Multinational tech solutions company EOH was once a darling of the Johannesburg Stock Exchange, with an exploding share price and hundreds of acquisitions.
But all was not as it seemed. In 2017, revelations of corruption began surfacing in the media. A investigation eventually revealed a “fascinating, cautionary tale of a rotten culture that was staggering in its depth and complexity,” observed Financial Mail editor Rob Rose.
He was speaking at a recent event called “Addressing corporate corruption in South Africa: the EOH experience”, co-hosted recently by the National Business Initiative, Corruption Watch, and the independent global affairs think-tank ODI, to launch the report of their in-depth investigation into the EOH story.
Their report reveals not only a story of how corruption becomes entrenched, but also a fascinating tale of corporate renewal. The story has been called “a model for how corporate SA can turn things around and implement the right systems and processes to deal with the scourge of corruption.”
EOH was implicated by the judicial inquiry commission into State Capture led by Chief Justice Raymond Zondo, although no criminal prosecutions have ensued.
At the event, Stephen Gelb, Senior Research Associate at ODI and the lead author of the report, outlined the key findings. EOH was started in 1990s, soon becoming “the fastest-growing firm around, seeming to make another acquisition every week”, he observed.
He was part of a prestigious panel at the event that also included the new CEO of EOH, Stephen van Coller, the CEO of Business Leadership SA, Busisiwe Mavuso, and David Lewis of Corruption Watch.
EOH’s revenue boomed from R59 million in 2001 to R15 billion by 2017, the share price exploding along with it for most of this period. Then media reports began highlighting dubious contracts between EOH and several government departments. As it turned out, the company was not making a profit at all.
Fractured, with few rules
Bids with several government departments were rigged, customers and suppliers were defrauded and there was a large amount of petty corruption. International research shows that on average, 4% of people within organisations are corrupt. At EOH, 10% of the staff – possibly about 1000 people – were involved. This included petty corruption to acquire items that included TV sets and even large quantities of cigarettes.
How was all the crookery made possible? EOH was a very fractured organisation, explained Gelb. Despite having well over 270 businesses within the group and over 900 budgeting units, the EOH structure was rather flat, with very few rules and a limited flow of information horizontally.
There was no internal audit function; almost no compliance; accounting standards were rather lax; and strangely, there was very little use of IT in EOH’s own internal systems, even though it was selling IT systems to other companies. The many acquisitions were not well integrated into the company, it used very little strategy, and the focus was on financial results, with no emphasis on proper processes.
A massive reset
After the initial media reports in 2017, the CEO resigned, although he stayed on in positions of power for some time. The next year, key shareholders forced the board to appoint a new CEO, Stephen Van Coller.
When he accepted the position, Van Coller had no idea how extensive the rot was. Many EOH staff knew about the corruption but didn’t report it. After one eventually blew the whistle to the Securities and Exchange Commission in early 2019, Microsoft cancelled its contract with EOH, which opened the opportunity for Van Coller to make sweeping changes.
The whole board was fired and replaced, along with most of the top management, and new auditors were appointed, in a massive company “reset”.
The company’s organogram, reporting lines and rules were reworked, and stronger enforcement introduced. Rigorous standards became obligatory for bidding and procurement.
The whole board was fired and replaced, along with most of the top management, and new auditors appointed in a massive company “reset”.
“One of the first things that happened at EOH was that I received a letter to sign, so I could be a signatory to the EOH bank account. I refused to sign it,” remembered Van Coller. “Power corrupts, and absolute power corrupts absolutely; we needed a segmentation of duties.” This segmentation now runs through the organisation; the staff bringing in new customers cannot be the people authorising payments, for example.
To build credibility, Van Coller took an approach of “proactive transparency” towards organisations from regulatory authorities such as Treasury and SARS to the Zondo Commission, customers, suppliers, and banks. He also appeared regularly in the media.
The focus for staff shifted from raising the share price to ensuring that the business remained solvent, and from parochialism to professionalism, encouraging pride in EOH as a national anti-corruption leader.
There are now “water-cooler / town hall” meetings and staff are involved in corporate strategy development. Far less bullying occurs, and staff feel that the new management has great concern for staff welfare, as was shown by acceptance of salary cuts during COVID.
Just one fine, and no criminal prosecutions
EOH was implicated by the judicial inquiry commission into State Capture led by Chief Justice Raymond Zondo, although no prosecutions have ensued. The new management has laid reports of criminality with the police and has four civil cases in process, including against former directors, suing them for R6,4bn in damages. The cases are yet to be finalised and none of the damages have been recovered, several years later.
The thing that bothers Van Coller most “is that the good people working hard and in some cases not getting raises and bonuses” have had to pay back the stolen funds through very hard work.
Busisiwe Mavuso, CEO of Business Leadership SA (BLSA), who addressed the event, pointed out that the private sector is complicit in government corruption, as “there is both a corruptor and corruptee.”
“The Zondo Commission didn’t do much in terms of producing clear recommendations for how corporate SA needs to deal with corruption, and I think the EOH experience is a step in that direction.
“Why have those named in the Zondo Reports and SIU (Special Investigating Unit) investigations not been blacklisted? There needs to be a better ecosystem for dealing with this.”
The company had to pay back about 4.8bn while continuing with its business. “It feels like down a highway driving 120km/h while trying to service the car at the same time,” said Van Coller.
Just one fine has been levied, by the JSE against EOH after the company itself approached them and many other regulatory agencies. No prosecutions or other regulatory actions were taken by these agencies.
The company itself has had to pay back about 4.8bn through measures including selling businesses, to stay alive, while continuing with its business. “It feels like down a highway driving 120km/h while trying to service the car at the same time,” said Van Coller wryly.
The former EOH leadership has escaped scot-free until now, some of them becoming leaders of opposition companies.
South Africa has excellent legislation on corruption, pointed out the EOH Chief Risk Officer, Fatima Newman, but the various regulatory bodies “don’t have a mandate with teeth” to enforce it.
Rob Rose pointed out that similarities existed between EOH and other firms now notorious for corruption, including Steinhoff and Tongaat Hulett, regarding the lack of proper processes and a culture of compliance.
“Hands tied behind their backs”
Mavuso observed that when new leadership is put in place in state-owned companies (SOEs) to clean them up, “they are sent into the boxing ring with both hands tied behind their backs.” Like in the EOH case, “we need to give the executive team complete power to deal with corruption, or we are setting them up for failure.”
David Lewis of Corruption Watch described the EOH report as “a beacon – an aspirational goal that companies can move towards.”
The panellists all agreed that the broad principles underlying the EOH turn-around could apply to all organisations, including in government. “But what was key in our project and would also have to be the case in the public sector, is that people in the organisation must be willing to speak out,” said Gelb.
The fish called government is rotten from the top… I think we’re probably going to have to press the reset button on government to get that right,” said Business Leadership South Africa CEO Busisiwe Mavuso.
People don’t do so in South Africa “because it means putting their lives on the line,” pointed out Mavuso.
Corruption needs to be addressed “from the top, and unfortunately, in government at the moment, the political will just doesn’t exist,” she observed. “The fish called government is rotten from the head … In South Africa, we have thieves masquerading as government ministers.
“I think we’re probably going to have to press the reset button on government to get that right.”
Read the full report on the investigation here.
Image Credit: NBI