Corporate Chronicles

Episode 3 of a 13-part weekly series on good governance and ethical conduct.

In this series I will be examining issues of corporate governance and matters of public interest. If readers have specific business integrity and governance topics they’d like me to explore, please message me here on LinkedIn, Facebook or email.

Cons, Conflicts & Cronies: Forces For Bad.

The Three Cs

In the arena of poor governance these three Cs play pivotal roles, with the latter two, ‘conflicts’ referring to conflicts of interest, and ‘cronies’ denoting cronyism or nepotism, being more well known. I’ll look at these briefly then talk about the concept of ‘con’ as a confidence trick and the ‘con’ in consultants.

Conflicts of interest occur when the personal interests of decision-makers of a company, influence, or appear to influence, their professional judgement. They are damaging, leading to a loss of trust because decisions are influenced by personal interests and not the common good of the company. They may create unfair advantage for the decision maker or affiliated party which could lead to suboptimal outcomes and potential legal or ethical violations. Because directors are in a “fiduciary” relationship with the company, they must put the company’s interests ahead of their own ambitions when a potential conflict arises: Hamel-Smith on conflicts of interest .

From a reputational perspective, even if there is only a perception that a conflict exists, it casts doubt on fairness and impartiality and could lead to poor decision-making which hinders the effectiveness and efficiency of the company.?

Conflicts: It’s not just about the money, baby

These conflicts can result in big or small monetary benefit, a form of reward exchange - i.e., "you scratch my back, I'll scratch yours” - where personal relationships, favours, or non-monetary benefits take precedence.?

Consider a situation where a director may have a close bond with a vendor. When this personal connection results in a decision to appoint, engage or outsource, even if it is the best choice, unless certain steps are taken to avoid conflict or the perception of conflict, then, with or without direct financial benefit, decisions are seen to hinge on the anticipation of future favours. This jeopardises impartiality, erodes trust, and tarnishes credibility. It is a compromise of integrity for personal interests.

Cronyism - Jobs for the boys

Cronyism is the practice of favouring friends or close associates in pivotal business decisions, particularly in hiring and contracting. It shares similarities with nepotism, which is specifically the preferential treatment of family members. Both practices erode the foundations of equitable corporate governance.

In environments like Trinidad & Tobago, where personal and professional spheres often intersect (like the local pumpkin vine), identifying cronyism becomes particularly challenging. It's not merely about who you know; it's the extent and nature of those relationships that should flag cronyism.

Consider this: a senior officer of a firm selects a service provider that is so close a contact that they even go on family vacation together. This is not only a clear example of cronyism but also starkly highlights a conflict of interest. This is particularly questionable when such an officer might be empowered to make unilateral decisions on procurement matters such as non-competitive single-sourcing. It raises concerns about the merit of the decision, when personal relationships may be prioritised over ROI and not necessarily in the best interests of the company.?

Cronyism therefore presents a subtle yet significant threat to the integrity of corporate governance and code of ethics. It directly confronts the principles of fairness and meritocracy. Cronyism does more than undermine truly merit-based decisions; it actively suppresses diverse perspectives and stifles innovation, hindering the organisation's overall growth and ethical standing.

Another hypothetical example, is that of inequity based on relationship. In one instance, an employee, already well past retirement, is allowed to continue in employ, even having a custom-made role created to accommodate that person. In another instance, the same decision-maker denies that same privilege to a female employee, who has not even reached retirement age, has a strong performance track record, but who does not belong to the ‘Boys’ Club’ and may often courageously challenge the status quo. This blatant double standard screams cronyism – favouring loyalty and 'fitting in' over merit and competence. It undermines organisational integrity and crushes workforce morale, spotlighting cronyism's toxic grip on corporate governance.

Ask yourself:?

• As the head of a company or corporate board, how do I ensure that my decisions, especially in hiring friends to provide services to the company I lead, are not influenced by personal relationships, particularly if I am accountable for funds from a publicly listed entity?
• What steps can I take to guarantee that the costs incurred by these decisions are justified and are always in the best interest of the company and its shareholders and stakeholders?

The Big Con: A facade of competence; an assault on regional talent

Cons, traditionally understood as confidence tricks, in the corporate context, refer to situations where businesses, often swayed by perceived expertise, engage consulting firms based on assumptions of superiority, rather than objective evaluation of their service value. This issue isn't about the quality of what consultants offer, but about the underlying presumption of their necessity and superiority, which can overshadow the development of local talent or consideration of alternative providers

Mariana Mazzucato and Rosie Collington are the authors of The Big Con: How the Consulting Industry Weakens our Businesses, Infantilizes our Governments and Warps our Economies (“The Big Con).

"The Big Con of the book’s title is not a crime; it’s a confidence trick. Consultancies and outsourcers, Mazzucato argues, know less than they claim, cost more than they seem to, and — over the long term — prevent the public sector developing in-house capabilities." Henry Mance , The Financial Times

There is a growing concern about the use of external consultants who often go counter-culture, imposing foreign values and at the same time extract valuable and scarce foreign exchange. The egregious sums of money that are paid to these consultants time and time again is in stark contrast to the value they say they bring, or the value the GM/CEO who engages the consultant, says they bring.? Not only that, it is but it is also very hard to distinguish that alleged value in terms of actual data or figures.

Buy Local

Barbados Prime Minister Mia Mottley is one such voice.

According to Barbados Today, 14 December 2023, Prime Minister Mia Amor Mottley urged the business community to look inward when it comes to growing an economy that includes all Barbadians. “If anybody here has the capacity to help us turn the corner to ensure that our growth is inclusive, it is the people in this room,” she told the Barbados Chamber of Commerce and Industry.

She urged business leaders to focus on the six tenets outlined in the Mission-Oriented Strategy for Inclusive and Sustainable Economic Growth in Barbados, authored by economist Professor Mariana Mazzucato (author of The Big Con).

PM Mottley says of Mariana she “truly is a force of nature, who has been prepared to “speak truth to power all over” - in the book and in person, that is very apparent in the way she calls out the private and public sector in relation to their ubiquitous use of the Big Three consultancy firms, and in particular and of great interest to this writer, the use of McKinsey, one of the Big Three. Some of you may have heard of the Bean Counters: The Triumph of the Accountants and How They Broke Capitalism by Richard Brooks which speaks to the Big 4 accounting firms and the inherent conflicts that arise due to a lack of true independence.

While the conclusion of The Big Con - the Case Against Consultancies states “It would be foolish to blame consultancies for all the problems that advanced capitalism has created,” the authors refer throughout to the approach adopted by the Big Three. In one case, a former McKinsey employee admitted that “50 per cent of the slides we used were already used on other clients, which showed a strong sense of superficiality”. According to the authors they are always “case savvy and powerpoint ready”.?

Henry Mance says “No one ever got fired for hiring McKinsey” in the Mariana Mazzucato Interview , FT, 13 February 2023.? He also asks the question - what do these outsiders — strategy consultants, such as the ‘Big Three’ of McKinsey, Bain and Boston Consulting Group — really know? He also goes on to say that she (Professor Mazzucato) is clearly not afraid of controversy.?

Enron and McKinsey: A Case Study in Cons, Conflicts and Cronies

The Enron scandal, one of the most notorious corporate collapses, involved McKinsey through Jeffrey Skilling, a former high-earning McKinsey consultant.

In this case, the collaboration with McKinsey, and the consultancy's endorsement of Enron's practices, highlights the potential risks and ethical challenges inherent in consultancy-client relationships, especially when these relationships are not managed with sufficient scrutiny and independence.

Clearly outlined in The Big Con is the modus operandi of the consultancy firms where the ‘alumni’ networks of former employees go on to become potential clients.

Duff McDonald asks the question: Which chief executive is likely to admit he has wasted money on overpriced consultants, or failed to benefit from the advice of the world's brainiest people? My addendum is … Especially if he is one of them?

It’s all about the money, baby - a shareholder’s perspective on the tangible cost of poor governance

Mr. McDonald goes on to speak of consultancies as boardroom luxuries, courtiers at the throne of late capitalism, a high-end service for insecure executives. They belong in the same category as corporate jets: another way of squandering shareholders' money. They can be heard referring to themselves as "the greatest collection of talent the world has ever seen".

The Three Cs profoundly affect shareholders' interests in several ways.

• Diminished Dividends: poor financial decisions caused by compromised decision-making means reduced profitability, directly impacting dividends.?
• Eroded Trust: when shareholders perceive that personal and social interests are influencing company decisions, it erodes their trust in the management and board and can lead to a decrease in investor confidence and potentially result in a decline in share prices.
• Value loss: Inferior business decisions resulting from conflicts can lead to a decline in share value and directly erodes the value of shareholder investments.
• Leadership: conflicts trigger concerns over the lack of transparency and accountability in the company's leadership and should provoke a deep investigation into company practices because - what else might be happening?
• Voting rights: when shareholders don't truly have a say in board composition then if there are inherent conflicts of interest and personal gain takes precedence over shareholders’ interests how do shareholders safeguard their investments?
• Compromised Decision-Making: a lack of meritocracy can lead to the appointment of less qualified individuals in key positions. This compromises strategy execution and performance - not just the quality of decision-making at the top level.
• Increased Risk of Fraud and Mismanagement: Companies that engage in cronyism and nepotism may be at a higher risk of fraud and mismanagement. This is due to a lack of accountability and oversight, as those in positions of power might be more inclined to protect their personal connections over the interests of the shareholders.

Truth and Accountability: Fitting in.

Perhaps Darragh McManus of the Irish Independent describes it best, ‘A shocking indictment of how, for decades, the consulting industry has made billions from public and private sources without providing much value for money. But it’s an equally damning verdict on those institutions that have handed over these fortunes’

The next post: Don't Stop the Carnival!

References and additional reading

1. Hamel-Smith on conflicts of interest
2. The Big Con: How the Consulting Industry Weakens our Businesses, Infantilizes our Governments and Warps our Economies
3. Mia Mottley and Mariana Mazzacuto speak about state capacity
4. PM Mottley says invest in your country
5. McKinsey: How does it always get away with it? The consultant sees itself as a great institution but it could be a case of the emperor's new clothes The Independent: [McKinsey: How does it always get away with it?](https://www.independent.co.uk ) 07 February 2014
6. When McKinsey Comes to Town
7. Bean Counters: The Triumph of the Accountants and How They Broke Capitalism, Richard Brooks on the Big 4 accounting firms
8. Duff McDonald - The Firm: The Story of McKinsey and Its Secret Influence on American Business
9. Mariana Mazzucato: ‘The McKinseys and the Deloittes have no expertise in the areas that they’re advising in’
10. Episode 1 - Boardroom Echoes & Egos: The dangers of groupthink
11. Episode 2 - The Role of the General Counsel & Directors' Duties: Conform or Resign
12. Check out my Facebook page: Angélique Parisot-Potter: Q&A