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Shawn Hagedorn: KPMG trigger for real radical economic transformation, starting with accountants

LONDON — In this brilliant assessment of dark forces that lie beneath the KPMG-instilled chaos, independent strategy advisor Shawn Hagedorn urges us to think deeply about the valuable lessons to be learnt. In particular, the peculiar South African obsession with chartered accountants, a throwback to seeds planted by the social engineers who gave us apartheid. The result has been communal worship at the shine of regulation, resulting in navel gazing at a time when creativity and looking outward is a prerequisite for economic growth. Hagedorn argues, rather convincingly, that radical economic transformation is desperately needed to replace the inheritance from the past. But in a way few are even considering. Simply superb. – Alec Hogg

South African president’s radical economic transformation. More magic available at www.zapiro.com.

By Shawn Hagedorn*

An article I wrote several years ago, “Why CA’s are bad for SA”, provoked many contentious comments and a rebuttal from SAICA, “Why CA’s are good for SA”. Given KPMG’s current difficulties, why SA produces many of the world’s best accountants – and what the costs are – should be freshly considered.

SA
Shawn Hagedorn

During apartheid, the dominance of government and business was split between Afrikaners and English South Africans, respectively. Dave Steward, former chief of staff to President de Klerk, can be heard on YouTube making the point that if you put sociologists in charge, you get social engineering.

HF Verwoerd was killed over fifty years ago, but social engineering, done shrewdly, sets seeds which germinate for generations. It would not have been lost on a government run by sociologists, actively managing departments like the Ministry of Information, that outstanding young business people could threaten their ideologically fueled regime.

CA’s and actuaries didn’t just happen to be held in particularly high regard in SA. Rather, this reflects purposeful social engineering directly at odds with how the world’s most prestigious universities have long espoused versions of Oxford’s Philosophy, Politics, and Economics curriculum for future leaders in business and government.

Encouraging such curricula would have stocked and stoked well-placed challenges to legislated racial oppression. Social justice issues weave unrelentingly within and among the three academic disciplines alongside examinations of how societal structures evolve. Instead, an absurdly high proportion of SA’s most exceptional business students were enthused with a passion for compliance to promulgated standards.

Moody’s is not wrong to reference SA’s “dysfunctional politics” but this barely scratches the surface. SA’s economy must be fully restructured yet the national dialogue is unfit for such a tumultuous journey.

The denouncing of apartheid has focused on the oppression of non-whites. KPMG’s current difficulties should provoke a broader appreciation of how whites were socially engineered under apartheid and how this has become central to SA’s current malaise.

The KPMG company sign sits at their offices in the financial district of Canary Wharf in London, U.K.

Big business was bullied by the apartheid regime toward accepting a generally compliant role. The post-1994 government then exploited such preconditioning and big business soon became inured to being routinely punished for the sins of the past. The transmission mechanisms were waves of regulations. A focus on competition would have to wait as the new government regime expressed itself through demanding box-ticking compliance which reinforced and exploited, SA’s privileging of accountants.

The rest of the world has integrated into one giant, globalised, highly competitive economy. This was never a problem-free path, yet it is central to explaining why less than 10% of the global population is extremely poor today versus over 90% just two centuries ago. Over the past generation, poverty alleviation has surged on the back of globalisation despite industrial-led growth having given way to services-led growth.

SA is an extreme outlier amid a thriving global economy whose success is underwritten by integration – and the spirit of collaboration coinciding with the competitiveness that it inspires. That over half of SA’s population is dreadfully poor traces definitively to successive government regimes entrenching inward focused policies where compliance prevails over competitiveness. From a global perspective, “apartheid”, in the original sense of the word, is alive and well in SA.

It is quite plausible that SA’s ruling party will break up and the post-2019 government will be a coalition among its moderate former members and today’s official opposition party. Such a politically promising scenario would, however, lack a mandate to restructure the economy. A vibrant national dialogue is required around economic development drivers. The required knowledge base is conspicuously absent.

Flag map of South Africa

When President Zuma fired then-Finance Minister Nene in December 2015, suddenly business leaders found a protest voice – but its message was narrow. It has since become clear that SA’s business leaders lack a workable plan to restructure the economy.

Accounting develops extremely valuable information management tools and schema. Today, most countries have a political economy which serves the needs of their people reasonably well. When, as in SA’s case, the political economy needs to be substantially re-invented, an accountant’s toolbox and perspective are of little use. This ties directly to why the profession appealed to apartheid-era social engineers and the policymakers, often communists, who followed them.

The core tensions which must be wrestled into a set of solutions pit commercial success drivers against social justice considerations. Becoming qualified for such challenges requires a curriculum vastly different from what accountants digest.

In a “normal” environment, business leaders would act as economic growth advocates. This hasn’t happened in SA as apartheid-tinged CEOs lack the reflexes and honed-tools to challenge commercially destructive social and political narratives. SA’s business leaders have been unable to transcend political targeting and this has served to compound the nation’s isolation.

Read also: Hagedorn: ANC ensnared in its own poverty trap – and not smelling the roses

It is easy to show mathematically that SA lacks the adequate domestic purchasing power to sustain even modest growth and poverty alleviation. The rest of the world has at least 250 times as much purchasing power – and it is growing – whereas SA’s per capita income will soon complete a decade of no growth.

The obvious response and that followed by nearly all countries in other parts of the world is to fully integrate into the global economy by focusing on increasing value-added exports. This is not an option; rather it is a requirement. Yet the volume of political and economic restructuring required is paralysingly profound.

A ruling party comprised of communists, cronies, unionists, and populists will be strongly biased to favour redistribution focused policies, particularly as a majority of voters are overwhelmed by entrenched poverty. This provokes inward focused policies which rely on making SA’s consumers – with a smidgen of the world’s purchasing power – compliant toward redistribution focused regulations. That such a policy regime inspired much corruption distracts attention from its inherent non-viability.

Democratic structures do not assure effective policymaking. Fixating on redistribution was always going to crowd out growth prospects. Most countries are far less isolated and almost all have transcended such challenges. SA has not and business’ compliant stance has bordered on complicity.

Read also: 7 ways for SA to achieve true ‘radical economic transformation’ – FMF

SAICA’s response to my 2011 article argued that the prudent influence of their members helped SA avoid the use of derivatives that led to the US-induced subprime crisis. This viewpoint misses larger considerations: that SA was less affected reflected its isolation; and the US needed a crisis to trigger much-needed economic restructuring. The US economy has become much healthier and competitive for reasons mostly separate from the regulatory responses celebrated by accountants.

SA’s similar opportunity to institute much-needed reforms was when African Bank collapsed in 2014. There is still little recognition of how this was a golden opportunity to correct SA’s excessive household indebtedness. Much of the country’s ongoing economic stagnation traces directly to past domestic consumption having been inflated through over-reliance on expensive consumer debt.

Only one asset manager (Futuregrowth) had publicly expressed its misgivings before the crisis. The general reaction across SA’s financial services industry was to blame the crisis on reckless lending by African Bank’s hapless executives. While such criticisms were valid, they veiled a meagre understanding of economic fundamentals across SA’s banking and asset management sectors.

SA has many exceptionally savvy business executives yet virtually none of them is fluent in the tricky science of economic development. Why would they be? Successive governments have perceived them not as partners but as threats.

Challenges, perspectives, and relationships are turned inside out and inverted. Economic issues are distorted through black-white, good-evil prisms resulting in a country that looks inward and backwards and is therefore unable to reduce dreadful levels of unemployment and poverty. Many of today’s top performing economies were once colonies and experienced far greater horrors than SA ever did.

If a country has its very best business students study accounting, when the time comes to fundamentally reshape the economy, no one will know what to do. This is where SA now finds itself. The people who run the world’s top universities have known of such risks for at least a century.

It would seem that quite clever people at leading companies lost sight of their moral compasses. Holding them accountable is important but this should not detract from accepting that SA has never pursued a path that would lead to it becoming a normal country with normal levels of employment and prosperity. That path has a name, global integration. What the journey requires is a passion for competing – not compliance.

  • Shawn Hagedorn is an independent strategy advisor. 
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