Corporate governance is all about having systems in place that ensure risks are minimised. It is also about ensuring that the board of directors is up to date on any issues that could threaten corporate survival. However, one of the most serious threats to corporate survival is management consultants.
Forget the complex strategic and organisational advice. The prime value of management consultants is to allow a board of directors to have a concept and some advisors that will enable them to get off the hook.
It has been a long time coming, but there is finally a 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 the corporate chaos at the turn of the century had its roots in the regulatory changes made in the US in the 1930s. These changes 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 organisational advice, traditionally the work that consultants then thrived upon.
During the 1930s, according to McKenna: “Boards of directors marshalled the legitimacy of professional opinion shrewdly, in part through the use of management consultants, to reduce their potential liability in the face of increased regulation.”
In the 1990s, the same process was repeated. McKenna said: “The worldwide scandals in corporate governance 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 managerial malfeasance.”
Like other disastrous changes in management perceptions, there is no independent person to make it clear that the change had occurred. The consultants were happy. In theory, their work had always been the provision of outside advice on strategic and organisational matters. And corporates are always happy to shunt the liability for their actions elsewhere.
McKenna said: “Where management consultants had previously proposed a suggested course of action to be ratified by independent board members, the tables were turned during the 1990s when consultants became the independent outsiders. Of course, management consulting advice had always been used as a political tool to legitimise executive decisions, but beginning in the late 1980s the consultants’ role in conferring legitimacy began to be openly employed as a legal hedge against corporate liability.”
And has the great catharsis following the aftermath of Enron changed all this? Not really, because along came Sarbanes-Oxley. The punishment for allowing corporates to get into the mess was to encourage them to do it all over again.
According to McKenna: “Thus, having failed to prevent the corporate governance crisis, management consultants were, nevertheless, once again touted as the best solution to rising corporate liability.”
You couldn’t make it up. But who knows? Boards of directors might take firmer action this time around.
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