Is De Beers Running Scared?
November 22, 07Our recent comments about De Beers risking damage to its own brand equity by failing to enforce Best Practice Principles (BPP) did not specifically address a much more potent issue: what are the ramifications of non-compliance on the overall management structure and decision-making process within De Beers?
When BPP were included as part of the De Beers Group of Companies credo, the authors assumed that violations would only occur among stakeholders – and that the company itself would always be compliant. Unfortunately, that isn’t the way it has evolved. It is fair to say that De Beers and some of its most important stakeholders find themselves in a state of mutual non-compliance.
This is a problem faced not just by the Diamond Trading Company (DTC), but also by De Beers and by the De Beers Jewellery joint venture with LVMH. Some infringements are more serious than others, but when a zero-tolerance policy is in place, there isn’t much room for discretion in dealing with infringements.
Some of the most serious in-house BPP violations can be attributed to the now almost-defunct Diamdel operations, which are solely De Beers’ responsibility. We disclosed in our earlier columns about the then-pending closure of these trading operations, about their losses and the abrupt firing of some officials. There were clear indications (and even proof) of serious internal malfeasance (switching of goods, employees trading for their own accounts, etc.). What is disturbing is that De Beers apparently has refrained from taking action that it should have taken. It also didn’t do anything when a top official was caught lying in court. This undermines management’s credibility and raises questions about the company’s resolve to pursue its own espoused principles.
But the main problem may be the gaps in the enforcement of its own contracts with client and the re-implementation of the scoring mechanism. These are all compliance issues and point to vulnerabilities.
True, some compliance failures are simple, honest mistakes. When standards are set high (or too high) a failure to meet the thresholds should be judged in proportion, maybe, to prevailing industry standards. That might become a mitigating circumstance – but it doesn’t apply in a situation where De Beers has set itself as a judge of others. In a situation where external investigators must report to De Beers on clients’ compliance, the company’s own compliance must be beyond question. It isn’t.
The Threats from Within
In the pre-Supplier of Choice (SoC) days, the threat to De Beers was mainly external. It intentionally monopolized the markets and did so until the last minute when the company couldn’t get away with it anymore. Now that external threat has disappeared. Ironically, under SoC, the external threat was exchanged with an “internal threat” resulting from De Beers’ inability, or unpreparedness, to competitively operate in a sound commercial manner. SoC was useful to “become legal.” However, it lacks flexibility and it ties the hands of those who manage it.
How to say this nicely: De Beers’ own non-compliance is a “homemade” mission impossible. It wasn’t imposed on the company, which made rules that it now finds difficult to enforce. In all fairness, it isn’t that the company isn’t trying.
Fear of Sightholders
De Beers is so concerned about “image” that it hesitates to take firm action on compliance issues – or even on dropping clients. One might wonder: of whom is De Beers “afraid”? Who are the parties that could potentially damage De Beers so much so that they need to be “appeased,” “tolerated” or “accommodated” at almost any price? It’s not the NGOs with whom the company has developed, by and large, excellent relationships. It’s not governments who have started to appreciate and applaud De Beers’ corporate behavior, including the U.S. government. It’s also not the company’s (governmental) mining partners who have achieved more for themselves in the past few years than at any time of their mining history.
On the mining level, De Beers operates the most efficient and safe diamond mines. It’s there where the bulk of the company’s 25,000 workers are employed, and, basically, an occasional strike not withstanding, the risk for negative reputational fallout is negligible. De Beers is simply a darn good mining company.
No, the only stakeholders that De Beers seems to be afraid of are the company’s very own clients. It is almost as if De Beers “recognizes” that it is not in compliance with its client contracts. And the angst grows when clients become ex-clients.
Isn’t that weird?
This goes far beyond BPP and SoC – it goes to the heart of how De Beers manages its relations with its most important stakeholders, the Sightholders. If an extra-terrestrial alien would land on earth and would do a quick survey of the global rough diamond marketing scene, he/she would quickly conclude that the DTC Sightholders must be the happiest bunch of diamond consumers around.
He/she would report to outer-space that, undoubtedly, De Beers is the cheapest rough supplier to the market. For example, most of the time discussions between Sightholders on prices focus on whether the premiums on the boxes are either slightly above or slightly under 12 percent. The going assumption is that if the premiums are 15 percent, De Beers will raise prices, but it will generally allow a comfortable margin. That’s why virtually everybody wants to become a Sightholder. The other conclusion would be that on the “specials,” privileged clients are making anywhere between 30-40 percent on their purchases. [The alien would probably wonder why De Beers wouldn’t auction those specials among its clients, just as virtually all other producers are doing. This might add some US$250 million to De Beers’ annual revenue, but the company declines to go that route. It really wants its clients to enjoy those margins.]
De Beers need not worry that clients feel that they aren’t getting a decent deal. No, it is worried that the self-imposed and self-designed management system, duly agreed and approved by the EC, has become exceedingly dysfunctional. It may work on paper, but not in practice. De Beers sets targets to be achieved, but just as with BPP, the targets may not be fully obtainable.
Dropping Clients: Damned if You Do, Damned if You Don’t
De Beers will now have to make a decision on the cut-off number for the next client list. That’s a policy decision at the top level. If the decision is guided by the element of fear for more
Not dropping any clients, while at the same time accommodating beneficiation, and even adding some new companies to the list, would lead to unsatisfactory levels of allocations to everyone. Such a decision would not only dramatically decrease the leverage (influence) that De Beers has over its clients, but it would also make it virtually impossible for most of the ambitious and innovative DTC Sightholder marketing programs to be sustained. It will hurt these programs and, ironically, it would dilute the value of being a Sightholder, as almost every significant player would have Sight privileges.
At the same time, it would make most of the clients so dissatisfied that they would view it as an implied breach of promise. They didn’t become Sightholders and do everything that SoC1 asked of them in the past five years and make huge investments in the specific programs that are to be supported under SoC2 only to get a fraction of their needs.
Unless, of course, the De Beers agenda has changed. A huge number of clients will help marketing the Forevermark – which seems to have become a vital De Beers objective. Or, maybe, De Beers wants to go public again, and many lawsuits and “media noise” would hinder the success of an IPO.
If there are no overriding Forevermark or IPO considerations, the other option for De Beers is to drop some 30-40 clients and remain with a leaner client list whose requirements can be far better satisfied and with whom they can “grow together in partnership.” Commercially, this seems the most sensible way to go, given the greatly reduced availability. In a way, a major drop in the list is also what the market is expecting. The DTC has given plenty of advanced warning that it may have serious availability problems, and its preparedness to help ex-Sightholders has been previously recorded in this column.
The cut-off point on the number of Sightholders is not a computer decision – it is the outflow of a decision on the minimum and maximum levels of a Sight. Except for a few blatant BPP cases, most clients being dropped can be legally justified by not having enough goods. Clients feel that there is also a new “invisible scoring” point – their excellence in promoting the Forevermark. That in itself may become a legal issue.
Fear of massive lawsuits by ex-clients should never be a reason not to drop clients. The company’s vulnerability is a direct result of its actions and it cannot be attributed to the pre-SoC management or days.
DTC Sightholders are not just very good diamantaires. They are astute businessmen and experienced De Beers watchers. They are Triple A companies. They can differentiate between courage and weakness. They also recognize, as we do, that in difficult economic times, the entire industry will benefit from strong leadership – visibly and demonstrably. It will do wonders for the brand.
Have a nice weekend.