HILARY JOFFE: McKinsey beware … a fishy reputation has the potential to gut a global company

When the US energy utility company Enron filed for bankruptcy in 2001, it took its auditors down with it.

At the time, Arthur Andersen was one of the big five global accounting firms. It had already been implicated in two substantial audit failures and should have been on guard against another client failure, especially one as large as Enron, which was the firm’s second-largest revenue earner.

As it turned out, there had been significant concerns within the firm about the dodgy Enron dealings the audit team was signing off. But Andersen was earning so much from other Enron consulting fees, as well as audit fees, that its independence was completely compromised — and it didn’t walk away from its client until it was too late to save itself.

Then there was Monitor, a global strategy consultancy that used to play in the big league with management consultancies such as Bain and McKinsey. That was until Monitor went bust and was bought out by Deloittes in 2013.

The work Monitor did for Libya couldn’t have helped. Monitor was hired by Libyan leader Muammar Gaddafi’s government in 2005 to consult on its economy. But it ended up with a contract for a campaign to enhance Libya’s, and Gaddafi’s, international reputation, which included some rather Bell Pottinger-like efforts such as writing a book in Gaddafi’s name and writing his son’s doctoral thesis for the London School of Economics.

Many people in the market still remember Monitor for the Libyan debacle, which the consultancy admitted was a "serious mistake", rather than for its undoubtedly excellent strategy work.

All of which is to make the point, simply, that one company, or one geography, can sink a global professional services firm or consultancy.

It is not just the legal risks global firms run with regulatory compliance in their home countries, particularly if they are based in the US.

There, a US-listed company can be prosecuted by the department of justice under the Foreign Corrupt Practices Act if it is found to be paying bribes in any jurisdiction in which it operates. But it is also the immense reputational and commercial risk global firms run if they are found to be involved with dodgy dealings anywhere in the world.

All they ultimately have to sell is the expertise, integrity and probity of their people. They can’t afford to have their names linked to dodgy clients or questionable dealings.

All of which makes it quite puzzling that a highly regarded global management consultancy such as McKinsey has taken so long to spot its Eskom problem and has been so timid about coming forward to own up to the problem, explain it and d eal with it.

In the past couple of weeks, since the release of the Budlender report on the allegations about Trillian, McKinsey and Eskom, the firm seems at last to have begun to take the issue seriously at a global level and to move to try to manage the legal, reputational and commercial risks involved.

This is all rather belated, given that McKinsey’s name was mentioned several times in then public protector Thuli Madonsela’s State of Capture report late in 2016 and that there was market talk long before that about McKinsey’s lucrative Eskom contract and the company’s possible links with Gupta-linked or formerly Gupta-linked consultancies Regiments and Trillian.

McKinsey took the legalistic route in a media statement released last week in which it insisted it had not entered into a contract with Trillian — which Trillian then flatly contradicted on Friday. It’s all pretty unedifying stuff for a leading global firm to be involved in.

The global consultancy appears to have lost its hugely lucrative contract with Eskom in July 2017 after it informed the power utility in March that the partner Eskom wanted on the contract, Trillian, had failed McKinsey’s due diligence.

But even if it did nothing illegal it still has much to explain, and the sooner it comes out in public the better its chance of preventing the damage to its reputation and its business. The same goes for global firms such as KPMG and SAP which have been involved in the rot at the country’s public entities.