Reference no: EM133091335
CASE ANALYSIS of Bell Pottinger: A Deal with the Devil
This is the abridged version of a case prepared by Abigail Tee Ren Hui, Adeline Ong, Ang Rui Hao and Stephenie Theng under the supervision of Professor Mak Yuen Teen.
Case overview
In July 2017, a video interview with the Gupta brothers - Ajay, Atul and Rajesh "Tony" Gupta (the Guptas) - and a number of Bell Pottinger's internal emails and documents were leaked, uncovering a scandal that shook South African race relations. The leaked information revealed Bell Pottinger's involvement with its highly controversial clients, the Guptas, in masterminding an "economic emancipation" campaign by smearing white capitalist businesses to intentionally escalate racial tensions. The Public Relations and Communications Association (PRCA), the body responsible for regulating public relations and communications work in Europe, condemned Bell Pottinger for its lack of ethics, immoral behaviour and poor management oversight, as the firm denied responsibility and pushed the blame around. The objective of the case is to allow a discussion of issues such as ethics and tone at the top; risk management; and the role of management and the board of directors.
A magnet for controversy
Bell Pottinger Private (BPP) was a large British public relations, reputation management and marketing limited liability partnership headquartered in London, U.K., with subsidiary offices in North America, the Middle East, and South-East Asia. The company offers services such as lobbying, speech writing, reputation management, and search engine optimisation to its clients, including companies, governments, and wealthy individuals.
BPP was known for being an "aggressive" PR firm, having the "most controversial client list" in the PR industry, and willing to take on "highly sensitive geo-political PR accounts and other controversial clients" that others feared to represent. Its past clientele include the Sri Lankan government, right after the devastating civil war; South African Paralympian Oscar Pistorius, who was convicted of murdering his girlfriend; and Alexander Lukashenko, dictator of Belarus. In addition to its controversial clientele, its campaign tactics became increasingly contentious as well. In 2011, BPP was accused of breaking Wikipedia's conflict-of-interest guidelines and employing search engine optimisation tactics to hide information regarding Uzbek human rights abuses on behalf of the Uzbek government.
Due to its well-known reputation for accepting controversial clients, BPP earned the London PR industry a "reputation for unscrupulousness" that many in the field felt decidedly uneasy about.
The internal conflict
BPP's board of directors was chaired by founder Lord Timothy Bell, with Chief Executive Officer (CEO) James Henderson as an executive director. There were four other board members as of 11 April 2016. On the six-member board, one director had a background in finance, another was a chartered accountant, and the remaining four directors specialised in public relations.
In 2012, Henderson became CEO following a £20 million management buyout which gave him the largest individual shareholding in the company (with 37% ownership between him and his fiancée). It was clear that Chairman Lord Bell and CEO Henderson did not get along, with both parties trying to force the other out of the company. The conflict stemmed from their disagreement over business strategy and the polarity of management styles of both men - Lord Bell had a more old-school and relaxed management style, while Henderson was more ambitious and growth-driven. The power struggle between the two leaders worsened as Henderson, backed by other executives, voiced concerns over whether Lord Bell's generous salary and expenses were justified.
BPP's internal struggles and contentious business practices were ultimately exposed when it decided to accept an engagement with Oakbay Investments, an investment holding company run by the Guptas.
The poisoned client
The Gupta brothers come from a wealthy Indian family. In 1993, they migrated from India to South Africa and developed close ties with Jacob Zuma when the latter was the President of South Africa. After achieving much success, the Guptas established Oakbay Investments in 2006 and made use of their close relationship with Zuma to advance their own interests, amassing a huge fortune. The Guptas' close ties with Zuma led to them being accused of corruption and state capture, and they were labelled the "most hated family of South Africa".
In January 2016, the Guptas were looking for assistance in communications and public relations. Lord Bell responded to this engagement call and led a team to Johannesburg to deliver a business pitch to them. It was reported that this business meeting was important for Lord Bell as he needed to prove to Henderson that he was bringing in sufficient business deals to justify his high annual executive remuneration of £1 million. The Gupta contract was worth £100,000 a month - over 10 times more than the average PR contract with a typical listed company in the U.K., which was generally around £5,000 to £10,000 a month.20 The contract with the Guptas was initially signed in January 2016 for three months.
What's in the deal?
The PR effort that the Guptas initially communicated to BPP was to help the underprivileged black population in South Africa, which Lord Bell thought was a good cause. However, the hidden agenda of the Guptas was slowly revealed. As the influence of the Guptas and Oakbay Investments attracted unwanted public attention, the real motive for engaging BPP was to set up a campaign to distract the public from allegations of corruption. This was to be done by championing the underprivileged blacks' economic interests, painting the Guptas in a better light. In turn, the attention was shifted to Guptas' white capitalist competitors instead.
To this end, an "economic emancipation" campaign was devised and led by Victoria Geoghegan, a partner at BPP, who met frequently with Jacob Zuma's son - Duduzane Zuma - to discuss and execute the campaign. The "economic emancipation" campaign stirred racial tensions, most notably aggression aimed at the wealthy white population. Taking advantage of the wide reach of social media, more than 100 fake twitter accounts with provocative names were created. In total, more than 220,000 tweets with racially sensitive hashtags such as "#WhiteMonopolyCapital" and "#RespectGuptas" were posted to spread anti-white sentiments. The campaign promoted a toxic narrative - South Africa's whites had seized resources and wealth resulting in the depravation of jobs and education opportunities for the country's blacks.
Initial response
Given the sensitivity of the work due to its racial slant, many of BPP's South African clients were perturbed when they learned that BPP was managing the Guptas' PR account. The adverse feedback from other clients made Lord Bell lose enthusiasm for the project. However, he was more concerned about the loss of clients rather than the ethical implications of the campaign. His only consideration was whether the losses incurred from the departure of clients outweighed the revenue earned from the Gupta contract. To his relief, only one customer terminated its contract with BPP by March 2016. Since the losses from the lost contract were insignificant, Lord Bell sought a compromise by signing a new agreement with the Guptas, including an additional "anti-embarrassment clause" which gave BPP the right to terminate the contract with immediate effect if the campaign were to tarnish its reputation.
Breakdown of relationships
Although the campaign was successful and the business deal was profitable, Lord Bell felt increasingly uncomfortable with the racist elements of the campaign. When he warned senior management that he sensed something amiss about the campaign, his concerns were repeatedly dismissed. Lord Bell felt belittled by Henderson, and in August 2016, he gave up his position as Chairman after being offered a generous £3.5 million exit package.
Exposing the scandal
In November 2016 - just three months after Lord Bell's departure - BPP's role in the "economic emancipation" campaign was exposed when a video of the firm interviewing the Guptas was anonymously leaked to the media.The video itself was evidence of BPP's relations with the Guptas and its involvement in the "economic emancipation" campaign. The video leak shocked Henderson as the video could only be accessed via the firm's internal server. Suspicion then fell on two executives - Jonathan Lehrle and Darren Murphy - who subsequently left BPP in December 2016 to start a new firm, Sans Frontières Associates, a geopolitical PR agency, with Lord Bell. Although both men denied leaking the video, many suspected that they were the source of the leak due to speculation that their actions were largely motivated by Lord Bell's attempt to regain control over BPP.
The 21-page mysterious report
More details about BPP's relations with the Guptas were revealed in March 2017, when a mysterious 21-page report was posted on the website of the South African Communist Party. Written anonymously, the report clearly laid out the history of BPP's work for the Guptas. The report outlined the unethical techniques employed by the firm to distract the public from the Guptas, mainly through the use of fake twitter accounts, fake bloggers and commentators, to influence public opinion. The report exposed BPP as the brains behind the entire malevolent "economic emancipation" campaign.
Within the firm, there was suspicion that Lord Bell had something to do with the leaked report as he may have had the intention of damaging BPP's reputation, undermining Henderson's role as CEO, and ultimately pushing for a change of leadership. However, Lord Bell denied allegations of such involvement.
#GuptaLeaks
In late May 2017, investigative journalists obtained over 200,000 emails and documents relating to the Guptas' corrupt dealings from an undisclosed source, termed '#GuptaLeaks'. #GuptaLeaks provided evidence of BPP's use of unethical tactics for the "economic emancipation" campaign and the underlying goal of tarnishing the reputation of Guptas' rivals. In response to the revelations, the opposition Democratic Alliance Party complained to PRCA in July 2017, highlighting that BPP planned a campaign that targeted predominantly white individuals and businesses as proponents of "white monopoly capital". It subsequently came to light that those targeted also happened to be the Guptas' business rivals, revealing the hidden agenda behind the campaign.
Damage control
After the reports were published, nationwide anti-Zuma demonstrations took place, alongside an anti-BPP agenda. Demonstrations also took place outside BPP's office in London. In an attempt to respond to the rising backlash, BPP backed out of the Gupta contract in April 2017. A statement released by Henderson refuted the mysterious 21-page report and stressed that the highest ethical standards were consistently employed in the firm's dealings. However, in July 2017, when the #GuptaLeaks emails became irrefutable, Henderson changed his tune, issuing a full and unequivocal apology and claiming that "senior management [had] been misled about what [had] been done".
The aftermath
In response, international law firm Herbert Smith Freehills LLP (Herbert Smith) was commissioned by BPP to undertake an independent review of its work on the Oakbay account. Soon after, lead partner Geoghegan and three other employees who dealt directly with the account were dismissed. On 3 September 2017, CEO Henderson resigned. A day after his resignation, the report by Herbert Smith was published. The document reported that the scandal arose when BPP spent more time devising the strategy for "economic emancipation" instead of a pure intent of regular corporate communications for its client.
On 5 September 2017, the results of the Democratic Alliance Party's complaint were released. BPP was found guilty of four breaches of the PRCA Professional Charter and Codes of Conduct. The PRCA Professional Practices Committee found that the lack of a well-designed campaign which upheld best practices led to the occurrence of the problem, and that the very nature of the campaign had a high probability of triggering racial discord. Consequently, BPP faced disciplinary action by having its PRCA membership revoked for five years, the most severe punishment applicable. BPP acknowledged the decision but could not agree with "the basis on which the ruling was made". Instead, it said that it was still willing to comply with the PRCA's code on a "voluntary basis" in the future, in a bid to gain acceptance and recover its lost reputation.
BPP suffered a severe loss of clients both in South Africa and worldwide. Moreover, the company's second-largest shareholder, Chime Communications Limited, decided to forego its 27% investment in the firm after it was unable to sell its stake but was unwilling to retain any interest in the disgraced firm.
Pointing fingers
Although the departure of both Lord Bell and Henderson following the scandal brought their five-year personal feud to an end, against the backdrop of the bitter conflict lies the key question - who was ultimately responsible for the scandal?
Both Lord Bell and Henderson consistently denied any involvement or awareness of the true nature of the campaign. Lord Bell claimed that he detached himself from the account while Henderson maintained that he was deceived by the head of the account, Geoghegan, into thinking it was a typical corporate reputation brief and had no idea of the harmful racial elements of the campaign. To date, no one is quite certain who exactly was accountable for the scandal.
With all the finger-pointing taking place, both the PRCA and Herbert Smith, in their independent reports, highlighted the lack of oversight from senior management for the account of a client they knew to be contentious. Although the Herbert Smith report stated that taking on an engagement with such a client was not unethical per se, senior management should have been aware of the risks involved. Moreover, the lack of safeguards, oversight and ethical standards resulted in the company's inability to stop the scandal. Subsequently, BPP expressed its commitment to review policies to improve its ethical standards, such as establishing an Ethics Committee and training staff on social media engagements.
Corporate culture
"Morality is a job for priests, not PR men."
- Lord Bell
In the wake of scandal, stories about the toxic, Machiavellian working culture within the firm and stories of racial and gender discrimination have surfaced. For example, it was reported that a male director screamed in outrage at a woman of colour for having the nerve to question his expenses. Additionally, there were suspected nepotistic hiring practices related to the company's highly competitive and cut-throat graduate intern scheme.
The scandal also highlighted the unique challenges that firms in the PR industry face when selecting clients and employing certain public communication practices, which in turn influence the PR agency's culture. While there is an argument to be made that everyone deserves PR representation, there is a line to be drawn on how morality, ethics and integrity have a part to play in PR and communications.
Who else were affected?
The Guptas were accused of "state capture" - political corruption whereby they used their ties to influence government decision-making and to obtain profitable state contracts. These inquiries came about in light of President Zuma's loss of power over the ruling African National Congress (ANC) to his presidential successor, Cyril Ramaphosa. The new South African President was said to hold the view that corruption was the primary reason for the country's ailing economy and strived towards stamping out corruption from the South African government.
In the aftermath of #GuptaLeaks and related investigations, South Africa's corporate registry also accused audit firm KPMG South Africa, management consulting firm McKinsey and software company SAP, of breaching South African company law. Investigations were subsequently launched to examine the three global professional services firms' ties to the Guptas.
KPMG South Africa was the external auditor for a number of Gupta-owned firms for 15 years until the audit firm resigned in March 2016. Despite its resignation, its past dealings with the Guptas were subjected to public scrutiny. The Companies and Intellectual Property Commission (CIPC) accused the audit firm of "knowingly failing to appropriately apply its own risk management and quality controls".61 Further investigations by KPMG International into its South African arm revealed that while there was no evidence of illegal behaviour or corruption, work done "fell considerably short of KPMG's standards", and there were instances of failure to sufficiently apply professional scepticism and to comply with auditing standards. KPMG was found not guilty of assisting the Guptas in tax evasion.
McKinsey was subject to South African state prosecutors' asset seizure order, over its association with sub-contractor Trillian, which was owned by a Gupta associate.63 It had worked with Trillian on a contract providing services to Eskom, the state-owned energy firm. McKinsey claimed that it never engaged in corruption, paid bribes, or entered into any formal contracts with Trillian. However, it cut all ties with Trillian and later admitted having made "several errors of judgement" in its work with Eskom.
SAP was reported to have roughly US$11 million worth of contracts with companies linked to the Guptas. The software company was found to have made 'commission' payments to third parties on contracts with Eskom and ports and rail operator Transnet SOC Ltd. The commission amounts were between 10% and 14.9% of contract values - just slightly less than the level that would have prompted an internal investigation. In addition, the CIPC found that a contract between SAP and a Gupta-associated company regarding work with another state-owned group contravened the South African Companies Act.
Epilogue
With losses accumulating, increasing debt and an exodus of clients, BPP was unable to find a buyer despite a fire sale. On 12 September 2017, BPP was put into administration and the administrators, BDO, announced that it had laid off more than 250 staff. BDO also started working with partners and employees on an orderly transfer of clients to other firms. As a separate legal entity, BPP Middle East is looking at a management buyout of the firm. Its Singapore-based Asian subsidiary which had high-profile clients such as Temasek Holdings and Noble Group, made a formal separation from BPP and changed its name to Klareco Communications on 8 September 2017. That was the end of BPP.
McKinsey and SAP have since identified staff who may have been involved and suspended them or put them on leave, while also initiating internal investigations. Similarly, KPMG International's Chairman apologised and vowed to strengthen the monitoring and selection of "potentially sensitive client engagements". Furthermore, Trevor Hoole, KPMG South Africa Chief Executive, resigned on 15 September 2017. He acknowledged that the audit firm "should have stopped working for the Gupta companies sooner than [it] did". Nhlamulo Dlomu was appointed as the new Chief Executive, after the resignation of eight senior partners over audit work relating to the Guptas. KPMG has also been banned from auditing South African public institutions, due to "significant reputational risks" associated with the audit firm considering its role in the high-profile scandal and its ties to the controversial Gupta family.
ANSWER ALL QUESTIONS OUTLINED BELOW.
1. Evaluate the composition of the Board of Directors in Bell Pottinger, based on best practices in corporate governance. Support your evaluation with citations from scholarly sources.