FULL SPEECH: We are sorry for our role in state capture, says McKinsey
Kevin Sneader, global managing partner of McKinsey & Company apologises for the company's role in state capture
Speech by Kevin Sneader, Global Managing Partner of McKinsey & Company at Gordon Institute of Business Science Seminar, 9 July 2018
PART ONE: INTRODUCTION
Let me begin with one word: Sorry.
It is the theme of this speech. It is the message I hope you take away.
I am very sorry personally and on behalf of McKinsey & Company for the fact that we have had anything to do with any of the issues surrounding State Capture.
State Capture has had a horrible effect on South Africa, its economy and its people.
As McKinsey's new global managing partner, I am here to talk frankly and publicly about how we handled this dreadful situation, what we got wrong and what we have learnt.
Thank you for being willing to come and listen this morning, I am grateful to have this time with you.
The stories written about us in South Africa hurt deeply as they strike at what we value more than anything else – the trust we have built with our clients through the judgment, character, and reputation of our people.
Indeed, the events of the last 12 months have meant that we have lost the confidence and trust of many South Africans, including many of you in the audience today.
I owe it to you, our clients and to all South Africans to confront our mistakes. To hold ourselves accountable. And to answer as best as I can for what went so badly wrong.
Let me start with a principle, a value, that we are taught to uphold the day we join McKinsey. Adherence to the 'highest professional standards'.
This means putting our clients' interests first, offering the best advice and having strong ethical values.
Day-in and day-out, our service to clients is based on this principle and on the resulting trust in our advice and support for our clients' most important problems.
I grew up in a Firm that sets out to safeguard that trust and independence, even when it means telling clients things they do not want to hear.
Even if it means walking away, rather than working in a manner incompatible with our values. That has been our calling card throughout our 92-year history. Yet that did not happen here.
PART TWO: OUR MISTAKES AND WHY THEY HAPPENED
Let me start with the mistakes we made:
- Our governance processes failed.
- Our commercial approach led to a fee that was too large.
- We did not admit where we were wrong. And worse, we did not say sorry quickly enough and clearly enough.
Mistake 1: Our governance processes failed.
We are proud of our impact in South Africa, and our role supporting the localization of the economy through partnerships with smaller black-owned companies in keeping with the country's empowerment policies.
However, we now know there were issues with Trillian, and questions about Regiments, regarding State Capture.
Our involvement stemmed from two different mistakes.
First, when we started working with Regiments we did a quick, but not robust, due diligence.
It was inadequate. Second, with Trillian, we did a robust due diligence.
But it should have been done earlier. Some of our people had raised concerns about Trillian. The due diligence should have been completed before any work started.
We were so focused on delivering our work that we did not focus enough on the broader risks. That was wrong. We deeply regret that mistake.
- We did not recognise soon enough how our focus on making a difference at Eskom, and our commitment towards supplier development partners, could be abused. We should have.
- We did not recognise soon enough that the governance structures of Eskom, and possibly Transnet, were compromised and some managers were not working in good faith. We should have.
- In November 2015, before the project began, Regiments explained its consulting unit was to become Trillian. Some on our client team took Mr. Wood at his word that credible and respected black owners committed to supplier development aims were lined up. We should not have accepted this.
- Then, as we wound down at Eskom in mid-2016, our client team continued to interact with Trillian at Eskom - even after they had failed our due diligence and no contract existed between McKinsey and Trillian. They should not have.
- Finally, our client team relied too much on their relationships at Eskom. They took Eskom's Board approval, Eskom's appointment letter and Eskom management's word at face value. They should not have done so.
My view is the attitude within our team was not right. They were not attentive enough to the fact that Trillian was a new entity or to the scale of the challenges facing Eskom.
Crucial administrative steps for our work at Eskom were also not followed correctly and our record keeping was inadequate.
There were additional errors of process that impacted our ability to make the right judgements at the right time.
Yes, the State Capture connections were hidden to us, the authorities and the public-only coming into view in the middle of 2016 - we should have questioned Trillian with greater scepticism and greater urgency.
Our professional investigators - who conducted an extensive check on Trillian - did not uncover definitive evidence, but they did raise sufficient concerns for us to decide that Trillian had failed the due diligence. This prevented us moving forward with a potential partnership in March 2016.
Ultimately, our risk controls did work.
But, we should have done things correctly from the start, including establishing clear parameters for McKinsey partners managing the work at Eskom while our deliberations on Trillian were underway.
This all amounts to an unacceptable breakdown in our governance processes.
It should not have happened.
Mistake 2: Our commercial approach led to a fee that was too large. A large part of our global work entails supporting clients to deliver major turnarounds.
Performance based fees are far from unusual in management consulting.
They have benefits for both sides.
We are compensated based on the success of our work.
In other words, if the client does not achieve a saving or improvement it does not pay.
I could explain how the contract was negotiated, at length over 28 days using subject experts on both sides. I could say that, fully committed, we had more than 130 people on the project.
I could say we helped stop load shedding, made operational improvements, slashed costly diesel bills and put more Eskom plants online. All that rings hollow given Eskom was on a financial cliff edge.
Eskom's situation improved, but we hadn't come close to completing our work when it was cut short - less than a quarter of the way in.
We should have realised that sustainable long-term change in Eskom's performance would likely fail to materialise.
The fee was weighted towards recovering our investment rather than being in line with Eskom's situation. In that context the fee was too large.
Our values say, "put client interests ahead of the Firm's." We did not meet that standard. That is not how we treat long-term clients. It is at odds with the professionalism that has guided our firm all these years. This should not have happened.
Mistake 3: We did not admit where we were wrong or say sorry.
It has taken us too long to understand what happened.
Events were complicated, facts took time to assemble, and we wanted to be accurate in our conclusions.
I can see, looking back, that we did not communicate well enough how seriously we were taking this, or how sorry we were for our involvement.
We came across as arrogant or unaccountable.
We were unduly reassured by having terminated our discussions with Trillian.
We failed to address legitimate questions.
We were not appropriately engaged or responsive with Advocate Budlender. We did not know about the letter he uncovered. It was not our intention to come across like that. We apologised to Advocate Budlender. We apologise again. And I am personally very sorry.
We did not deal with this in a frank enough way when it came to civic society, the press, academia, the public, our clients and our alumni. We did not fully appreciate the significance of what was happening.
We were too focused on ourselves and our legal obligations. To be brutally honest - we were too distant to understand the growing anger in South Africa. We understand now.
We welcome everything being done by campaigners, the press, public leaders and authorities - many of you are in this room today - to pursue justice and uncover the truth of State Capture.
PART THREE: WE ARE SORRY
The trust of our clients and the public in South Africa is now, understandably, very low. These mistakes should not have happened. On behalf of McKinsey & Company I sincerely apologise to the people of South Africa for our mistakes. We are deeply sorry. I am sorry.
PART FOUR: HOW WE ARE CORRECTING COURSE
Let me now turn to how we are addressing the mistakes we made so that they do not happen again. I recall feeling very proud of our new office in 1995.
I was excited that McKinsey could contribute to South Africa's future, after a principled decision not be here until Apartheid ended. Today, 23 years on, we have delivered over 1,000 projects.
Our economic prospectus for Africa, 'Lions on the Move', underlines the potential of this continent and its young population.
Our 'Big-5' report sees big opportunities for South Africa's economic growth and we tell investors about them.
In recent months since I was elected to my current role, I have asked many South Africans for their views as to what we should do.
Their advice was, 'You need to fix things, and be part of the solution.'
As you can imagine, we have thought hard about how to put things right.
While we may do more later, we have identified five crucial actions that we will undertake now.
First, we acknowledge our mistakes,
I hope you feel that I have been open about our mistakes.
We have examined all the evidence we could find about our work for Eskom.
Nine million emails; hundreds of thousands of documents including telephone logs, personal emails, financial records. And we conducted over eighty interviews.
The facts are:
We found no evidence our firm engaged in corrupt activity. Let me repeat this as it is important. We found no evidence our firm engaged in corrupt activity.
Since we first published those findings last October we have kept our internal inquiry going to ensure that no stone was left unturned.
This enquiry has made clear three things.
First, McKinsey never made any payments directly or indirectly to secure any contracts, nor has it aided others in doing so.
Second, we did not give Eskom authorisation to pay Trillian. Eskom has acknowledged that when payments were made they were well aware of our decision not to partner with Trillian.
Third, the suggestion we got paid for no work is simply not accurate. If anything, our desire to deliver meant that we failed to appreciate the risks.
i know questions about Regiments' actions at Transnet also exist.
Like Transnet's purchase of 1,064 locomotives, assisted by Regiments in 2014.
Our investigation verifies what we told Parliament - McKinsey withdrew from that work before the tender was awarded.
We did not help determine the locomotive prices. We did not help select the winning supplier. And, we did not work on the transaction advisory service.
When Regiments did work with us we closely monitored their output and performance.
Yes, we should have conducted a more thorough and professional due diligence of Regiments in 2012.
And yes, there were times in 2014/15 when our team sought and received the written and spoken word of Regiment's executives around compliance with anti-corruption laws.
We assumed those assurances were truthful.
The exact role of Regiments at Transnet is still unclear to us and we hope it is fully examined by the authorities.
Second, we have returned to Eskom the fee for our work on the Turnaround Programme.
This is something we committed to months ago when we found out Eskom had not followed the correct procedures for approving the contract.
This was a priority for us. We sought many times to repay - it proved less than easy. Late last week we signed an agreement. The change in leadership at Eskom and the engagement of the AFU have been important. I am grateful to them.
I can tell you that the money will be in Eskem's account today. As a firm, we have met our commitment voluntarily. It was the right thing to do.
Third, we have disciplined colleagues that have done wrong. Where we have been able to act on our investigation we have. We have dealt with the individuals who violated our professional standards.
One partner left the Firm, during a disciplinary appeal. Another partner was demoted along with other significant penalties.
We also found an instance where research assistance was provided that had nothing to do with our client service role. That is unacceptable to me.
I really wish that I could say more, but the terms of all those actions prevent me from doing so. I can say illegality or unethical behaviour, in any guise, has no home in McKinsey.
I welcome everything that has been done by public leaders and authorities to piece together and halt State Capture. We will continue to co-operate with all relevant authorities or investigations.
Should the Portfolio Committee on Public Enterprises' report contain any lessons or actions for us, we will act, and act with speed. If the Honourable Judge Zondo asks us before his Commission we will be willing. If he finds fault with any of our people we will address those faults.
We can only examine the facts we have access to. I encourage anyone with any new information or evidence to come to us – we will pursue it fully. If new failings should come out of any external processes we will act on them decisively and promptly.
Fourth, we have upgraded our internal processes
To prevent mistakes with our supplier development partners:
- We have revamped how we pick them. They must now pass a rigorous prescreening to go onto a vetted list of approved partners.
- We have set up a new local risk committee so that assessments are made by partners who understand the local context.
- There will be no way for supplier development partners to start work without contracts.
- We will not accept recommendations solely on a client's say so. We will always check.
- We have replaced and upgraded our South African office's finance, legal, and compliance staff.
Globally we have undertaken a firm-wide policy review, to identify and close process gaps where we serve public sector and State-Owned Company clients and where we work with external partners.
As a result:
- We have strengthened our global compliance activities.
- Partners must now check proposals to serve all new clients, or clients we have not served for over 2 years, with Firm leaders.
- Partners must seek approval of new development partners from Fimm leaders.
- All public-sector work must be registered with our Risk team before proposals are submitted.
- Annual risk assessments will be conducted for state-owned company clients.
- Our Legal department must review all public sector and state-owned compa sole sourced work.
Fifth, we hope to contribute to the future of the country.
If we can find some way to be of value to South Africa we stand ready to assist.
We are willing to commit resources on a no cost basis to the country's priorities such as job creation, economic growth and attracting inward investment.
One area where we have already committed our expertise in other countries around the world is to building the skills of thousands of unemployed young people though our Generation programme.
All that said, we do not presume to know how we can help. We humbly ask that you help us understand how and where we can be of good service to South Africa.
PART FIVE: CONCLUSIONS AND CLARIFICATIONS
As I said at the beginning, we owe the people of South Africa, civic society, our clients, our alumni and our colleagues an apology.
This situation should never have happened. The fact that it did, is a source of huge regret. With that in mind, let me repeat: we are deeply sorry as a Firm and I am truly sorry as its leader. More than this, we are committed to learning the lessons that will ensure it does not happen again.
Indeed, I hope you will allow us to eam back the trust we have lost and in doing so, regain our ability to contribute to the future development of South Afric
Thank you for listening. And let me end as I began with one word: Sorry.