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Lessons from Bell Potts, KPMG, McKinsey, SAP: Stop focusing on profit only — Graham Sell

JOHANNESBURG — The unravelling of big global companies embroiled in South Africa’s Zupta state capture scandal has been devastating. Bell Pottinger basically doesn’t exist any longer while KPMG South Africa is staring down the barrel. SAP is also grappling with its own investigation into alleged kickbacks paid to Zuptoids that helped win state contracts. Meanwhile, McKinsey is seemingly in denial that it was involved with Gupta-linked Trillian. What’s clear from all these scandals is that companies have prioritised profit over ethical corporate behaviour. The pursuit of profit and the determination to please shareholders has resulted in negative ripple effects for society, writes Graham Sell. Yes, capitalism has probably been the world’s most effective system in terms of creating wealth, but by prioritising profit over all else, what kind of society are we creating? – Gareth van Zyl

By Graham Sell*

Are the suspect actions of Bell-Pottinger, KPMG, McKinsey and SAP merely aberrations, or are they the only ones who have been caught out due to the abnormal set of circumstances surrounding South African state capture?  

Tying the knot: In business and in love. Heather Kerzner, ex-wife of controversial South African businessman Sol Kerzner, has invested in Bell Pottinger. She is set to wed Bell Pottinger CEO James Henderson soon. Here the happy couple are photographed at a social event covered by glossy magazine Tatler.

Do we really believe we have an otherwise ethical and socially responsible business community when, for the last 30 years, leading business schools have been teaching CAs and MBAs that their only responsibility is to generate profits for shareholders?

It was back in 1970 when American economist Milton Friedman first floated what Jack Welch, a master of shareholder wealth creation and long-serving CEO of General Electric, later described as “the worst idea in the world”.

In an acerbic, although intellectually questionable article, published by the New York Times on 13th September 1970 titled The Social Responsibility of Business is to Increase its Profits, Friedman definitively asserts that the only responsibility corporate executives have is to generate profits for shareholders, and any other definition of social responsibility is a “fundamentally subversive doctrine“. In a single article having no factual foundation, Friedman sowed the first seeds of the Shareholder Supremacy doctrine.

Throughout the 1980s and 1990s Harvard Business School’s tenured professor, Michael Jensen, gave impetus and undeserved legitimacy to Shareholder Supremacy through his “Agency Theory”. Jensen’s untested opinions and ideas unleashed the perfect storm of corporate greed, in which ethics and integrity take a back seat to increasing shareholder wealth. In this regard, Harvard Business School recently came in for a roasting from Newsweek journalist Duff McDonald who wrote “By propagating ideologically inspired amoral theories, business schools have actively freed their students from any sense of moral respnsibility”.

Then there are the unintended consequences of using share options to align an executive’s interests with those of the shareholder. Not only has this driven ever-expanding income inequality, but is also behind a great many lapses in corporate governance due to executive compensation being aligned to ill-conceived incentives.

Living and breathing people have become impersonal “human resources”, because the shareholder is all that matters. Corporations frequently use “human resource” layoffs to balance the books, cynically depriving these people of an income to maintain or generate additional shareholder wealth. As Simon Sinek so aptly put it in his talk Nobody Wins, “We don’t care how hard you work, or how long you’ve been here, you are on the wrong side of the spreadsheet”. He also likens Shareholder Supremacy to a sports coach prioritising the needs of the fans over the needs of the players.

A sign sits outside the SAP SE office in Budapest, Hungary, on Tuesday, Oct. 20, 2015. SAP shares rose 0.2 percent to 66.28 euros at 12:24 p.m. in Frankfurt, for a gain this year of 14 percent. Photographer: Akos Stiller/Bloomberg

Companies demand loyalty from their employees, yet this is not reciprocated. Employees are constantly under threat of losing their jobs, so is it any wonder they also focus on looking after their own interests? Companies sometimes impose almost impossible tasks on their employees in their quest for improved shareholder profit, turning a blind eye to questionable dealings until they are exposed, whereupon the hapless employee is duly thrown under the proverbial bus while executives continue with “business as usual”. Self-interest begets self-interest, resulting in the greatest threat to social cohesion we face today.

A lot of lip-service is presently being paid to corporate integrity, ethics, and social responsibility, but that is all it is, lip-service. Generating profit for shareholders is still the only objective, and every time there are layoffs implemented to solely protect shareholder wealth, corporations are being socially irresponsible. This is particularly true in South Africa where economic inequality, the gap between rich and poor, is said to be the widest in the world. I am a dyed-in-the-wool capitalist so have no problem with entrepreneurs, like the founders of Google for example, taking huge rewards for their skill, perseverance, and dedication in building a premium product.  But I do have a problem with bureaucratic executives who believe they are entitled to the same level of wealth, even though they operate within established companies that they had no hand in building.

What has been missing since last seen in the 1950s and 60s is the executive skill of balancing the interests of all the various groups that touch their companies—customers, employees, suppliers, shareholders, and the community at large. It is therefore not surprising that Marxist/socialist ideology is gaining political traction among the poor and unemployed. Unfortunately, politicians are no better at balancing anything other than their personal advancement, as evidenced by the unworkable but supremely populist approach used to garner more votes in their quest for ultimate power.

To use a phrase that executives understand, the bottom line is the combined failure of big business to adapt to changing social conditions, and the failure of politicians to address systemic failures in local and national government have conspired to bleed all colour from our Rainbow Nation, leaving us with a shadowy monochrome image of what might have been.

Business executives and politicians need to understand that we don’t need radical economic transformation. We need corporations to stop clinging to discredited Shareholder Supremacy theories and return to balancing the needs of all their stakeholders. Politically, we need a complete overhaul of the electoral system, and preferably a completely new political party that is not entrenched in the present party-centric dispensation. But as American writer Upton Sinclair (1878-1968) said as far back as 1935, “It is difficult to get a man to understand something when his salary depends upon his not understanding it”. I will however keep trying to get the message through…

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