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.