Pass the buck: Consultants are the major threat

Corporate governance is all about having systems, which ensure that disasters
and consequent reputational risks are minimised. And it is also about ensuring
that the board of directors is sharp and up to date on any issues that could
threaten corporate survival.

Stop and think of what you would understand to be the top ten issues you
would expect to identify as threats. Think for a while. And then think again.
One of the most serious threats to corporate survival is management consultants.
Ah, you say, it’s all about spending too much money on them, isn’t it? And,
indeed, the most recent criticisms of management consultants have revolved
around the vast amount of cash, particularly in the public sector, paid to them
in fees.

But it is not about that at all. Management consultants are a threat because
their existence allows boards of directors to offset their responsibilities.
Some people have come round to the idea that it is their only function. Forget
the complex strategic and organisational advice. Forget the systems
implementation. The prime value of management consultants is to enable boards of
directors to have a concept and some advisors, which will enable them to get off
the hook.

It has been a long time coming, but there is a thoughtful and scholarly
account of the creation, rise and current state of the profession of management
consultancy. In it, Christopher McKenna, lecturer in strategy at the Said
Business School in Oxford, comes to some very uncomfortable conclusions for both
companies and their consultants.

His argument is that much of corporate chaos at the turn of the century had
its roots in the regulatory changes made in the US in the 1930s. The regulatory
changes brought in following the financial chaos in America in the late 1920s
meant that corporations hired everyone they could lay their hands on to certify
that what they were doing was correct. In among all this activity, accountants
provided the financial audits and management consultants effectively provided
‘management audits’.

But the key to the consultants’ efforts is that they did not provide any new
value in the form of, for example, organisational advice, traditionally the work
that consultants then thrived upon. It was simply a way for boards of directors
to obtain seemingly independent confirmation, which they could use to advertise
the legitimacy of their judgement. “During the 1930s,” McKenna points out,
“boards of directors shrewdly marshalled the legitimacy of professional opinion,
in part through the use of management consultants, to reduce their potential
liability in the face of increased regulation.”

In the 1990s, exactly the same process repeated itself. “The worldwide
scandals in corporate governance,” says McKenna, “culminating in the failures of
Enron, WorldCom and Parmalat, were a consequence of two decades of surging
demand for accounting and consulting services by directors and officers
attempting to offset corporate liability for potential managerial malfeasance.”

Like many another disastrous change in management perceptions, it all comes
down to a lack of anyone with an ounce of independence about them making it
clear that the change had come about. The consultants were happy. In theory,
their work had always been the provision of outside advice on strategic and
organisational matters. If, in fact, what corporates now wanted was something
different, and for which they were willing to pay huge fees, then why should
they not provide it. To a partner building earnings and reputation within a
consultancy it is all just ego and adrenaline. The future consequences are not
on their charts. And corporates are always happy to shunt the liability for
their actions offshore.

“Where management consultants had previously proposed a suggested course of
action to be ratified by independent board members,” says McKenna, “the tables
were turned during the 1990s when consultants, in practice, became the
independent outsiders who endorsed the ‘internal’ board’s previous decisions.
Management consulting advice, of course, had always been used as a political
tool to legitimate executive decisions, but, beginning in the late 1980s,
consultants’ role in conferring legitimacy began to be more openly employed as a
legal hedge against corporate liability.”

And has the great catharsis following the aftermath of Enron changed all
this? Well, not really, because along came Sarbanes-Oxley. The punishment for
allowing corporates to get into the mess was to be encouraged to do it all over
again. “Thus, having failed to prevent the corporate governance crisis,” McKenna
concludes, “management consultants were, nevertheless, once again touted as the
best solution to rising corporate liability.” You couldn’t, as they say, make it
up. But, who knows, boards of directors might take firmer action this time
around.