Morality Is Not Just A Question Of Individual Conduct
State capture has occupied the imaginations of South Africans for the last few years. For much of that time it was told as a tale of shady politicians and a clique of special friends, but over the last while a different story has started to emerge. This story includes some of the worlds’ leading professional services companies.
I’ve been bemused by the responses. The repayment of fees, the handwashing declarations that ‘they’re no longer employed by us’ and ‘mistakes were made.’ These are businesses who stake their global reputations on their strategic nous, their deep grasp of systems and operations, and so the narrative of individual rogue agents feels disingenuous. It certainly doesn’t allow for the development of a transformative approach to the challenges South Africa has faced over the last 15 years.
Former Vice-Chancellor of UNISA, Professor Barney Pityana, in the foreword to Professor Nkhulu’s book, Enabler or Victim? KPMG SA and State Capture says, “Morality…is no longer just a matter of individual conduct, it is also about how institutions are organized, so as to engender a moral accountability.”
We should be cautious about individualising misconduct when so often it is the product of systemic failure.
I have turned to Prof Nkuhlu’s work because we all carry an accountability for the kind of society, we both actively build and passively enable. To do it justice this is all we will focus on today. Next week we will return to our more eclectic mix.
It’s a South African case study, but the lessons are universal.
/ strategy
Professor Lumkile Wiseman Nkuhlu became the non-executive chairman of KPMG SA on 1 March 2018. KPMG was caught in a storm that had, at that point, two primary sources – their role as auditor for Gupta-owned businesses, and their involvement in the concerted effort to eviscerate the South African Revenue Service (SARS).
His book offers a rare insight into an organisation that lost its way, and what was required to repair it.
Prof Nkuhlu reflects on how he grappled with whether he should accept the appointment, before finally deciding that he should. His decision was predicated on the hope that he could perhaps have a meaningful impact in stopping the erosion of integrity that was corroding South Africa’s institutions and future.
In the lead-up to Nkuhlu’s appointment, nine senior executives including the CEO had been removed. Despite this storm, the firm was yet to uncover or at least reveal, its failings in relation to VBS Mutual Bank, an audit client and one from which billions had been looted, apparently undetected. When the VBS news broke, a few weeks after Nkuhlu’s appointment, he decided that he had to resign.
He says, “My view was that familiarity and complacence continued to undermine the effectiveness of the firm’s controls. That the general thinking was still dominated by the view that the firm is fine and that there were just isolated incidents by rogue partners. I insisted that all of this amounted to denialism that made it difficult to generate enthusiasm about renewal.”
Throughout the book his frustration in tackling a culture that had enabled misconduct is palpable. He says, “from the very beginning, I was confronted by legal and technical arguments regarding why the firm should not respond to the public demand for transparency about what really happened.”
His frustration reminded me of the ancient wisdom of the Tao Te Ching that says when justice is lost, one must learn the rules of conduct. It feels fair to assume that when the corporate culture becomes overly legalistic and technical, justice is probably under threat. It’s something to watch out for.
The combination of VBS and Nkuhlu’s pending resignation created the crisis required to trigger the kind of actions he believed was necessary.
He insisted that there would be an independent review of each audit partners work over the preceding 18 months coupled to independent integrity checks of all partners, associate directors, and their spouses. Those who were found wanting would face either remedial or disciplinary action.
Nkuhlu notes that “Partners had come to believe that chasing revenue growth was all that mattered for their remuneration and advancement.”
By June 2018, numerous clients had left KPMG in turn resulting in the retrenchment of 400 people. It is a consistent irony that a singular focus on profit almost always results in companies experiencing crisis, with terrible social effects. Profit is a powerful measure of efficacy, but on its own it can never ensure the survival and thriving of a business.
Ultimately 26 audit files were found to be substantially non-compliant with KPMG’s audit methodology. Five partners resigned, another seven were to face disciplinary action.
The internal reviews triggered greater scrutiny from the Independent Regulatory Board for Auditors. They wanted access to the results to use them in their own review processes. Initially KPMG resisted the IRBA’s intent to use internal reviews, but ultimately accepted their position. Nkuhlu noted that, “while I might not have been entirely pleased with the outcome, given the circumstances I happily concede that I was impressed with the IRBA’s stance and resolve to act in line with its mandate. This is precisely how state institutions are meant to operate – with competence, rigour and the public interest at heart.”
Nkuhlu initiated wide-ranging conversations with the remaining staff and partners to understand what had gone wrong. He says it included, “an unhealthy preoccupation with increases in revenues and a distorted mindset and value system primarily focused on delighting the client at the cost of serving the public interest.”
Read that again. And again. Reflect. How might those self-same tendencies be turning up in your business? What might the consequences ultimately be?
Ultimately Nkuhlu together with non-executive director Ansie Ramalho, key executives and external stakeholders led a series of initiatives to lay the foundations to get KPMG back on track, including:
Ensuring that, “Being a role model for ethical conduct…is now at the centre of what we measure and reward.”
Establishing a separate board audit quality committee under the chairmanship of an independent non-executive director.
The appointment of a new CEO from outside of the firm.
Increasing the number of non-executive directors on the board.
In other words, KPMG undertook systemic changes. KPMG International ultimately invested R2 billion to stabilise the business. Focusing solely on profit can become an expensive exercise.
Importantly they sought and welcomed the engagement with and oversight from external bodies to reinforce ethical conduct and to sanction misconduct. Their internal documents and processes were opened to the light of day.
Nkuhlu concludes his book with 18 lessons from the KPMG experience. He says that “(o)n matters of ethics and corruption, the cleaning up process should not begin and end only with those who have been caught and exposed. The incidents that are revealed should serve as a wake-up call for deeper introspection that is not clouded by conscious or unconscious denialism.”
/ self
The KPMG experience is instructive. Where have you found yourself silent in the face of ethically dubious decisions? Have there perhaps been moments where profit trumped purpose? What might you have done differently? How do you keep your business’s purpose alive in your language and the minds of your leadership teams?
/ soul
The KPMG experience took place in the context of the wider disruption of state capture. Importantly though Nkuhlu draws our attention to an earlier, profound failure – the failure of big business to forge a partnership with government to fundamentally transform South Africa – which provided the fertile soil in which the seeds of corruption landed.
In this view state capture and its attendant ills, is a symptom of a deeper illness. An illness that can only be healed by embracing a fundamentally different way of being to that which has dogged our country for hundreds of years.
Healing requires a commitment to the principle that building a world in which all can participate is a far better option than holding on to the status quo. It requires a moral accountability.
Karl
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(This letter was first published on 31 January 2021)