How Mckinsey lost its way in South Africa

Johannesburg

The blackouts kept coming. The state-owned power company, Eskom, was on the verge of insolvency. Maintenance was being deferred. And a major boiler exploded, threatening the national grid.

McKinsey & Co., the godfather of management consulting, thought it could help but was not sure that it should, according to people involved in the debate.

The risk was huge. Could McKinsey fix the problems? Would it get paid? Would it be tainted by South Africa’s rampant political corruption?

In late 2015, over objections from at least three influential McKinsey partners, the firm decided the risk was worth taking and signed on to what would become its biggest contract ever in Africa, with a potential value of $700 million.

It was also the biggest mistake in McKinsey’s nine-decade history.
The contract turned out to be illegal, a violation of South African contracting law, with some of the payments channelled to an associate of an Indian-born family, the Guptas, at the centre of a swirling corruption scandal.

Then there was the lavish size of that payout. It did not take a Harvard Business School graduate to explain why South Africans might get angry seeing a wealthy US firm cart away so much public money in a country with the worst income inequality in the world and a youth unemployment rate of more than 50 per cent.

And a bitter irony: While McKinsey’s pay was supposed to be based entirely on its results, it is far from clear that the flailing power company is much better off than it was before.

The Eskom affair is now part of an expansive investigation by South African authorities into how the Guptas used their friendships with Jacob Zuma, then the country’s president, and his son to manipulate and control state-owned enterprises for personal gain.

International corruption watchdogs call it a case of “state capture.” Lawmakers here call it a silent coup. It has already led to Zuma’s ouster and a moment of reckoning for post-apartheid South Africa.

Entangled

Yet despite extensive coverage of the scandal by the local news media, one question has remained largely unanswered: How did McKinsey, with its vast influence, impeccable research credentials and record of advising companies and governments on best practices, become entangled in such an untoward affair?

McKinsey admits errors in judgment while denying any illegality.

Two senior partners, the firm says, bear most of the blame for what went wrong.

But an investigation by The New York Times, including interviews with 16 current and former partners, found that the roots of the problem go deeper — to a changing corporate culture that opened the way for an aggressive push into more government consulting, as well as new methods of compensation.

While the changes helped McKinsey nearly double in size over the past decade, they introduced more reputational risk.

The firm also missed warning signs about the possible involvement of the Guptas and only belatedly realised the insufficiency of its risk management for state-owned companies.

Supervisors who might have vetoed or modified the contract were not South African and lacked the local knowledge to sense trouble ahead.

And having poorly vetted its subcontractor, McKinsey was less than forthcoming when asked to explain its role in the emerging scandal.

“I take responsibility,” McKinsey’s managing director, Dominic Barton, said in a recent interview. “This isn’t who we are. It isn’t what we do.”

Regrettably, he added, the firm had a “bit of a tin ear” in its early response to the crisis.

Since the Eskom disclosures, much of McKinsey’s business in South Africa has evaporated.

Barton has made six trips there to assess the damage and make amends, and McKinsey has asked its 2,000 global partners to repay South Africa, where it is under investigation.

Profound harm

Indeed, the harm to the McKinsey brand is more profound than the fallout from the epochal Galleon hedge fund case almost a decade ago, in which McKinsey’s former managing director and a senior partner were convicted on charges related to insider trading. Neither man acted on behalf of McKinsey.

More broadly, the scandal in South Africa — which has ensnared several other overseas companies — underscores the risks that arise as governments increasingly turn over responsibilities to consultants who operate mostly in secret, with little or no public accountability.

McKinsey built its brand as the ubiquitous adviser to businesses great and small. But in recent years, it has created an increasingly powerful unseen presence as counsellor to governments across the globe.

The extent of that global influence is difficult to evaluate because, as a matter of policy, the firm will not reveal clients or the advice it gives.

Even so, by examining government records, along with McKinsey publications and other company documents, The Times found that the firm shapes everything from education, transportation, energy and medical care to the restructuring of economies and the fighting of wars.

McKinsey’s clients include sovereign wealth funds worth more than $1 trillion, as well as what one marketing brochure describes as “defence ministries, military forces, police forces and justice ministries in 15 countries,” where the company consults on such matters as the maintenance and support of “armoured personnel carriers; minesweepers, destroyers and submarines; and fast jets and transport aircraft.”

McKinsey “is a hidden, unaccountable power that has a prestigious face,” said Janine R. Wedel, a professor at George Mason University who has written extensively on what she calls “the shadow elite.”

She added, “Think of them as a repository of the most intimate information that governments and others have, from what they are investing in to who wields influence.”

Embraced democracy

McKinsey refused to work in South Africa until it embraced democracy in the mid-1990s, but records show that it consults for many authoritarian governments, including the world’s mightiest, China, to a degree unheard of for a foreign company.

Late last year, two McKinsey partners spoke at a meeting of the state-controlled conglomerate China Merchants Group that focused on carrying out Communist Party directives.

McKinsey is also advising the Saudi crown prince, Mohammed bin Salman, as he seeks to make its economy less reliant on oil.

While confidentiality is necessary in private business, it can become problematic when public money is involved, as in South Africa, or for that matter in the United States, where McKinsey has advised more than 40 federal agencies, including the FBI, the CIA, the Defense Department and the Food and Drug Administration.

Since President Donald Trump took office, McKinsey has greatly expanded consulting for Immigration and Customs Enforcement through that agency’s office of “detention, compliance and removals.”

Their contracts with the agency exceed $20 million. Asked about those contracts, a McKinsey spokesman said the company’s work focused primarily on administration and organisation and was unconnected to immigration policy, including the separation of children and parents at the border.
Certainly, consulting firms other than McKinsey keep client lists confidential and work for authoritarian governments.

And McKinsey has undeniably been a force for good, through its pro bono work and by helping many organisations become more efficient engines of economic growth.

As for the quality of people McKinsey hires, many have gone on to run some of the world’s biggest and most successful companies.

That is why McKinsey’s behaviour in South Africa is so startling.