McKinsey has closed its eyes in South Africa
It does not take a genius to recognise that corporate reputations are easily lost in South Africa under the dismal presidency of Jacob Zuma. It should not be beyond the analytical powers of a global consulting firm such as KPMG or McKinsey. Neither firm was as crass as Bell Pottinger, the PR firm that went into administration after running a racially divisive campaign for the holding company of the Gupta family, Mr Zuma’s business patrons. But both have been tarnished by Mr Zuma’s misgovernance of his country and its tragic descent into cronyism and corruption. KPMG audited many of the Guptas’ companies and eight of its executives last week resigned as it admitted its errors of judgment.
McKinsey took a juicy contract with Eskom, a state utility, that involved working with a consultancy linked to the family. The firm still maintains that it behaved correctly and is walking the tightrope of self-justification. I am intrigued to see how long it will take to fall off. Here is a simple guide to South African due diligence: avoid the Guptas, the Zuma family and state-owned enterprises over which they exert any influence. Other professional services firms paid greater attention to the daily bulletins of “state capture” by the president’s allies; they were also better at resisting financial temptation.
A client gains two things when it hires a KPMG or a McKinsey: sound advice that helps it to raise revenues while maintaining strong controls, and the imprimatur that comes with their names. Particularly in economies where corruption is common, government officials take bribes, and regulation is suspect, they can charge for lending the benefits of integrity. South Africa is tricky, for the end of apartheid in the early 1990s offered a chance for advisers and consultants not only to make money but to become part of the legitimate rebuilding of a nation that needed business expertise. As the country has degenerated during Mr Zuma’s tacky leadership, their responsibility to examine carefully what they are asked to endorse has increased. KPMG has conceded that it failed in that duty, although it took far too long to recognise this failure. It was auditor and adviser to Gupta companies for 15 years, until the taint became too great last year. It audited the accounts of one Gupta entity that diverted $3.3m of public money to a family wedding and wrote a report that helped Mr Zuma’s circle wrongly to discredit Pravin Gordhan, former finance minister. By its own account, the firm ignored warning signs about “the integrity and ethics of the Guptas” and should have ditched them earlier. It fell into the trap of sticking with an old client after its flaws became clear, but it can hardly complain that it was not informed.
Mr Zuma has undermined many of South Africa’s institutions but it still has a vibrantly outspoken media. McKinsey’s mistake was shorter lived and less blatant, but it was wrong nonetheless. As one partner of a Johannesburg firm sees it: “KPMG became part of the machinery, while McKinsey looked the other way for money.” It was indeed a lot of money. Eskom paid McKinsey $73m for nine months work ending in July 2016, and at one point the consultancy anticipated receiving a payment of up to $370m over four years. McKinsey produced a restructuring plan for the inefficient utility, which was inflicting power cuts across South Africa. It was also due to work on implementing the plan and be paid a share of the financial gains. The firm insists that such contracts are common and the terms matched similar deals, but rivals are astonished. One internal McKinsey document noted the risk of being criticised for “exorbitant fees”. It was never tested because of another obstacle. McKinsey legally had to work with a black economic empowerment partner and Eskom wanted it to be Trillian, a consulting firm formerly majority owned by Salim Essa, an associate of the Guptas. After six months, Trillian failed McKinsey’s due diligence and Eskom later ended the contract.
The firm has a brisk defence to accusations from South African politicians and Corruption Watch that it facilitated state capture by helping Trillian to gain money from Eskom. It says that its own inquiry into its behaviour has not uncovered wrongdoing, nor anything that would require it to report itself to the US authorities under anti-corruption laws. This seems to be setting the reputational bar rather low. Being willing to charge an entrenched institution in a fractured country so much money looks awfully like rent seeking, especially when payments of up to $700m were to be split with what it should have known was a dubious consulting partner. McKinsey is full of superior intellects but sometimes you only need to open your eyes. None of this occurred in a vacuum. The group Business Unity South Africa this month bemoaned the “scourge of corruption that is stifling the country” and called for an end to a “culture of immunity”. Each time that a consultant or accountant fails to take a decisive stand, the scourge worsens. KPMG has recognised it but McKinsey is still learning. It could start by confessing that it was wrong and promising not to repeat its failure.
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