McKinsey and South Africa’s Corruption: A Loss on a $700-Million Contract and Brand Damage — Should Have Listened to Jeffrey Skilling

Top front page and 3 full; inside pages in today’s New York Times about McKinsey & Company’s consulting contract with Eskom, a South African power company. It was a $700 million contract, but the payment was contingent on turning around a nearly insolvent company. In the late 1980s, when McKinsey was just launching into energy consulting, Jeffrey Skilling was with McKinsey. Yes, that Jeffrey Skilling, former CEO of Enron who was convicted of and imprisoned for accounting frau. At that time, Mr. Skilling was against anything but flat-fee contracts in energy. Payments under contracts based on whether McKinsey delivered results, Mr. Skilling argued, would be an incentive to tell clients to reduce costs when cost reduction might not be in its best interests. Mr. Skilling told McKinsey partners that such contracts “could destroy” McKinsey. Funnily enough, Mr. Skilling saw the ethical issue. The other partners did not. McKinsey went full speed ahead into results contracts in the energy sector.

The $700 million bet in South Africa was a big one. Just the amount McKinsey would be paid (and with government agencies the amount paid is always public) would turn the heads of officials and citizens in financially struggling South Africa. However, the payment amount turned out to be the least of McKinsey’s worries. It affiliated with a local company, without really doing the vetting. As it turns out, that company was a front for other companies that were funneling money to other companies in order to funnel money to the Gupta family to funnel money to government officials.McKinsey found itself in the midst of a national scandal with an illegal contract.

Some saw the red flags in 1980. Some saw the red flags in South African corruption. Some saw the red flags when the contract amounts were so large. Some saw the red flags when they witnessed the profligate spending. But seeing the red flags is different from acting on them. This one, as Dominic Barton McKinsey’s resigning managing director said, “I take responsibility. This isn’t who we are. It isn’t what we do.”

Yes, actually it is who McKinsey is now. A ‘tin ear” to ethical issues gets one into a great deal of deafness and the fallout of failure.

About mmjdiary

Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards. Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio. She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News. In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles. Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
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