German political economist and sociologist Max Weber once defined “power” as the ability to impose one's will "even in the face of opposition from others." The internal corporate power plays at De Beers surrounding the new Sightholder list are now proceeding to their final stages. It’s difficult to predict whose views will prevail in an arena of widely differing approaches and concepts. The Diamond Trading Company (DTC) staff has presented its recommended list to Managing Director Varda Shine, who still has the prerogative to rerun some data through the computer and, together with the review panel, make changes.

At that point, the allocation process becomes a “3-P exercise”: a political play in which Power, Principles and Profiles need to be accommodated and reconciled. More about that later.

Shine is currently meeting with staff and discusses each and every recommended company in depth. Next week, she will forward the list to managing director Gareth Penny, who will have to ratify the final choices before they are made public on December 17.

After the computer has delivered its choices, outputs that appear “not to make sense” or illogical, can be run again through the system. Varda is operating through a review panel of senior colleagues. The DTC stresses, “That all decisions are taken jointly by the panel. No single individual has authority to make the decision whether someone is on or off the list.” It isn’t clear whether changes will be made at the level of Penny or by chairman Nicky Oppenheimer.

My sources believe that the process is so complicated that, by then, given the time constraints, additional changes are most unlikely – but not impossible. Penny has clear views about the type of clients he would like to have, says an insider. According to DTC spokeswomen Louise Prior, “Naturally, our senior team was very much involved in helping to shape the client selection strategy and eventual client list, as they should be, but not in the way in which you describe,” says Louise. “Their involvement was much earlier in the process in contributing to the criteria and goals of the selection process.”

The DTC clearly believes that De Beers’ top management cannot make changes in the list. Says Prior, “Let us be entirely clear, the DTC client selection process allows for no executive override of individual client selection decisions or allocations.” These assurances are duly noted.

South African Allocation is Major Issue

Some decisions are purely political and have little to do with either availability or profiles. One of the main issues is South Africa. In the last decade or more, the DTC consistently sold to South African Sightholders rough that also originated from non-South African mines. If last year the DTC supplied some $650 million worth of goods to some 16 South African Sightholders, about a third of those goods originated from Botswana, Namibia or Russia. Will those non-South African goods still be supplied to South African Sightholders, especially since 10 percent of the De Beers local production (by value) has to be made available to the State Diamond Trader? Sightholders may have forgotten this, but early in the year, the DTC advised clients that the “composition of supply available will be broadly aligned to footprint of SA production.” This may limit the availability of suitable locally mined goods to merely $390-$430 million.

Will the DTC really stick to that “footprint” statement? If the answer is positive, will South African Sights be reduced by 30 percent across the board (making everybody unhappy), or will they reduce the number of clients (making four to six clients miserable)? How will the South African government react to such a reduction? We don’t know, but we expect that differing views on the subject will lead to some form of compromise where political expediency and pragmatism may void the “footprint” declaration. In any event, such decision is anything but a computer output result. It’s up to management to decide.

Availability Problems Will Trigger a Drop of Some 20 Clients

Then there is another decision that has nothing to do with the profiles. As we reported earlier, tremendous pressure was exerted by De Beers’ management on the DTC not to drop any client, mainly because of legal vulnerabilities. But here we see the limits of the exercise of power. When the goods aren’t there, it can’t be done. Clients of De Beers must get sufficient goods to carry out the programs for which they made a contract proposal. It is my present understanding that some 20 Sightholders will be dropped and that some new ones (not more than 10) will be added. It is clearly the result of internal politics – and the list hasn’t yet finalized. Earlier in the year, it had been expected that the drop of clients would be more serious. Here, too, compromise took place. The investment in the ex-client support program may turn out to have been superfluous.

Some London sources close to De Beers believe that the profiles have actually been successful in identifying those companies who indeed produce the greatest added value. The outcome may not have been what Bain & Company had in mind when they were predicting the future, but the greater added value is apparently produced by many of the smaller and medium-sized Sightholders. If Supplier of Choice was carried out consistently to advance the very principles that created it, one would see some of the mega-clients getting significantly lower allocations. At what level does the shape of the added-value curve decline? It surely depends on the goods.

Some manufacturers believe they can’t really add value effectively above $150-200 million annual turnover level. Others have cited a $700-800 million figure. Beyond these numbers, companies are merely seen as simply selling volumes at minimal margins. How does this impact the allocations? Top management at De Beers (and that includes the chairman) are believed to be very fond of major players and would rather see a reduced number of actors in the diamond industry.

At least one senior director holds the view that large jewelry manufacturers and retailers should become Sightholders – they’ll know what to do with the raw materials they purchase.

Favoring the big firms, however, is not reconcilable with the SoC profile results and, with all the reservations I have about the process, these results do count. This is one of the reasons, I believe, the final list will see the aforementioned rather limited reduction of clients.

New Clients: Blind Dates?

One of the main differences between SoC1 and SoC2 is the (welcomed) reintroduction of some human discretion in the process. The Key Account Managers (KAMs) are playing a crucial role in making qualitative judgments on many parts of the profile questionnaire. The DTC has encouraged KAMs to maintain a close relationship with clients, to enable them to fully understand the businesses and the people who manage them.

There may have been anywhere between thirty and fifty new applicants, many of whom are new players in the diamond industry. Except for some technical inspection of their factories, most of these new applicants have never had a face-to-face meeting with a KAM. Many of the senior executives at the DTC and De Beers have no personal knowledge of these companies. Their profiles are assessed by KAMs who have no first-hand impressions of the people managing some or most of these companies. On a few occasions in the past, there were new clients who no-one had “actually seen” at the DTC.

In theory, there will be a three months data verification process after the announcement of the new Sightholders, but the DTC will only “drop” these new clients if they discover something materially incorrect in the submissions. The last time new clients were added, there were some Sightholders who literally went to a ”blind date,” meeting executives of the DTC after they had been appointed.

That’s a risky business. I remember one new Sightholder (in 2005) who already had sold its first boxes even before ever receiving them. The new Sightholder names evoked response such as “the man has never polished a diamond in his life,” or “this man hasn’t a penny to his name.” Some of the new Sightholders operated under the umbrella of major companies to whom the Sights were sold, and they made comfortable margins. Others became insolvent - or needed to be rescued. Mistakes are not easily undone. But why risking the repeat of mistakes?

Moreover, the difference in the process of assessing new applicants and existing ones doesn’t deliver on the promise that all applicants are playing on a level playing field. No KAM is going to “fight” for a worthwhile client he has never met. Moreover, this really makes it hard, if not impossible, for the DTC to evaluate the relative strength of competing proposals in each category of rough. When a Sightholder goes bust, when a Sightholder merely has the “strength” to trade boxes and cannot afford (or doesn’t know how) to manufacture the box, this hurts the image of all DTC Sightholders.

Asked for a comment on this view, Prior replied, “We would object to the perception that your article creates that we would supply new clients whose business proposals we do not thoroughly understand. Supply does not begin until April 2008 and this provides more than sufficient time to establish effective business relationships with any new client prior to supply commencing.”

We didn’t suggest that the DTC doesn’t “understand” the proposal – we merely stressed that the KAMs obviously cannot make the same judgments and rating on companies where he knows the people as compared to companies he only sees the submissions. And the three month period is hardly relevant – it starts AFTER the appointment decision has been taken.

BPP: Not (Yet) Officially Dead

Are Best Practice Principles (BPP) totally dead? No, they aren’t. But this will mostly be evident from the group of otherwise good applicants who were hoping to be added to the list and who will find out that they haven’t been because of reputational reasons. Here the DTC’s hands are also tied by their African distribution partners. What do you do with a company that has settled a money-laundering case? What do you do with a company deeply implicated in the Gemological Institute of America’s (GIA) Certifigate fraud? What do you do with a company that was behind the (recent) smuggling of six kilos worth of Zimbabwe diamonds into Europe concealed in the double bottom of an icebox and caught at Brussels airport? What do you do with a client who has been taken off the client list of another producer after being caught paying kickbacks to company salesmen? What do you do with companies that consistently delay payments to suppliers beyond the agreed period? As today there are close to 40 Sightholders that have operations in one or more southern African country, what do you do if any of those companies are implicated on BPP grounds? Though, theoretically, the DTC’s country partners are fully committed to BPP, it works out differently in practice.

This is part of the power play. Within De Beers and the DTC, some executives would like the company to demonstrate zero tolerance as far as reputational issues are concerned, while others merely view BPP as attractive slogans to please governments, NGO’s and public relations executives. (When a major producer was suspected of paying kickbacks to a high De Beers official, the latter was asked to quietly leave the company. No action was taken against the producer.) Just for the record, I respectfully want to remind DTC management that in early 2007, at a presentation to Sightholders about the new contract proposals, one slide shown to clients gave the DTC’s commitment that “we will deliver enhanced BPP (including key individual accountability).” I haven’t discovered yet the meaning of “enhanced BPP” – I doubt anyone else has. Surely, irrespective of one’s views on BPP, not appointing someone as a Sightholder for the new three-year contract is far “easier” than dropping someone in the middle of a contract period. Will the DTC seize the opportunity?

That gets me back to Max Weber. As much as De Beers has done to establish a fully transparent, fair, highly computerized allocation system, in which all applicants compete on equal terms, the reality is far from perfect. At the end of the day, it is an exercise of power wielded by various corporate stakeholders; and let there be no mistake – power can also be exerted from outside the company.

Delayed Surprises – Blow to Transparency

A few of my sources used the word “surprises” in describing the list-in-the-making. I was unable to get more than just that word, but I do understand that the list-that-was is certainly not going to be the list-that-is, also in respect of the ranking order.

There are 11 more days to go until “The Day.” But don’t hold your breath. The DTC will only make public the number of successful Sightholders. It will also not separately announce either names or number of new clients. So no one will know whom – or how many – clients were dropped.

The full list of successful applicants will be revealed once the new contract period starts in April 2008. Trade press, banks, non-successful applicants will be left in the dark as long as possible before they can estimate who lost against whom. The DTC maintains that by not announcing which companies were dropped, it allows these firms to quietly make arrangements with banks, clients and others. They still may decide on announcing the number of new clients – that decision will be made closer to the December 17 date.

Sources close to De Beers suggest that “by not being specific, the DTC retains some flexibility. If a dropped Sightholder puts up a fight (remember Spira?), depending on its leverage and power (as defined by Weber), it might be quietly reinstated. Nobody will know. Nobody can prove (or disprove) a further deviation of the rules.” The DTC almost angrily rejects any such suggestion. “No changes will be made after December 17.” Time will tell. In any event, the market will be rife with rumours – which cannot be helpful to anyone.

The Burden of Proof is on De Beers

When we asked the DTC for comments on the views and information contained in this article, the company said that I “grossly mischaracterize the DTC client selection process and the role of senior and experienced DTC and De Beers executives in it.” I don’t think so.

If I didn’t believe it was correct, I wouldn’t write it. The DTC should not ignore that in recent years court cases have been heard, evidence has been submitted to courts, its own Ombudsman has written eloquent though scathing opinions finding fault with the processes. The way the company is “living up to diamonds” on the vital BPP issue doesn’t need to be further documented. The team that Varda Shine is heading today is undoubtedly professional – and consists of highly motivated and dedicated people. This doesn’t change the fact that during SoC1 serious questions were raised about the robustness of the administrative processes.

The DTC is saying that it had listened to client feedback, has remedied any deficiency, and has now achieved a very transparent, objective, process. Indeed, they would like the market to be forward looking and “forget” the past. In all fairness, it is difficult to give both De Beers and the DTC the full benefit of the doubt. At this stage the burden of proof that the company adheres strictly to its own contract with clients and to its own criteria (including BPP) is squarely on the company.

One more point: It is not me who needs to be convinced. It is the stakeholders (the clients, the brokers, the applicants, and the market) that need to be convinced. Journalists are not inventors of news – they report what they learn in the market. They report what reliable and authoritative sources tell them. With all due respect: if people at Charterhouse Street 17 don’t like this article – they should draw the conclusion that they themselves may have a problem. The market – Sightholders and non-Sightholders – like their producers to be seen as leaders in good governance.

Have a nice weekend.