In a series of stories we ask Australia's strategy gurus about the keys to growth.
![Dominic Barton, McKinsey's global managing partner, says there's is a growing expectation that CEOs will speak up on ...](http://web.archive.org./web/20180311072549im_/http://www.afr.com/content/dam/images/h/0/w/5/0/w/image.related.afrArticleLead.620x350.h0w0zn.png/1520475683665.jpg)
Meeting McKinsey’s outgoing global chief executive Dominic Barton feels more like confession than interview.
When BOSS raises McKinsey’s ongoing scandal in South Africa, it comes as a shock when Barton admits he made serious errors of judgment and has major regrets about his handling of the crisis.
“I needed to do a better job of embracing it,” Barton says bluntly.
We’re in a private room at Melbourne’s Sofitel, discussing his response in-depth for the first time.
![Former McKinsey global CEO Rajat Gupta served a two-year prison sentence for insider trading.](http://web.archive.org./web/20180311072549im_/http://www.afr.com/content/dam/images/g/x/y/f/m/p/image.imgtype.afrArticleInline.620x0.png/1502949309894.jpg)
“I look in the mirror and realise we should have embraced it and said, ‘There have been mistakes made, here’s the things we don’t know but we are looking into.’ But when you put up walls, which is what we did in the beginning, it makes people madder. They say, ‘What are you guys trying to hide?’ ” Barton says.
“Part of the South African challenge is we said, ‘We didn’t do anything wrong.’ But something did go wrong, so let’s talk about it, let’s talk about what we knew and engage with people instead of hiding,” says the 193-centimetre tall, silver-haired CEO, the son of a Canadian missionary and nurse, with the manners of a choirboy.
McKinsey was drawn into the political scandal in November 2017 during an investigation into state corruption.
It had been paid $US70 million ($88 million) in consulting fees for work with South African utility Eskom.
Officials are investigating whether McKinsey knowingly let funds from Eskom be diverted to a company called Trillian to secure the deal to advise Eskom.
![Trillian was controlled by Ajay, Atul (pictured) and Rajesh Gupta, the billionaire friends of scandal-marred former ...](http://web.archive.org./web/20180311072549im_/http://www.afr.com/content/dam/images/g/n/p/f/s/x/image.imgtype.afrArticleInline.620x0.png/1458705288593.jpg)
Trillian was controlled by Ajay, Atul and Rajesh Gupta, the billionaire friends of scandal-marred former president Jacob Zuma.
The Guptas have been accused by South Africa’s anti-corruption watchdog of exerting control over state agencies to siphon public funds.
An investigation into Trillian unearthed a letter from McKinsey partner Vikas Sagar which appeared to present Trillian as its formal subcontractor that allowed Eskom to approve payments of fees to Trillian.
The South African corporate regulator has filed criminal complaints against McKinsey, KPMG and SAP. Sagar left McKinsey.
![South Africa's former president Jacob Zuma, who resigned in February.](http://web.archive.org./web/20180311072549im_/http://www.afr.com/content/dam/images/h/0/w/5/1/1/image.imgtype.afrArticleInline.620x0.png/1518662752243.jpg)
McKinsey says it had never had an official partnership with Trillian, although it worked beside Trillian for several months at Eskom, until Trillian failed a due diligence test because it would not provide information about its ownership structure.
Storms of abuse
The scandal broke publicly last July, but it was not until late October that McKinsey apologised and publicly admitted it was embarrassed by the scandal and was taking action to fix it. In the meantime, it has had to weather Twitter storms of abuse and popular protests.
In South Africa, Nedbank, Barclays, Standard Bank and the South African arm of Coca-Cola have cut ties with McKinsey, which has had $120 million in assets frozen.
![Barton admits he was not prepared for the South African crisis and reacted by being overly legalistic.](http://web.archive.org./web/20180311072549im_/http://www.afr.com/content/dam/images/h/0/w/5/0/x/image.imgtype.afrArticleInline.620x0.png/1519074947337.jpg)
“When I came out and said there was no bribery, my CEO contacts were like, ‘OK that is interesting, but come on Dominic, tell us what didn’t go right.’ One reminded me of what I told him when his company was dealing with a crisis, and asked, ‘Did you forget that?’
“You’ve got to be out there and say, ‘Here’s what’s happened. First, let’s apologise; it’s embarrassing. We weren’t involved in bribery, but that’s not the point. The point is we worked alongside an organisation and whether you knew it or not, it had links to these guys and we shouldn’t have done that. Secondly, the scale of our involvement was huge.’ Some people are saying, ‘You were charging $US70 million, what are you guys up to?’ ”
It is the second major scandal in Barton’s nine years as head of McKinsey. Former McKinsey global CEO Rajat Gupta (who is not a relative of the South Africans) was convicted of insider trading in 2012 and former McKinsey director Anil Kumar was given two years’ probation for his role in the scheme.
![Larry Fink: warned companies need to find a purpose beyond making money.](http://web.archive.org./web/20180311072549im_/http://www.afr.com/content/dam/images/g/t/8/h/d/c/image.imgtype.afrArticleInline.620x0.png/1485347823172.jpg)
Too many lawyers
Delving into how McKinsey got its response so wrong, Barton says he was not prepared for the South African crisis and reacted by being overly legalistic.
“There was this letter that came up that we didn’t know was there. Our reaction at first was no comment. When we found out, we got a law firm [Norton Rose] literally going through every email. In retrospect what we should have done is say, ‘We are very disturbed by this too, we have brought in a law firm, we don’t know the answer yet but we have done it,’ rather than saying, ‘Please go away,’ ” Barton says.
He says McKinsey’s legal advice was not to speak about the matter publicly until the law firm had concluded its investigation.
“These things take longer than you think. I think it was from May until November, as they looked through everything, 2.4 million emails and financial transactions.
“First of all we said, ‘This is what we think we have done wrong and we want to pay the money back.’
“The challenge is who do you pay the money back to? So we have ring-fenced it. Some people go, ‘Have you really paid it back?’ We actually have. It’s gone out of the partnership and every partner in McKinsey was affected by that last year, make no mistake about it.
Long-lasting damage
![Barton says the lessons from the South African crisis are still being unpacked but the damage will be long-lasting. ...](http://web.archive.org./web/20180311072549im_/http://www.afr.com/content/dam/images/h/0/v/v/1/6/image.imgtype.afrArticleInline.620x0.png/1519074877099.jpg)
“We have removed two people who were involved. We are co-operating with every investigation. We have had a legal firm look at what we do and we are being transparent with our clients, but you can’t explain it in a sound bite and we are not very sophisticated at explaining what we have done.
“We would argue that what we have done is completely different from what KPMG and Bell Pottinger have done. It doesn’t matter, it all gets lumped in. But I understand it because people are saying we need accountability in South Africa and these are global companies.”
Barton says the lessons are still being unpacked but the damage will be long-lasting. Change will also be easier said than done.
“The reputational damage will take a long time to come back in South Africa. We could have said, ‘We quit,’ because it’s a tiny part of what we do. But we want to be there for the long term, we have actually put more partners back because we took too many away,” Barton says. “There has been reputational damage and we just have to figure out how to learn from it, build from it and talk about it.”
The firm should be asking itself not just, “Can you do the work?” but also, “Should you do the work?” he says.
“We worked alongside this entity [Trillian] for three months while we tried to work out their ownership structure. We should have said until we find out, don’t do that.
“So the process of vetting and knowing your client has to be done in a better way. For example, there was a debate about whether the contract we had was legitimate. The board minutes from Eskom says we went to National Treasury and there is a question about whether the board actually knew the truth. Maybe we should have gone to National Treasury and not relied on the client to provide assurances. So there are things like this where you need extra belts and suspenders.”
Stone-age CEOs ‘taken out’
!["I needed to do a better job of embracing it," says Dominic Barton, of McKinsey's ongoing scandal in South Africa](http://web.archive.org./web/20180311072549im_/http://www.afr.com/content/dam/images/h/0/w/5/0/y/image.imgtype.afrArticleInline.620x0.png/1519075017498.jpg)
Barton says his own experience is part of a broader trend he sees from meeting two CEO or government ministers every day – an expectation that CEOs will speak up on broader social and business issues or risk being “taken out”.
He cites the open letter BlackRock chief executive Larry Fink sent to CEOs in January, which warned that companies needed to find a purpose beyond making money.
“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate,” Fink wrote.
It was a provocative idea says Barton.
If business is regain the trust it’s been losing for 30 years companies will need to reconsider where their priorities lie, Barton says.
“Business people are going to have to start playing a broader role in things like education, innovation for the communities in which they are operating and how they use resources. I think we will see more measures of your trust level in the relevant community in which you operate and investors are going to ask for that because you can be shut down.
“For example, when Charlottesville occurred [when a white nationalist drove a car into protesters, resulting in one death and 19 injuries in August 2017], I wouldn’t normally have thought that I would make a statement about that. But there were people in McKinsey who said, ‘You didn’t say anything, do you have a problem?’ and I said, ‘I wasn’t asked.’ It was almost like, ‘Are you a stone-age guy?’
“So the pressure has gone up significantly. Companies can lose their licence to operate or be badly affected. But I actually think the CEO is the one who will get taken out. That’s why I think CEOs are being much more aggressive about expressing their views, you are seeing a lot of CEOs getting involved in social issues now, because if you don’t you are going to lose support.”
The long history of secrecy at McKinsey has been one of the drivers of its success, author Duff McDonald explains in his fascinating 2014 book, The Firm: The Inside Story of McKinsey. One example is the secretive process and ballot by which partners elected Barton’s replacement, Kevin Sneader last month. Barton was not eligible to run again since he has served the maximum permitted three three-year terms.
Sneader, who is chairman of McKinsey’s 27 Asia Pacific offices, will take up the role in July.
Barton admits that McKinsey has been more talk than action on gender diversity. Women make up only a small percentage of the firm’s partners.