De Beers Must Enforce Its Best Practice Principles – Or Irreparably Damage its Brand Equity
November 08, 07The moment of truth has arrived. The gulf between De Beers' management’s endless speeches about Best Practice Principles, business ethics and integrity and its own enforcement of these principles has become gigantic. It might even bring down De Beers.
In its contract with Sightholders, the Diamond Trading Company (DTC) “confirms that it satisfies the current Best Practice Principles (BPP) and will continue to satisfy these principles.” The Supplier of Choice (SoC) sightholder contract obligates both sides. Sightholder (and applicant) “must demonstrate that it has a good reputation in all its business dealings. DTC will take into account any past conduct of the applicant or the key applicant or key individuals which would cast doubt on its general professional standards, integrity or probity.”
Reputational issues and BPP compliance are not comparatively rated in scoring points. According to the SoC contract, non-compliance triggers only one result: immediate suspension of Sightholders privileges. No more supplies. The point is that, except for a temporary reduction of the size of the sight to one client, no company has ever lost its DTC sight privileges because of reputational reasons or BPP infringements. It’s not that there haven’t been solid reasons for the DTC to suspend sights, but De Beers lacks the corporate will to implement and enforce its own commitments.
Lawyers as Proxy for Management
Business or corporate reputation is not a legal issue. Reputation reflects the opinions of the public or relevant stakeholders toward a person, a group of people, or an organization. It is an important factor in many fields – it is absolutely vital in the diamond jewelry business. The professional literature tells us that research has shown that the reputation of the CEO is inextricably linked to the reputation of the company. CEOs set the tone, define company direction, attract talent and are the human face of the organization. In times of uncertainty, the CEO is called upon to speak on behalf of the organization. De Beers managing director
Banks look at business reputations before lending money. Companies look at reputations before deciding on partnerships, on choosing clients or suppliers. This has nothing to do with lawyers; a good business reputation, or conducting one’s business in an ethical or honest matter, are in no way legal issues. De Beers, under Gareth’s management, has given a new definition to “business reputation” – you only have a bad reputation if there is legal proof of relevant criminal wrongdoings. So if you are bribing graders of a gemological lab in a big way, defrauding consumers for hundreds of millions of dollars, bribing your way through Africa or Russia, everything is fine. Your reputation, for SoC and De Beers purposes, is untarnished, as long as there is no legal proof – no police investigation, no smoking-gun, no trial and no court conviction. Even if being charged, it is enough to make an out-of-court settlement, and you are in the clear. Instead of raising the standards, the threshold (“a legally proven criminal act”) has become so high that one will get away almost with murder.
Today, the sight applicants and Sightholders know that it doesn’t matter at all, if you pay bribes or kickbacks to an African president, his daughter or her sister, the head of the state mining organization, some generals, etc. It also doesn’t matter if you bribe export authorities to avoid export duties by declaring such a ridiculously low value that you need to ship the parcel through a free trade zone, since the traditional centers will not accept the understated values. You do all that and you secure a larger sight because your business is growing enormously and you have become an enormously powerful player. And, of course, extremely profitable.
At every opportunity, De Beers executives talk in superlatives about the success of the Kimberley Process, but carefully avoid looking at the value train – the transfer pricing of the rough. If Sightholders purchase rough at 30%-40% below their real value in a producer country and then move the goods through free trade zones to adjust the price to their real levels, the evidence is there for everybody to see. But not De Beers or the DTC - they display (and this is a legal term) willful ignorance. One wonders why such huge amounts were spent on forensic accountants to audit clients and what happened to their findings.
The depth into which De Beers is sinking became clear to me after reading the many reactions to last week’s column about the DTC’s “Sightholders Support Programme,” which will provide ex-clients support “in managing their reputation.” One Sightholder’s response questioned, “If these London jokers ever wondered whether one’s reputation might improve dramatically when not associated with De Beers?” Management apparently is not willing to face that De Beers is in the midst of a reputational crisis. Reactions, such as the ones we received this week, point to an alarming dilution of equity in De Beers’ own company reputation.
Working in a building where marketing consultants are only outnumbered by lawyers, it should have been obvious that De Beers’ reputation forms a basic platform from which it serves its customers, its stakeholders and its employees. A reputation is an individual’s and corporation’s most valuable marketing asset. It must be treasured, nourished and protected as equity. It can be worth a fortune – wasting it is a crime.
De Beers has gradually eroded its own reputational equity by mostly giving lip-service to BPP, by either ignoring or assisting in money laundering, ignoring evidence of serious infringements, and by accepting creative accounting and fictitious turnovers. Some (Indian) Sightholders have so abused the financing system that the industry’s leaders express fear for a governmental backlash. SoC has created an absurd situation: it has encouraged cheating; it has encouraged BPP and reputational infringements – because there is no real sanction. . Oh yes, I am aware of letters sent to some Sightholders warning them about various minor infringements that have been detected. If a random poll was held among one thousand industry players about the business reputation of a company, and 99% of the respondents would rate the firm as having a reputation bordering on the criminal, the De Beers lawyers would just dismiss this as “gossip.”
When, in another rough producer’s marketing office, a DTC sightholder was caught bribing a sales executive in return for “stone switching” to add extra value to the box, that producer didn’t hesitate for a moment before kicking out the client and reporting the sales executive to the police. That producer has the highest corporate reputation in the market – and, interestingly, it’s also able to get its clients to pay the highest prices for rough. Sadly, I have good reasons to believe that if something like this was detected at De Beers, the company would not act in a similar manner.
When Gareth made the previously mentioned remark that “ethical considerations do not motivate a consumer to purchase a diamond…but they can put them off,” he immediately added one more line: “and we want to thrive for the next 100 years and beyond.” Forget it. If De Beers doesn’t take its contractual obligations to Sightholders seriously and doesn’t enforce its own criteria on business reputations and BPP, it will gradually destroy its own and its clients’ brand advantage in the market. De Beers will only thrive for the next 100 years if it makes a U-turn, shows leadership, and enforce its contracts with clients. This requires a corporate decision at CEO level.
What De Beers fails to comprehend is that its clients are begging the company to bring order to the deteriorating situation. Good, decent, honest, ethical companies can never successfully compete with the companies that bribe, falsify papers, defraud consumers and make money through laundering or by abusing subsidized financing schemes. Good companies will gradually disappear. With the shift of operations to Africa, where there are still serious problems on good governance, zero tolerance for reputational and BPP infringements may well make the difference between success and failure. One sightholder with a factory in an African country confided that “I’ll start in an honest manner. But if that doesn’t work out, I’ll do what I need to do to survive.” The crooks become bigger and bigger clients, and, as one Belgian sightholder said this morning, “they will become untouchables.”
“Forevermark” versus “Jacob the Jeweler”
I would invite top executives at De Beers to Google separately the terms: “Forevermark” and “Jacob the Jeweler.” The first word will give you 19,900 hits; Jacob is doing twelve times better with 253,000 hits. Then Google both terms together. Be grateful: the overlap only gives six hits. Fortunately, the Directory of Diamond Trading Company Sightholders (2005-2007) is not in Google’s database. Thus, the public at large may not realize that Jacob the Jeweler Inc., Jacob & Co. Inc., Jacob & Co. Watches Inc. are proudly listed in the Directory as Associated Companies of a prominent DTC sightholder.
To be listed in a Sightholder’s corporate group, a sightholder had to control Jacob the Jeweler. SoC rules clearly state that a company can only be a member of a Sightholder Group if the sightholder can exercise “control” over it by either having ownership of a majority of equity (including partnership equity) in the company; and/or by having the right to appoint and dismiss the company’s board of directors, and/or the sightholder, through an agreement with other members, has ability to control a majority of voting rights in the subsidiary
What we remember from the days when the GIA Certifigate scandal broke, involved DTC Sightholders would quickly sever all ties with those associates “on the frontline,” who were likely to be caught. Without knowing the facts, I must assume that the relevant DTC sightholder got rid of these companies as soon as Jacob Arabov was arrested (in June 2006) on charges of laundering some $270 million of drug profits on behalf of the Black Mafia Family (BMF) of Detroit. As we have also seen in other situations, severing ties will generally do the job at the DTC. One’s sight is safe – especially if you are Untouchable. But this article isn’t about any specific sightholder – it is about the erosion of standards on reputational and BPP issues among scores of companies. Matters became worse, when the rewards (in level of Sightholders) became greater.
The DTC has always conveniently ignored that its contract with Sightholders specifically includes “past conduct.” In cases of serious crimes, the behavior always stops when the police step in, so the “infringement” ceases. Thus, relevant BPP violation becomes part of the past, while the reputational damage only starts then. (The DTC should have immediately reprinted its Directory without these damaging names.)
The issue is not Jacob the Jeweler, nor a particular sightholder, but rather
By refusing to act, the DTC and De Beers are actually and truthfully damaging the reputation of their good, honest, decent clients – which still represent the large majority. Actually, the legal risks to De Beers are far greater now than they would have been if it had enforced BPP, as it should have. If the lawyers refuse to accept that, I am willing to organize a test case – just to get the message across. The DTC must commit itself to a zero-tolerance formula on business ethics.
If at the December 2007 Sight, the DTC still has the same number of clients as it had at the November sight, the relevant decision makers ought to consider their own position and their responsibilities to the other stakeholders, including their shareholders. Enforcing BPP and reputational conditions may trigger the loss of a handful or so of Sightholders – maybe more, it depends on how much the company is willing to raise the reputational threshold. I am too familiar with all the usual arguments (“the lawyers don’t want it,” “the lawyers are afraid…” etc.). Please, Gareth and Varda - I have said it many times before, get rid of 80% of your lawyers and don’t let them prevent you from doing what is morally, ethically, and contractually the right thing (and the only thing) to do.
De Beers and DTC spokesperson Louise Prior, whom we asked to comment on our remarks, said that the company cannot discuss confidential client information with external parties. Louise did confirm, however, that “we are looking at breaches of BPP.” She added: “We will take the appropriate action.”
Legal Mistakes May Prevent Dropping of Sightholders
Allow me to illustrate what happens when lawyers manage a commercial business. In 2005, when the DTC prepared the market for a severe reduction of the DTC sightholder list, lawyers feared legal problems and – mysteriously and illogically – not a single client was dropped. Now, in 2007, I think the DTC’s lawyers really blew it. The SoC contract states that the sightholder appointment can be terminated “by giving no less than 6 calendar month’s prior written notice. … If such notice of termination is not given, the Sightholder’s appointment will continue for a further 30 calendar month period.”
When the expanded authority of the Ombudsman caused a delay in the profile processing, and the African DTCs needed to be established as well, the proper thing to do was to amend the contracts (in writing) by extending them for six months. Not a single sightholder would have refused to sign such a contract extension.
No, instead, the lawyers had a letter posted on the sightholder website advising all clients of their termination at the end of the contract. That totally defeated the intention of the European Commission, which had insisted on the six-month notice period. That blanket contract termination was a legal fiction – as it was clear to everybody that the DTC wouldn’t be without clients. The purpose of the six months’ notice was for clients to prepare themselves to secure alternative supplies. None had that opportunity.
Without a proper legally agreed amendment to the contract, all Sightholders might well claim that they have been automatically reappointed for another 30 months – which, at the same time, will make all Sightholders the unhappiest species in the business. None will get what it needs, but all SoC obligations will apply. I’ll say more about this in a future column; it is mentioned here to underscore what an over-reliance on lawyers can do to a good company.
While giving a speech at the Wharton Business School Leadership Conference
Both of you must act immediately to protect the reputational equity of De Beers, the DTC and its clients. Accept that there will always be court cases against De Beers and/or DTC, but realize that if you, yourself, are in full compliance, this will be your best defense. Linking business reputation assessments to concrete legal evidence has lowered the bar so much that it risks ruining the company. It is a devastating threshold. If you let the lawyers run the company, at the end of the day, when the business is almost destroyed, management will console itself and its shareholders that it was done legally. That is one unintended consequence you can do without…
Have a nice weekend.