McKinsey ‘got it’ wrong

An article that appeared on the business section of Sunday Times on the 29th October 2017 reported that McKinsey was awaiting a court ruling on the legality of their contract with Eskom. If the court deems it illegal, then they will pay back the money Eskom is claiming from them. The contract resulted in payments being made to a Gupta linked company, Trillian Capital Partners and Eskom is claiming back over R1.5 billion of this money from both companies via the South African courts.

One has to appreciate that McKinsey is faced with a difficult dilemma that confronts businesses all the time. Should they prioritise the financial income or act in an ethical manner regardless of the financial implications of such a decision? What is troubling about McKinsey’s response though, is that when Eskom entered into a contract which ends up in ‘questionable’ payments being made, another stakeholder, namely the South Africa taxpayers enters the fray. Two questions arise from this response from McKinsey. Why delay paying back the money? Will their act become ethical if the contract passes the legal test?

Professor David Coldwell based at the School of Economic and Management Sciences at Wits University and his colleagues provide a useful argument to assess McKinsey’ s response. These academics presented two forms of capitals that a business manages, namely financial capital and reputational capital. Explaining the latter capital, Coldwell and his colleagues referred to it as stock that is accumulated over a period of time and saved in the reserves. In times of economic and other challenges, a company can come through a period of difficulty due to its strong reputation.

By delaying paying back the money, McKinsey’s reputation with their stakeholders will be eroded. Whether the courts confirm the contract as legal, the fact that payments were made to a Gupta linked company, the powerful family accused of ‘state capture’ takes it into the realm of unethical conduct from McKinsey.
Therefore McKinsey got it wrong and waiting for the courts will mean their reputational capital is eroded before they pay back the money. Consequently, the right thing to do, is to pay back the money and acknowledge that their act was unethical, knowingly or unknowingly.

The Sunday Times article also highlighted that KPMG has announced that it will pay back the money it received linked to the Gupta family. Despite this, their reputational capital still continues to erode. Perhaps that is a point to McKinsey to ponder, whether they pay back the money or not, the reputational capital might never be retrieved. Bell Pottinger learnt that lesson only too well.