Case Study

PROGRAMME Advanced Diploma in Business Management

MODULE Ethical Business Management
YEAR 1
INTAKE July 2023
Marks 30
CASE STUDY
Read the case study below and answer the questions that follow:
McKinsey Charged in South African Corruption Case
The South African branch of the global consulting firm has been charged in a corruption scandal related to its work with the
country’s state-owned freight rail and port operator.

The McKinsey & Company offices in Sandton, South Africa.Credit...Gulshan Khan for The New York Times
The South African branch of McKinsey & Company, the global consulting firm, was charged in a corruption scandal
involving work the company completed advising the country’s state-owned freight rail and port operator. It may be the first
time in McKinsey’s 96-year history that the firm has faced criminal charges.
South Africa’s National Prosecuting Authority added McKinsey and one of its former top consultants in the country to a long
list of defendants in a case involving a locomotive purchase contract for the state-owned operator, Transnet, the authority
said in a statement on Friday. McKinsey oversaw work on the bid, which, at the time it was announced in 2012, was the
country’s largest-ever public procurement.
The other defendants, including the former chief executive of Transnet, are facing charges including fraud, corruption and
money laundering. It was not clear from the statement what specific charges McKinsey and its former senior partner, Vikas
Sagar, would face. A spokesperson for the authority was not available to comment.

“We believe the charges filed against our South Africa office are meritless and we will defend against them,” a spokesman
for McKinsey said in a statement.

Details of McKinsey’s role in the troubled procurement have been known for years, aired extensively in the media and in
government hearings. The investigations exposed deep-seated corruption, which turned departments of the South African
government into revenue-generating vehicles for crooked businessmen and led to the downfall of Jacob Zuma, the
country’s former president. In South Africa, this endemic corruption of public officials and enterprises is called “state
capture.”

McKinsey is just one of several international companies caught up in the investigation. This month, its rival Bain &
Company was banned from bidding on public contracts in South Africa for 10 years because of work it had completed
with the country’s tax collection agency during Mr. Zuma’s tenure.
The charges are among the most serious ever levelled against McKinsey. Last year, in the United States, McKinsey agreed
to pay more than $600 million to settle civil investigations into its role in advising opioid makers, though it admitted no
wrongdoing.

To secure a consulting contract with Transnet, McKinsey was required by South African law to work with a Black-owned
subcontractor. But instead of thoroughly vetting that subcontractor, McKinsey relied on a recommendation from Transnet
that it hire a company called Regiments Capital to help oversee the purchase of a fleet of 1,064 rail locomotives. The
locomotives were initially estimated to cost $2.6 billion, but their price inexplicably rose, almost overnight, by about $1
billion.

McKinsey has said it played no role in the decision to pay the extra money. But Matthew Chaskalson, a member of a judicial
commission investigating suspicious contracts with state-owned agencies, said in a 2020 hearing that after hiring
Regiments, McKinsey received “an extraordinary succession of sole-source contracts” during which its fees increased
“exponentially.” Subsequent investigations by the media and the commission discovered that Regiments had links to the
politically powerful Gupta family — three brothers who for years hid their ties to companies that were improperly securing
lucrative state contracts.
By the end of 2020, the judicial commission had uncovered three tainted McKinsey contracts, including ones with the state-
owned airline and the nation’s power company, Eskom. McKinsey said it knew nothing about the improprieties, nor was any
evidence introduced that indicated that the firm had been aware of them. McKinsey voluntarily returned about $100 million.
“We publicly apologised and took action where we made mistakes,” the McKinsey spokesman said in the statement. “We
also returned our full fees with interest for those projects. We did this because of our firm belief that it was the right thing to
do. We cooperated with all authorities and shared everything we found from our own extensive internal investigations.”
A focal point of the government’s investigation is Mr. Sagar, a leader in McKinsey’s consulting work on behalf of Transnet
and Eskom.

Before joining McKinsey, Mr. Sagar studied at the University of Michigan and received an M.B.A. from the Wharton School
at the University of Pennsylvania in Philadelphia. Mr. Sagar rose quickly through the ranks at McKinsey’s South African
office. He was popular, with a vivacious personality and a noted interest in fashion, but he was also a risk taker, one who
once arranged for McKinsey employees to write part of a thesis on behalf of a senior official at Transnet. An internal
investigation concluded that Mr. Sagar had done nothing illegal. Later, he left the firm amid an investigation into his
undisclosed ties to politically connected individuals.

https://www.nytimes.com/2022/09/30/world/africa/mckinsey-corruption-case-south-africa.html

Question One (10 Marks)

Based on the case study, provide a definition and discussion on business ethics.

Question Two (10 Marks)

Discuss five (5) value/benefits of sound corporate governance in companies like McKinsey.

Question Three (10 Marks)

Explain the concept of corporate governance and discuss any four (4) factors that have significantly contributed to the current
prominence of corporate governance.
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