The Collateral Damage of a Scandal

(Bloomberg) -- As the HIV epidemic devastated impoverished townships in South Africa in the early 2000s, a big corporate philanthropist made it possible for charity Abraham Kriel to help hundreds of orphans.

Now that donor, Steinhoff International Holdings NV, is struggling to survive what could be the worst accounting scam in South African history—and charities are bracing for the day the support vanishes. The alternatives are so few, Abraham Kriel is even thinking about selling its sprawling 116-year-old Johannesburg headquarters.

“It’s been very stressful,” said Miemie Retsuri, who manages community services for Abraham Kriel in the Soweto township outside of Johannesburg, where Steinhoff donations feed and clothe 400 black children, many of whom have lost one or both parents to AIDS and are among the most disadvantaged youth in the country.

The Collateral Damage of a Scandal

With creditors circling and angry shareholders suing Steinhoff for the billions they lost when investors were blindsided by the scandal in December, it’s not hard to see how the most defenseless victims risk being cast aside.

Funding to non-profit organizations is typically one of the first things to go when a corporate sponsor plunges into financial difficulties. The demise of Lehman Brothers and Bernard Madoff’s Ponzi scheme in 2008 left charities like the Harlem Children’s Zone in New York nursing substantial funding cuts.

“The unfortunate reality is that in difficult times resulting from reported corporate malfeasance, there’s less to give away,” said Amanda Bloch, founder and director of GastrowBloch Philanthropies in Cape Town. “When one funder dominates the funding base and the nonprofit doesn’t diversify, they stand the chance of damage and loss and human devastation.”

The Collateral Damage of a Scandal

In Steinhoff’s case, two children’s charities are most vulnerable: Abraham Kriel and the Knysna Initiative for Learning and Teaching, which runs programs to improve the quality of education for 12,000 kids. Their budgets rely heavily on the hundreds of thousands of dollars Steinhoff gives annually—money that’ll be hard to replace during an economic downturn, as unemployment hovers at 15-year highs and the government spends billions bailing out state businesses.

When approached by Bloomberg, a Steinhoff spokeswoman said the company stands by both commitments. How sustainable that is depends on whether creditors who agreed to a debt revamp in July pressure Steinhoff to cut spending. A lot also rides on how damning the findings of an anticipated PricewaterhouseCoopers LLP auditing investigation end up being.

In Soweto, hit hard by the HIV outbreak that peaked in 2006, there’s a lot at stake for orphans. Once home to Nelson Mandela and Desmond Tutu, the township was formed by the apartheid government to move black people out of Johannesburg, and even today many of its over one million residents live in extreme poverty. Those living with HIV are sometimes ostracized by their schools, families, friends and churches.

Steinhoff foots the bill for as many as 400 daily meals, some delivered directly to the kids’ homes where they share it with relatives who can’t afford basic necessities. On an October afternoon, the menu was a small serving of pap, a porridge-like South African staple made from milled white corn, spinach, carrots and beef stew along with four slices of bread and a banana.

The Collateral Damage of a Scandal

“For each of the beneficiaries of the Steinhoff scheme, another three or four people are supported,” Retsuri said at the charity’s Emdeni center in Soweto, where about 80 children gather for lunch each day. “The impact is huge.”

Near the southernmost tip of Africa, programs run by the Knysna Initiative, or KILT, at 15 schools are also in jeopardy. The charity got a whopping 86 percent of its budget from Steinhoff in the fiscal year ended February, or 10.9 million rand ($763,000), used to train and support teachers and principals, tutor students and pay for school infrastructure.

“Steinhoff funding made it possible to do the bulk of what we have done,” said Gill Marcus, executive director of KILT who once ran the South African central bank. “Given the cataclysmic events since December, credit should be given to Steinhoff’s interim board that they remain committed.”

The Collateral Damage of a Scandal

Charities become vulnerable when sponsorship is drawn directly from a company’s annual profit rather than a separate foundation generating its own investment income, like the one Bill and Melinda Gates set up. Founder Bruno Steinhoff didn’t do that as the company he formed in 1964 mushroomed into, at its peak, a $26 billion furniture retailer operating in over 30 countries via brands like Britain’s Poundland and Mattress Firm in the U.S.

Steinhoff’s value fell rapidly to about $650 million after Chief Executive Officer Markus Jooste quit last December, just weeks before Steinhoff reported him to the police for allegedly masterminding the scandal. The company subsequently posted a record 621 million-euro ($715 million) net loss in the first half.

What happened is shrouded in mystery. Documents examined by Bloomberg show Steinhoff paid above-market rates to buy forestry and property assets from companies linked to Jooste and other executives. The ex-chief financial officer also raised suspicion that profit at some subsidiaries was overstated and transactions with related parties were inappropriately declared. Charges haven’t yet been laid against Jooste, an avid horse collector whose Steinhoff shareholding was once worth 236 million euros.

The Collateral Damage of a Scandal

Charities are bracing for tough times. In its latest annual report, KILT’s auditors cited “material uncertainty” on whether Steinhoff can honor the five-year, 75 million-rand commitment it made in May 2017. It’s already reduced this year’s funding, according to its website.

Abraham Kriel’s corporate donors, also including Siemens AG and Anglo American Plc, were by far the biggest contributors to its income in the fiscal year through March, but with the Steinhoff debacle there are cuts anticipated in staffing and children’s support next year.

If it comes to it, the charity can sell property in Johannesburg to ensure funding reaches those most in need, according to Hilda du Toit, who’s worked at Abraham Kriel for 22 years and heads the marketing department.

Her boss, CEO Paul Momsen, doubts they’ll find a replacement donor to make a multi-year commitment while the economy is in tatters. “We need to find more money,” he said. “But it’s hard to convince funders now.”

©2018 Bloomberg L.P.