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November 18, 2018

Reputational risk and a cautionary tale from SA

An aerial view of Nairobi city a top KICC. /FILE
An aerial view of Nairobi city a top KICC. /FILE

It is widely accepted that a company’s reputation is perhaps its most valuable asset. Reputational risk is the possible loss of the organisation’s reputational capital. Imagine that the company has an account similar to a bank account, that they are either filling up or depleting. Every time the company does something good, its reputational capital account goes up and every time the company does something bad, or is accused of doing something bad, the account goes down (FT).

Recent developments in South Africa (where President Jacob Zuma is hounded by 783 corruption charges and saved, for now, by the immunity conferred on him by his office) are a cautionary tale for any company that takes its reputation seriously. The world is flat, news spreads like wild-fire and what happens at the periphery creates real time blow-back at the centre before you can say Bell Pottinger, KPMG and McKinsey.

The bell has tolled for the PR firm Bell Pottinger. In Bell Pottinger’s case, the reputational hit was terminal. Bell Pottinger ran a racially divisive campaign (on behalf of the Guptas’ Holding Company) whose code words were ‘’White Monopoly Capital’’.

KPMG was an auditor and advisor to the Guptas’ companies for 15 years until last year. KPMG chose to overlook a $3.3m diversion of public funds for a family wedding and wrote a report into the so-called Sars spy unit. This report was self-evidently a paid-for ‘’hatchet job’’ and KPMG last week rescinded the findings and recommendations contained in the report, which saw the removal of several senior officials at the revenue service. It also cleared out its South African leadership, including the company’s CEO. KPMG is seeing a significant hit in its South African business and has had to decapitate its senior SA leadership.

McKinsey took a juicy contract with Eskom, a state utility, that involved working with a consultancy linked to the family. Eskom paid McKinsey $73m for nine months work ending in July 2016, and at one point the consultancy anticipated receiving a payment of up to $370m over four years. One internal McKinsey document noted the risk of being criticised for “exorbitant fees” (Africa Confidential). McKinsey have yet to take any action against any of its officers.

There is an old adage in the markets, that of greed versus fear. What has happened in South Africa has moved the dial from greed to fear. If KPMG and Mckinsey were listed on the markets, both would have tanked big. What this scenario informs us is that, clearly, both global businesses have insufficient oversight over what have become far-flung operations and that the bottom-line has blinded headquarters to what is going on on the ground. This is a startling situation.

“I sincerely apologise for what went wrong in KPMG South Africa. This is not who we are,” said John Veihmeyer, the chairperson of KPMG International, in a statement on Tuesday evening. He is to be commended for getting ahead of the curve.

By contrast, Mckinsey (whose reputation has been built on the reputation of its intellectual capital) are still trying to find their moral compass.

Aly-Khan is a financial analyst

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