7/11 Diamond Stores and DTC Policies
November 30, 06It was at a press conference at a diamond congress in
This was underscored when the GIA bribing-for-grades scandal erupted and some DTC Sightholders seemed implicated. Then DTC Sales Director
“The BPPs emphasize,” she wrote, “the requirement for the highest professional and ethical standards. It is a fundamental principle of the BPPs that consumers must be able to rely upon the professional and ethical standards of those involved in the gem diamond industry. Further, Criterion 6 of the Sightholder Criteria and other considerations to the SoC Policy Statement makes it clear that a Sightholder must demonstrate that it has a good reputation in all its business dealings.”
Honoring commitments (financially and otherwise) to all stakeholders, not defaulting on agreements with lenders, and not being engaged in creative accounting or corporate structuring to present bogus “profiles” to suppliers are all clearly reputational imperatives of the highest order.
Indeed, the De Beers’ preoccupation with inculcating the reputation issue in its corporate culture and environment have been extensively documented and would easily fill a Yellow Pages size directory. My favorite citation remains the words of Chairman Nicky Oppenheimer, at an
Though I wouldn’t have dared to compare the reputation of the players in our industry to that of a virtuous woman, the intention of Nicky Oppenheimer is abundantly clear: the price for violating reputational principles is enormous – “above diamonds.” (Applying Nicky’s statement to client infringements, it sounds like he meant “you will lose much more than just your Sight privileges.”)
In a zero tolerance environment the standard of expected behavior is unambiguous. In the case of De Beers and the DTC the standard seems to have been quite clearly described and defined through the BPPs, the speeches, the publications, the seminars, and the Sightholder criteria and documentation. We all know the standard.
Reluctance to Enforce
What has always been missing at the DTC is a willingness, a resolve, a determination, and a commitment to take the disciplinary action required by the policy. Reputation, or more precisely a “bad reputation”, has been reduced to something that needs to be legally proven, to be legally defendable in court. Legalistic arguments and reasoning have eroded management’s ability to lead the company; they have become a substitute for decision-making and plain “common sense.” It is far more serious than this: the DTC is perceived as being “vulnerable” on reputational issues and even in those instances in which a client is put on notice we get the infamous quote “if you take me down, I’ll take you down.” Though the DTC says the quote isn’t exactly correct, it is the sense, the feeling that it radiates, the message that it conveys that really counts.
If the DTC wants to have a meaningful future – and if it wants to regain its lost respect and stature in the diamond community – a very good way to start is to fire half of the legal team and for Nicky Oppenheimer, Gareth Penny, and
To stick to Nicky’s virtuous woman comparison, we don’t need a legal opinion about her behavior. (What is needed? Signed receipts or affidavits for services provided?) Reputations are subjective, are a reflection of market and trade perception, and when a consumer decides that diamonds are too tainted to touch, it is irrelevant if her perception is based on legally provable facts. Reputation reflects the general opinion (more technically, a social evaluation) of the public toward a person, a group of people, or an organization
At the DTC, the reputation issue as a prerequisite to Sight entitlement has basically been reduced to the level of speeches, to public relations (mostly to the outside community – such as
What happened in
A 7/11 Diamond Store
Hey, stop it right there. The New York-based company is technically not a Sightholder. What are you talking about?
That is exactly one of the points that needs to lead to serious soul searching in
As this is written in the single most important sales season, allow me not to get into names. Within the business everybody knows whom we are talking about and this article is not about them, it is about the DTC and De Beers.
Let’s therefore refer to a hypothetical 7/11 Diamond Store. A 7/11 Diamond Store opens at 11 and quite conceivably may well end up closing at 7.
The hypothetical 7/11 Diamond Store filed for relief under Chapter 11 of the Bankruptcy Code in a New York Bankruptcy Court for its New York-based company and its domestic subsidiary. It is exceedingly relevant to note that the company’s foreign and domestic affiliates were not included in the Chapter 11 filings and one of the reasons for that exclusion may well have been that the DTC Sightholder privileges were technically granted to overseas companies, a 21-year old partnership in Israel and a stake in a recent Indian Sightholder.
The owners of the 7/11 Diamond Store have (through a family trust) a very long time relationship with the Indian partner. The Indian partner was appointed sightholder only last year. The joint venture between the 7/11 Diamond Store and the Indian sightholder recently changed status and, according the Indian news reports, the Indian partner assumed 75% control of the joint venture, without needing to invest in it. The commercial relationship between this very large Indian jewelry exporter and the 7/11 people certainly impacted the decision to grant sight privileges. Was the dilution of the formal interest by the 7/11 people in the joint venture related to their financial situation?
A similar pattern could be seen in
Reputation and image are closely related. The DTC has carefully nurtured an image that Sightholders are the world’s financially strongest, most reliable, most reputable, most dependable companies. (Reputation, as distinct from image, is the process and the effect of transmission of the desired image.) With all the profiles, auditors, auditors of auditors, forensic auditors, it is hard to comprehend how looming financial failures of Sightholding group’s are not detected at an early stage. That the Sight is technically taken by a subsidiary joint-venture doesn’t make it a non-Sightholder.
The scoring-system underpinning the DTC Sight allocations to the subsidiary are based on the total activities of the 28 companies in the 7/11 Diamond Store group of companies; they are based on the various downstream programs; they are based on the group’s financial strength (!); and on the reputation of 7/11 Diamond Store as “the world leader of fine diamonds and jewelry” – a phrase it proudly repeated in its filings with the Bankruptcy Court.
“Reputation” is, incidentally, a crucial element in the DTC Sightholder criteria, which were duly approved by the EC competition authorities. It is a subjective element. One might argue whether being declared in default by at least one of its bankers, by being sued by Indian suppliers for non-payment, by having to petition for protection against creditors under Chapter 11, would be viewed by the DTC as being in compliance with the reputational imperatives (or the financial strength and reliability criteria) on which the Sightholder system is based.
Just as in the GIA bribery scandal – or rather far more so in that instance as in this scandal consumers were intentionally and blatantly defrauded – De Beers has been surprisingly non-forthcoming and never misses an opportunity to drive the message home that “reputation” has nothing to do with “market perception”, or “market information.” The “R” word has eroded to something very intangible, very indescript, meaningless lost behind a smoke-screen of le
Reputation has often very little to do with le
Fraudulent Companies
Incidentally, a loss of reputation can be triggered by many factors. Going bankrupt because of legitimate reasons (“some of our clients defaulted on payments to us”) can be understandable and give rise to sympathy. It doesn’t change the effect – one’s business reputation is blown away.
On previous occasions we have lamented Supplier of Choice’s unintended consequence of clients engaging in creative accounting (such as overstating turnovers, fictitious manufacturing to hide box trading, questionable off-shore free trade zones to facilitate questionable transfer pricing practices, entering into fictitious marketing programs with jewelers – and I can add at least another dozen questionable practices inspired by the comparative scoring system) and, what makes it worse, the DTC is acutely aware of most if not all of these. In fact, it is so well aware that it has appointed forensic auditors (Kroll) to verify the veracity of DTC profile statements – something unique and unprecedented in relations between a raw material supplier and clients. If anything, it has made the DTC’s position less tenable, as it cannot claim that it isn’t aware of what is going on. Gareth Penny, Varda Shine, and their teams have their fingers closely on their clients’ pulses – and I mean this figuratively.
It hasn’t done anything as a result. Once I recall
Gradually the DTC is leaving the profound message and impression that Diamond Best Practices and Sightholder criteria are mostly for public relations purposes and not to be enforced. In fact, that is the DTC’s prerogative – and I have no problem with it – as long as it doesn’t pretend that it isn’t so. It’s time to call a spade – a spade.
Incidentally, by not acting against bogus profile producers or bribers, it becomes very difficult to act against a 7/11 Diamond Store, where the circumstances are totally different.
What should the DTC have done? First make a decision one-way or the other. Then
The industry would have applauded such position – it would have enhanced the reputation of De Beers as a decent company. It is not deviating from a zero-tolerance position as it has the right to make a judgment on the subjective “reputation” issue – as long as its reasoning is clearly communicated.
Going to the Lawyers – Again…
We hoped that we might get a statement to this effect and asked the DTC for a formal position on the not so hypothetical 7/11 Diamond Store. We were told that we are not the only ones asking for clarification and that they are looking into it. We would, it was said, be informed in due time. Indeed, the questions we are raising are posed by Sightholders and non-Sightholders alike. We waited.
Then the DTC announced a position – and it is that position that triggers this editorial.
Says the statement: “There appears to be some confusion since [the
Wow, how disingenuous. The basis of the scoring of the allocations is based on financial and other data of group companies, of directorships, of controls, of partner ships. The “profile lite”, well known to all Sightholders, has used a hypothetical company called Wundergems to explain all of this. The 7/11 Diamond Store group has faced financial trouble for a while, it had negotiated “standstill agreements” with some banks, it was in default, etc. – we don’t have to rub it in and list all the details.
The Israeli group, which DTC Spokesperson Louis Prior says (“formerly known as….”), really means until “just a few days ago known as”…..
It would almost be funny if it wasn’t so serious. The DTC, in its statement, mentions that there is some “confusion”. The market is not confused; neither do I think that anyone is confused on this specific issue. The DTC is giving a wrong message. If the Sightholder is part of a group, if it reports its financials, its marketing programs, its essential criteria as a Group, the DTC is basically telling clients that you can “save your Sight” by spinning the relevant Sightholder company off from the troubled group – just days or hours before the Chapter 11 or Chapter 7 filings. You can do so even well after the banks made it clear that the end was in sight - no pun intended.
It is quite astonishing to say that neither companies “is involved or implicated” in the filings. Life is full of technicalities. O.J. Simpson never killed his wife Nicole, nor did Bill Clinton ever have sex with Monica Lewinsky. A partnership or affiliate has nothing to do with the mother company.
We don’t know whether the Israeli Sightholding group will continue to support their former partners, we didn’t ask – and it isn’t our business. It isn’t even relevant. What is relevant is the positioning of the DTC. It may well be doing the right thing – and others undoubtedly may disagree on that point – as goods given to one party comes inevitably on the account of someone else who is not getting these goods. But doing the right thing – and leaving the wrong impression is, what I call, another missed opportunity to show clearly what the DTC and De Beers really stand for.
Through this rather innocuous position on a major industry issue of first order, the DTC has basically told the industry that creative accounting or the fast-tracking of restructuring of a group company can make the reputational tragedy faced by all members of the group totally irrelevant.
Actually, it is not just because of decency reasons that I don’t think the DTC should suspend the Sights to the 7/11 Diamond Store affiliates – simply because it has consistently refused to act on far and far more serious, blatant and disturbing reputational issues.
At a recent visit to
This will also be financed, so that the hypothetical company has ample means to boost earnings by making good use of the moneys on the financial markets. For DTC profile purposes, the growth in exports and turnover of the hypothetical Sightholder group are astonishing.
This is the kind of company – if it wouldn’t be so hypothetical - that
If
Just think how the DTC will look when the hypothetical bubble bursts.
The DTC should appreciate that enforcing its own BPP’s actually serves to increase the brand value of De Beers itself and enhances its own bottom line.
The Preservation of One’s Reputation
Goods allocated to a non-deserving or non-compliant company always come at the expense of other companies. Recently I have become aware of a major and substantial DTC Sightholder in one of the diamond centers that has concluded that with all the costs of Supplier of Choice marketing programs, the required downstream investments, the uncertainties of DTC supply support, and the rather low returns on capital employed, it is better to close doors. If one cannot be successful as a DTC Sightholder one is unlikely to fare better without a Sight (though there are some remarkable exceptions to this rule.)
The Sightholders manufacturing facilities in low-labor cost countries are being sold; its premises are being put on the market; banks and suppliers are fully paid all that is due – and the partnership will be resolved. Their Sight may well be discontinued – or maintained by another party. I don’t know. The profit margins, returns on capital earned by these Sightholders were too low in proportion to either the risks involved and/or to alternative investments of the Sightholders resources. The principals will walk away with a most honorable reputation. They have the decency to take steps in time – and avoid a serious situation many years down the road.
Showing Leadership
Reputation may well be difficult to define. A conviction for perjury by a Sightholder in a court case was not considered relevant by the DTC, as the case had nothing to do with diamonds. (It was a divorce case.) So you can have one reputation outside of the business – and a different one within. An infringement is only an infringement if a conviction is diamond-related.
Enforcement by the DTC of its zero-tolerance policy on reputation goes beyond the protection of consumer confidence. It has a lot to do with the integrity of the DTC’s allocation system – and the image of De Beers and all its stakeholders, Either it should suspend the reputational criteria and tell all the bribers and others “you see, we clearly don’t give a hoot,” or they should start to implement the rules they preach.
Even in zero-tolerance rules, there is quite some room for maneuverability. That is the beauty of the broadness of the reputation principle. But then, don’t hide behind a statement that technically the 7/11 Diamond Store group is not a Sightholder, so the subsidiary or affiliates can continue to get their Sights. Say: we decided we want to support these companies in this difficult period. At the same time: please start dealing with the real serious offenders, whom, by their bad practices, earn a competitive advantage over all other Diamantaires – Sightholders and non-Sightholders alike.
I would be disappointed – but not surprised – if the DTC will say, after reading these comments, “we fully stand behind our statement on the
Have a nice weekend.