Opinionista Brij Maharaj 26 September 2017

As the Gupta Empire falls apart, anarchy can be loosed upon the Rainbow Nation

As the international fallout unravels over the Gupta empire whose prolific expansion was aided and abetted by elements and factions in the ANC leadership and the boards of State-owned Enterprises, and the extent of state capture is revealed – “things fall apart; the centre cannot hold”. And there is a potential for “mere anarchy” to be “loosed upon” the Rainbow Nation (apology to W.B. Yeats). With Bell Pottinger hovering on bankruptcy, and KPMG in the doldrums, the spotlight turns on McKinsey.

McKinsey, an international global management consulting firm, has been around for nine decades. In 2013, it earned $7-billion in revenue. It receives about 235,000 job applications annually, employs 2,500 people internationally, and “advises everyone from chief executives to heads of state”. Founder, Professor James O McKinsey, emphasised “a commitment to rigorous research and training”. He was later joined by Marvin Bower, who stressed that a core value was the “consultant’s obligation to advocate for what he or she believes to be true” with clients as well as within the firm.

According to a company blurb: “McKinsey opened its first African office in Johannesburg in 1995, soon after South Africa’s new democracy brought Nelson Mandela to power … The sense of possibility was palpable. We were the only top management consulting firm in the country, and we went knocking on CEOs’ doors. Before long, we were helping several of the largest companies rethink their strategies and reshape their operations.”

However, the democratic government “had inherited a stagnant economy with high levels of unemployment and public debt. In business, South African companies finally had access to international markets after decades of isolation. Yet they also faced an influx of global competitors, making modernisation essential”.

Twenty years later there were 200 McKinsey consultants in South Africa, who have “worked with government departments on everything from industrial policy to public finance, and helped to tackle urgent social issues such as strengthening public education systems and developing strategies to combat HIV/AIDS”.

For the next 20 years McKinsey would focus on developing leadership and “capability-building” and train “a new generation of managers, professionals, and entrepreneurs from all hues of the Rainbow Nation”, and especially promoting women in management and leadership. McKinsey’s goal: to “help the next wave of South African companies win on the global stage, and to work with government to achieve excellence in public education and other national priorities”.

However, outside the PR sound bites, McKinsey’s record of accomplishment is sullied in SA and beyond.

McKinsey had an Eskom contract that accounted for more than 50% of its business in SA. It also consulted for Transnet. There is a very serious allegation that “McKinsey and their local Gupta-linked counterpart Trillian extracted R1.6-billion in fees for ‘turnaround’ advice given to Eskom”. McKinsey claimed to have “helped Eskom with its Turnaround Programme to stabilise its finances and reduce ‘load shedding’ (electricity blackouts) which have contributed to a significant improvement in the company’s performance”.

According to Eskom, Trillion, a Gupta-linked company, was a subcontractor to McKinsey, which the global company subsequently denied. Vikas Sagar, McKinsey director in South Africa, confirmed in a letter dated 16 February 2016 to Eskom that subcontractor Trillion be paid for its services. Subsequently, Trillion was paid R495-million (but there was no evidence of services rendered), and McKinsey R900-million for consultancy services, which was facilitated by Eskom CFO, Anoj Singh, widely believed to be a Gupta agent.

The firm’s global spokesman‚ Steve John‚ said: “McKinsey has never served the Gupta family or any companies known to be linked to the Guptas. We have not made payments to the Guptas or any company publicly linked to them. We have categorically not paid bribes in exchange for contracts. We have secured all our work for State-Owned Companies on the basis of our demonstrable impact for our clients.” Vikas Sagar was subsequently placed on compulsory leave.

NGO Corruption Watch wanted the US justice department to investigate McKinsey’s conduct, which was viewed as a “gross contravention of the US Foreign Corrupt Practices Act”. The DA intended to request the Serious Fraud Office in London to investigate “McKinsey’s dealings in terms of the UK’s Bribery Act”.

McKinsey’s shenanigans in SA should not be surprising, as the firm has a tarnished image globally. According to financial commentator and economic journalist, Barry Ritholtz, McKinsey “created dubious strategies for all manners of companies ranging from Enron to General Electric”, and this can be illustrated with a few examples:

  • Advocating side pockets and off-balance sheet accounting to Enron, it became known as ‘the firm that built Enron’.
  • General Electric lost over $1-billion after following McKinsey’s advice in 2007 — just before the financial crisis hit.
  • Advising AT&T (Bell Labs invented cellphones) that there wasn’t much future to mobile phones.
  • Swissair went into bankruptcy after implementing a McKinsey strategy.
  • British railway company Railtrack was advised to “reduce spending on infrastructure” – leading to a number of fatal accidents, and a subsequent collapse of Railtrack.
  • Rajat Gupta (not related to the South African patriots), the first foreign-born managing director of McKinsey between 1994 and 2003, was “convicted for insider trading by a New York court”.

McKinsey is responsible for the widening pay gap between CEOs and workers. A study by McKinsey consultant Arch Patton about executive compensation, published in the Harvard Business Review, revealed that “from 1939 to 1950, the pay of hourly workers had more than doubled, while that of top management had risen only 35 percent”. This McKinsey finding set in motion the demand and motivation to increase executive benefits by corporations.

It is amazing that McKinsey continues to operate with impunity after being responsible for so many financial disasters. It has been argued that, like Goldman Sachs, McKinsey could be described as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Veteran journalist and author Duff McDonald contended that McKinsey had “a blind spot regarding things like the human implications of important corporate decisions”. A major moral concern is whether consultants take responsibility for the consequences of their advice or recommendations. Or is it just another day in the office? DM

Brij Maharaj is a geography professor at UKZN. He writes in his personal capacity.

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