Disgruntled investors of Enron, the one-time energy company that spectacularly collapsed in 2001 were famously quoted outside of a court house after filing a class action as saying “how did so many smart people mess things up so bad?” The just concluded corporate earnings season has been the most bizarre of my life. I’ve started to wonder whether managers running some of the largest firms in the world are as wise as investors, media and various academic studies make of them. More pertinently, do the so-called leaders of large corporations actually have much to do with anything anymore?
At the heart of my disillusionment are the “media trained” and “look what I recently picked up at executive education” answers to serious questions on business strategy. Questions on corporate strategy are illuminating not only for the gaffes and inconsistencies most senior managers come up with, but also as an insight to the work culture of any organisation. The great companies of the world, who compound shareholder returns annually for decades, generally have highly, motivated staff leading innovation. The mediocre run of the mill competitors on the other hand depend extensively on the scourge of all companies; the overpaid external consultants.
The consulting business has gone from bad to worse. Whether it’s the commoditisation of the MBA, higher subscription to Harvard Business Review or general incompetence due to the death of deductive reasoning, consultants are eroding value from shareholders at a faster clip than at any time over the last three decades. There is one type of consultant, usually at the big end of town, based on 20 of the largest firms around the world I have researched in the last four years, who takes pride in a macho culture that hinges on that poisonous phrase “shareholder value”. Their contribution to these businesses was to drain all resources dry.
Consultants are hugely overpaid rubber stamps used to validate highly questionable management decisions. In those cases, their job is to produce reports that go largely unread – except for the bits that recommend more cuts and an increase in executive remuneration. The upswing of new markets such as Sri Lanka and major changes to the top ranks of global firms has been a popular source of income for consulting firms. New corporate leaders take comfort in having a compliant consultant’s report in the top drawer as they wield their “new best practice”.
Some companies are simply addicted to using management consultants. The corporate sector often portrays itself as hard-nosed, but it can also be very gullible when it comes to using consultants, as the happenings of McKinsey’s demonstrated during the Galleon saga. While assiduously monitoring costs in the tea room and rationing paper clips, these companies fritter away fortunes on “paradigm-shifting” consultants, pointless workshops based on the latest management fads, irrelevant training and nebulous strategy documents.
Of course, some businesses really do need the expertise of external consultants – in a last ditch bid to survive. Many of the big management consulting firms have unattractive cultures, but their brands are potent. Smaller consulting firms seek to mimic them by devising their own convoluted proprietary products that suggest plenty of intellectual rigour. It has become the norm for smaller firms to have “unique” proprietary management systems thick with bogus “management science”, ideally involving workshops, certification training and regular refresher courses.
John Gapper captured the essence of the danger of consultants in London’s Financial Times as the Galleon scandal damaged McKinsey’s hard earned credibility. “One of the main reasons companies hire consultants,” wrote Gapper, “is to make sure they do not fall behind what their competitors are doing – in return for parting with their own secrets, they gain access to their rivals’ suitably disguised ‘best practices’. The consultant is a broker who attempts to amass so much knowledge that each company has to hire him, no matter how uncomfortable that feels.”
Investors have tremendous power over how shareholder funds are used by senior management.
Consultant creep is directly and exponentially correlated with low shareholder returns. Shareholders should use their power vested in proxy voting to show disappointment at management who tend to shower consultants and cut employee development.
The great organisations spend disproportionately large sums on developing in-house talent; the weaker companies tend to hide behind consultants.
Don't stop there if you are unsatisfied; vote against every director. That will show them you are paying attention. As the investor Benjamin Graham wrote in 1951: "Poor management is often paid more than it deserves; but here, if the stockholders bestir themselves at all, they should devote their efforts to changing personnel rather than pay."
(Kajanga is an Investment Specialist based in Sydney, Australia. You can write to him at