, but rather that the sale was caused by margin calls against these equity financed transactions (a separate SENS announcement will be issued in this regard).
Separately, as published previously, EOH has finalised the sell-back agreement in order to unwind its
acquisition of Grid Control Technologies Proprietary Limited, Forensic Data Analysts Proprietary Limited and
Investigative Software Solutions Proprietary Limited, which it acquired in November 2015.
EOH had been in discussions with the previous shareholders of the above-mentioned companies for some
time about unwinding the transaction. These discussions were initiated as a result of a significant
underachievement against performance warrantees. Recent media allegations relating to Mr Keith Keating
caused EOH to expedite the unwinding and conclusion of the sell-back agreement.
In view of the allegations and in the interest of good governance, EOH has appointed Edward Nathan
Sonnenbergs Incorporated (“ENSafrica”) to conduct a full fact-finding review of the commercial activities of
the three companies mentioned above. In keeping with the Group´s zero tolerance commitment, it will act
against any identified wrongdoing or misconduct involving any individual or entity.
To further strengthen EOH´s corporate governance, material public sector engagements and contracts will
be subject to independent oversight by ENSafrica.
This is in addition to the internal compliance measures adopted by the board´s Audit Committee in July this
year, which includes a review of EOH´s governance framework and all material public sector contracts, which
is well underway.
Shareholders in EOH and other potential investors are advised to exercise caution when dealing in the
securities of EOH until the financial impact of the sell-back transaction is announced.
11 December 2017
Shortly after issuing this Sens, EOH released another Sens detailing more about its directors’ “forced” share sales: