Penny Was the Transition Guy. What's Next?

Many are very impressed by Gareth Penny while others, far, far behind his back, criticize him for turning the diamond industry upside down for no real good reason. But Penny was the right man, at the right place, at the right time. He was the transition guy, the transition manager that De Beers needed.

The De Beers we have today is a dramatically different company than the one we had just ten years ago, and Penny had a big part in this change. When he was appointed manager in charge of the De Beers Strategic Review in 1999, he started a process that led to a new way in which the company views itself. He, together with others, helped the company pull itself from the bootstraps, transforming it from the old-school, white boy, South African, clubish company that it was, into a lean, international corporation fitting the 21^st century.

In the old days, for example, the monopolistic company acted in a very bullish way, practically appointing and replacing presidents in Botswana, ignoring U.S. legal proceedings and treating their clients, the Sightholders, as a group of people that needs to be tolerated, and not always politely.

Sightholders from those days can tell you that they got very thick hints from some executives about what presents they wanted for the holidays. Nothing cheap or modest, mind you. At the time, De Beers was commonly called 'The Syndicate'. The negative characterization the nickname carried was not accidental.

Today the company no longer wrestles goods at very low prices from other miners to quickly turn around and sell them at much higher prices. The Alrosa and BHP Billiton buying agreements are gone, as are many of the legal issues that haunted it in the past.

One of the biggest changes that Penny led was in the way the Sightholders are picked and allocated goods. In the move that took away the Sights from old pillars such as Bill Goldberg, Moshe Schnitzer and Bram Fischler, Indian firms such as Venus Jewel started to get Sights of large, high quality rough based on their true manufacturing ability.

The Supplier of Choice system that angered so many in the industry was perhaps a crude attempt to make the industry more sophisticated. But guess what, now that SoC is all but dead, Sightholders are far more sophisticated in their marketing, manufacturing and long term strategic plans. If it wasn't for Penny's drive to make the change, it would not have been here.

There is no good without bad, and the cost of dragging the industry forward was not small. Companies nearly folded, many wasted enormous amounts of money on attempts to enter sectors of the industry they knew nothing about - but did so to appease "the Custodian." Prices of rough diamonds started to fluctuate wildly as soon as the famous $5 billion stockpile was eliminated. Bringing in MBA types to replace the more expensive employees that lived and breathed diamonds was another transformation not liked by many.

He acknowledges the great change, telling me this week that the company went through an "immense transformation." He chose, however to point out increased automation at polishing factories and the ethical stand of the industry – the birth and implementation of the Kimberley Process. His view about KP, by the way, is that "maybe it is imperfect, but most unique."

About De Beers, he says it is a more modern operation, "very focused on production" as opposed to mining, buying goods, polishing, researching and so much more.

When asked if it wasn't a mistake to sell assets that proved profitable for other companies, he retorted, "Thank god there are juniors such as Petra that can pickup assets like Cullinan and make a profit!" He says the change he led is in the company's mind set. "De Beers needs to focus on long-life assets at the beginning of their life. After their maturity, they should be run by junior [mining] companies. We would like to invest in early stage assets."

The timing of his departure is not a good one for the company, as it enters negotiations with the Botswana government over the renewal of their five-year marketing contract. Penny said that he does not think his departure will impact the talks. "Its not a major issue," he added.

I'm not sure that is true. Botswana is their main source of rough, and De Beers needs a clear and strong leadership to head the talks. With him as full-time CEO in the third quarter, no clear successor, and two others as Co-CEOs at his side, not to mention Nicky Oppenheimer's promise to take a more active roll – who calls the shots? Who sits in the middle on De Beers' side of the table during negotiations?

Penny was the transition guy that modernized the company. Now De Beers needs someone to continue and pull it forward and the succession battle is on. Varda Shine is in, and appointing her will be a real change. No more could a South African politician talk of the "Lily white men" heading De Beers. Stephen Lussier is also in the race as is Stuart Brown. A couple of outside candidates are currently being considered and more may be vying for the job.

The new CEO will need to reassure Sightholders that he or she can lead the company safely ahead, reassure shareholders that profits can be delivered while navigating through labor union demands, government appetites for more local income, a shifting global economy and a possible IPO, while charting a new course for the century-old giant. That is a large number of balls to keep in the air. Good luck to whomever the next CEO will be, the shoes are big and the pressures are plentiful.