New Spar chair Mike Bosman admits there have been “several mistakes made” in the scandals that have enveloped the retailer in the past three months. Bosman was speaking to the FM after the sudden resignation of CEO Brett Botten and the decision by former chair Graham O’Connor to withdraw from re-election to the board.
It’s been a bruising three months, in which Spar’s share price tumbled 10.9% amid revelations that an 18-month-old legal report had found “fictitious loans” made by Spar to retailers, a R2.1bn lawsuit by its largest retailers and serious questions over its governance.
Bosman revealed last week that Spar has found three loans worth a combined R11m, described by auditor PwC as a “reportable irregularity”. PwC has now filed a report with the regulator.
“We view this very seriously, and this was one of those mistakes. It seems like no-one really benefited from these loans, so it’s hard to see why this happened. The auditors could never have been expected to pick this up, since these were for very small amounts,” he says.
Of revelations in the FM that Spar’s largest retailers, the Giannacopoulos Group, had lodged a lawsuit against the company for R2.1bn in damages, Bosman says the matter should never have reached this stage. “We’re going to focus on sorting out this dispute as a priority. Everyone has disputes, but it needn’t have got to this. And it emphasises that we need to work extremely hard to earn back the respect from our retailers,” he says.
Yet the suspicion remains that there is more to come. What, for instance, of the troubling conflicts of interest at senior levels in the group?
O’Connor may be gone, but Spar’s annual report revealed that companies in which he has a stake earned up to a head-turning R261.3m last year alone in contracts from Spar. And that’s besides other allegations of nepotism: Spar, for instance, is the headline sponsor of South African indoor hockey, and O’Connor’s daughter happens to be captain of the indoor team.
On Botten and O’Connor’s sudden exits, Bosman stresses that it was “genuinely their choice”.
But analysts say that, in all likelihood, O’Connor in particular probably opted to leave when it became clear he was unlikely to win shareholder support for re-election to the board at Spar’s AGM on February 14.
Veteran retail analyst Syd Vianello says these ructions evoke comparisons with Clicks, where former CEO Trevor Honeysett withdrew his nomination to be re-elected to the board when it was clear shareholders wanted him gone.
“I have a suspicion that the same thing happened with O’Connor. When it became clear that certain fund managers were going to vote against him, I suspect he decided to leave rather than suffer a humiliating loss,” Vianello says.
Asked whether this was the case, Bosman says: “I’m not sure. I think Graham believes that he was acting in the best interests of the company.”
You have to ask yourself why they’re getting involved with ‘fictitious loans’, and whether they’ve been covering up things for years
— Syd Vianello
Fund managers contacted by the FM were coy about whether they’d pushed for O’Connor’s departure.
Coronation Fund Managers, at last count, held 15% of Spar, though it sold down sharply in the middle of last year.
“We’ve been quite actively involved with Spar for some months,” says chief investment officer Karl Leinberger. “We believed there needed to be a more independent board, and we’re fully supportive of Mike Bosman as the person to bring [about] this change.”
While Coronation isn’t saying so, this suggests it was one of the shareholders unlikely to have supported the resolution to re-elect O’Connor.
The Public Investment Corp (PIC), though speaking for more than 21% of Spar, remains frozen in the headlights.
Asked by the FM about what influence it wielded to get the board changed, the organisation ignored the question. Instead, it says it “engages directly with investee companies and their boards to address concerns regarding corporate governance, transformation and diversity”.
However, sources inside the fund manager say there was “great unhappiness with Spar and how it handled this crisis, and this was even discussed at the PIC board”.
As a result, “pressure was put on Spar to change its leadership”.
It’s unclear whether this included Botten. However, Vianello says: “It wouldn’t be at all surprising if pressure was put on Botten to resign.”
This is especially since law firm Harris Nupen Molebatsi said in a 294-page report for Spar in July 2021 that when it came to two specific Spar stores, loans given to the retailers were “without substance and could be described as fictitious [and] could inflate the profitability of the South Rand distribution centre”.
What, for instance, of the troubling conflicts of interest at senior levels in the group?
And Botten, before being promoted to Spar CEO in 2021, headed that South Rand distribution centre. Asked whether Botten was likely to face disciplinary action over these loans, Bosman says: “There was never any discussion at the board about further disciplinary action on that particularly old matter — several implicated parties left the group a few years ago.”
That seems convenient, and Bosman may be grilled further on this point at the AGM.
Vianello, for one, says there are many questions still to be answered about the loans.
“Those loans ran for five years and at the same time Spar was providing a ‘marketing subsidy’, which cancelled out the loans. So you have to ask, why do something that has a net zero impact? But the accounting changes if the retailer decides not to stick it out — then Spar has a receivable on its books, and the marketing obligation falls away, even though the loan is unlikely to get paid,” he says.
While it’s true that the “fictitious loans” amounted to less than R11m and may be immaterial in the wider scheme of things, Vianello says it’s all about the ethical breaches.
“You have to ask yourself why they’re getting involved with ‘fictitious loans’, and whether they’ve been covering up things for years. This isn’t the kind of thing you imagine Spar’s old management — CEOs like Peter Hughes or Wayne Hook — would have got involved in at all,” he says.
Investors will be hoping Bosman’s tenure coincides with a change in financial fortunes for them too.
Leinberger, for one, says Coronation has been buying Spar shares again. “We’re quite happy with the direction Spar is going in now. It’s still a fragile system, relying heavily on trust between the retailers and Spar, but it’s in a better position to deliver,” he says.
Which is, of course, premised on the belief that all the skeletons have already been excised from the cupboards. It’s a big bet to take right now.
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