Harvard Business Review Article:
The Tempting of Rajat Gupta
9:45 AM Thursday March 24, 2011
by Walter Kiechel
As anyone with the slightest interest in the consulting business knows by now, the SEC has brought civil charges against Rajat Gupta in the Galleon insider-trading case. What makes the matter fascinating to industry watchers, approximately their equivalent of the Charlie Sheen supernova, is that Gupta served three terms as managing director of McKinsey & Co., from 1994 to 2003.
Let us be fair to the man and the firm he headed. These are not criminal charges. Gupta denies any wrongdoing, and in particular, he denies that he made any money from the conduct alleged. (Indeed, his lawyer says the ex-consultant lost millions on an investment with Raj Rajaratnam, the central figure in the case.) There has been no suggestion that Gupta betrayed any client confidences in his McKinsey days. This in contrast to his former partner and friend Anil Kumar, who pled guilty to taking a couple million from Rajaratnam for inside dope on McKinsey clients Advanced Micro Devices and eBay.
For now we may leave certain questions to the daily press, who have seats at Rajaratnam's trial and can listen to Kumar sing like a canary, albeit a thoroughly well-spoken and poised McKinsey-trained canary. Questions such as, How strong is the evidence that Gupta knowingly shared confidential information gleaned from his service on the boards of Goldman Sachs and P&G? Or how likely is all this to hurt McKinsey's reputation?
What intrigues me more is what the allegations against Gupta may suggest about his response to certain temptations commonly faced by management consultants. Okay, this might seem a slightly parochial perspective, bordering on squirrely. My contention, though, is that in looking at some of the beguilements — moral, even existential — beckoning to consultants over the last two decades, and at what we know about how Gupta responded to them, we might possibly begin to better understand how he could have gotten himself into the current mess.
The temptation to be a big "macher." This Yiddish term, indispensable in the analysis of many business interactions, means variously a person who gets things done, a big shot, a schemer, and someone with a lot of plans. In his tenure as McKinsey's worldwide managing director, Gupta displayed macher-like ambition not just for himself but even more so for his firm.
To its credit, for much of McKinsey's modern history there was debate within the Firm, as it styles itself, over how fast to grow and how large a public presence to be. In the early 1980s, for example, at least some partners — Bob Waterman, co-author of In Search of Excellence, among them — counseled gradual, quiet expansion, this to maintain the top-flight quality of the consultancy's people and its work. But by the end of the decade, the advocates of more rapid growth had pretty much won out in the name of better serving clients in an increasingly globalized world.
But even by the standards of the pro-growth crowd, McKinsey's expansion under Gupta was eye-popping. Between 1994 when he was first elected and 2001, in his third term, the Firm more than doubled its number of consultants (3,300 to 7,700), partners (425 to 891), and annual revenues ($1.5 billion to $3.4 billion). Starting with 58 offices in 24 countries, it expanded to 81 outposts in 44.
While the majority of partners cheered on the effort — at least they re-elected Gupta twice — the man and his big push had detractors. Some insiders complained the Firm was yarding back on Grand Ideas. (McKinsey responded that it was actually investing more on intellectual capital, but on the industry-specific variety of more use to consultants and clients.) Competitors whispered that Gupta was committing the most un-McKinsey-like of sins: cutting price to get into new markets. Others decried what they saw as a lowering of hiring standards. "I couldn't believe some of the people I was seeing from McKinsey," recalls a partner at another strategy firm. It was hard not to notice, too, that by the end of Gupta's tenure — Firm rules limited him to three terms — major clients had begun to get into well-publicized trouble, most notably Enron, whose CEO had been head of McKinsey's energy practice.
The temptation to look down on clients. Which can curdle into envying them. Which can in turn sour into aping their worst behavior.
An occupational moral hazard for consultants is feeling superior to clients, in particular thinking you're smarter than they are. While this may often be true in a strict I.Q. sense, it entails a potentially disastrous failure of the imagination, an inability to appreciate all the exigencies the client confronts in trying to actually get something done, much less changed, within his organization.
When strategy consulting firms first got going in the 1970s and 1980s, it was probably easier for the hotshot MBAs they hired to look with disdain at the poor Joes they were nominally attempting to help. Starting managerial salaries were a lot lower than consultants' — they still are — and even client CEOs didn't make all that much.
As the stock market began to take off, though, and options rained down on corporate execs, the compensation tables began to turn, certainly for the top ranks. Among McKinsey's biggest clients in the 1990s were pharmaceuticals and financial-services companies. Was it only ten years ago that the profits of the top 10 U.S. pharma companies equaled the total for the other 490 in the Fortune 500? They paid their executives accordingly, as did the banks, brokerage houses, hedge funds, and private-equity outfits whose share of U.S corporate profits was heading toward something north of 40%.
The strategy firms saw some of their best talent head off to startups, which promised untold riches, at least until the Dotbust of 2000, and to Wall Street or Greenwich or wherever the racier genii of modern finance ply their trade. You can still find many an alum of McKinsey (or Bain & Co., for that matter) holding down a senior-management seat at private equity firms on either side of the Atlantic.
And gosh did those folks make a lot of money. If I, a management consultant of certifiably superior intelligence, am so smart, why aren't I as rich? And why shouldn't I be?
One of the secretly taped conversations played at the Galleon trial last week has Kumar and Rajaratnam speculating in 2008 that their friend Gupta wants to leave his Goldman board seat, where he's only in the club of people worth $100 million or so, to join Kohlberg Kravis Roberts, where he'll be keeping company with genuine billionaires. (You can listen to their friendly conversation. Besides passing what sure sounds like insider information, the two men speculate that Gupta seems "tormented," and may hope to make $100 million over several years from his KKR connection.)
The desire to be an insider. Consultants by definition spend most of their careers as outsiders, guns hired from afar to help clients shoot at problems. Their very outsiderness, their independence of judgment, is supposed to be one of the assets they bring to the fray. Top-flight firms typically don't let their partners serve on corporate boards, certainly not the boards of clients, in part to safeguard that independence from potential tangles with the fiduciary duty directors owe to shareholders.
For all their occasional looking down on clients, consultants can now and then register a nose-pressed-to-the-glass, here-I-am-stuck-on-the-sidelines wistfulness about their outsider status. I've heard more than one veteran of the industry recall with great fondness moments when a client "treated me like I was a member of senior management."
You might think that, for a retired McKinsey managing director, board memberships at Goldman Sachs, Procter & Gamble, and AMR, the parent of American Airlines, might be enough insiderness. But the Olympian heights of corporate America apparently weren't enough for Rajat Gupta. Somewhere along the way Gupta became part of the network that included Rajaratnam and Kumar, as well as other South Asian and western businessmen. What, if anything, did the former McKinsey managing director have to give up to be part of the group? And what risks did he run?
At the very least, contagion. Four years ago, a couple of finance professors and one of their graduate students published a fascinating paper recounting how the practice of backdating stock options had spread to different companies through interlocking boards . A director would learn this kind of cheating, then pass it on to another company where he also served on the board.
As technology makes networks tighter and easier to put together, does the risk of contagion increase proportionally? Phones and face-to-face meetings were apparently good enough for Rajatnam and Kumar. We'll see if they were sufficient means to hold out a poisoned apple to Rajat Gupta.
Walter Kiechel III is the former Editorial Director of Harvard Business Publishing, former Managing Editor at Fortune magazine, and author of The Lords of Strategy: The Secret Intellectual History of the New Corporate World. He is based in New York City and Boston.
1993 Forbes Article:
HOW MCKINSEY DOES IT
By John Huey REPORTER ASSOCIATES Joyce E. Davis and Jane Furth
November 1, 1993
(FORTUNE Magazine) – FOR ALL THAT has been said over the years about McKinsey & Co. -- the most well-known, most secretive, most high-priced, most prestigious, most consistently successful, most envied, most trusted, most disliked management consulting firm on earth -- perhaps the only statement that would spark immediate agreement from all camps, friend or foe, is this: These fellows from McKinsey sincerely do believe they are better than everybody else. Like several less purposeful organizations -- Mensa, Bohemian Grove, Skull and Bones, the Banquet of the Golden Plate -- McKinsey is elitist by design. So much so that on occasion, when in the presence of a young McKinsey partner, ^ one gets the distinct impression that if plied with a cocktail or two, he might well lean across the table and suggest something awkward, like comparing SAT scores. To say that ''testing well'' is the sine qua non for membership in this outfit -- filled as it is with Baker Scholars from the Harvard business school, Rhodes scholars, White House Fellows, nuclear physicists, and Ph.D.s in the hard sciences -- is to understate the premium placed within the McKinsey culture on analytic ability, or as its denizens say, on being ''bright.'' There is no denying it: These men from McKinsey -- and they are mostly men, and mostly white -- are indeed bright. Even so, several more prosaic questions still bear asking: Do they have a lick of sense? Are they any better than the competition? Can you trust them? Can they really help your company? And finally, are they worth what they charge? Like most questions about such institutions, the answers lie somewhere between McKinsey's self-image and what its detractors want to believe. McKinsey, though damned good at what it does, is not as good as it thinks. (Could any collection of mortals be?) Brain for brain, its consultants aren't any brighter than those at some close rivals, and much of the work it performs can be done quite competently by a number of less pricey, less haughty consulting firms. At the same time, McKinsey's explosive growth -- it has doubled in the past five years to become a firm with $1.2 billion in annual revenue and 58 offices worldwide -- hasn't eroded its formidable culture nearly as much as competitors fantasize. It is that culture, unique to McKinsey and eccentric, which sets the firm apart from virtually any other business organization and which often mystifies even those who engage the services of ''The Firm,'' as its members have long called it. ''They're not a very open organization,'' says Edwin Lupberger, chairman and CEO of Entergy Corp., one of the nation's largest utility holding companies and a constant and highly satisfied McKinsey client since 1986. ''Even from the client side, you just get to see the tip of the iceberg.'' Understanding McKinsey's enigmatic culture is the only way to answer the larger, more intriguing questions about The Firm, which are: How does McKinsey do what it does -- and can it keep on doing it? In a business whose only constants seem to be upheaval, transience, faddism, and customer suspicion of snake oil, how does McKinsey inspire such high-level trust? In a world seemingly overpopulated with consultants, can McKinsey endure as the ultimate worldwide brand name -- the Rolls-Royce of its industry? Extraordinarily tight-lipped, McKinsey shuns publicity. But lately it has found itself in an unwelcome spotlight, mostly because of the celebrity of such firm alumni as Lou Gerstner, Harvey Golub, and Michael Jordan, former consultants who have assumed hot-seat CEO posts at IBM, American Express, and Westinghouse. TCI boss John Malone, the so-called King of Cable, is also a former McKinsey consultant. Throughout this recent flood of press attention, The Firm has said nothing. Until now. As with most cabals, the real answers are best found on the inside. And that is where FORTUNE has been reporting for several months, wandering the halls of McKinsey & Co., poking into the nooks and crannies. What follows, then, is a report from behind the rarely lifted veil of one of the world's best-known, least understood organizations. To fully appreciate the inside view, it helps first to see how McKinsey looks in the cross hairs of those who compete against it in an increasingly fragmented, competitive marketplace. Founded in the 1930s, McKinsey isn't the oldest consulting firm; Arthur D. Little dates to the 1880s. Nor is it the biggest; Andersen Consulting's annual revenues of $2.7 billion are more than double McKinsey's, though Andersen specializes mostly in integrating information systems (FORTUNE, October 4). Among its general management consulting peers, however, McKinsey is far and away the largest, with revenues almost double those of No. 2, Booz Allen & Hamilton. What's more, McKinsey's 3,100 consultants and analysts haul in far more annual revenue -- $387,000 each -- than any competitor's (the 780 professionals at the Boston Consulting Group are second, at $359,000 a head), according to Consultants News, a trade publication. Most of McKinsey's rivals insist that in recent years it has become much more vulnerable to their inroads. Says Fred Steingraber, chairman and CEO of A.T. Kearney, a fast-rising Chicago firm that was long ago part of McKinsey: ''Last year we competed against them head to head in 35 situations and won every time.'' While McKinsey has consulted for many of the current era's great successes -- Hewlett-Packard, Johnson & Johnson, PepsiCo, BritishAir, AT&T, GE -- it has also been a fixture at many of the big losers: American Express, GM, IBM, Eastman Kodak, Digital Equipment, Sears, and the late Pan Am. Critics argue that McKinsey is starting to suffer from some of the same ailments that eventually brought these dinosaurs low. Claims a senior partner at Bain & Co., a resurgent competitor: ''McKinsey sells consulting the way IBM used to sell computers -- from the top down. Which makes you wonder: 'Are they the IBM of the consulting business?' I think they have a bunch of the same cancers and ten years from now won't be as strong as they are today.'' Of such chop-licking competitors, Fred Gluck, 58, McKinsey's managing director, says simply, ''All I know is that every consulting firm anybody talks to always says they're second to McKinsey.'' He's right. ''The hardest thing about competing with them,'' admits that same Bain partner, ''is that they have these deep relationships with senior management that lead companies to return to McKinsey, unquestioned, time and time again.'' Even Kearney's Steingraber grudgingly agrees: ''They are definitely the model many other consulting firms would like to emulate. It is difficult for a CEO who hires McKinsey to be challenged either by his board or by the rank and file. They have established themselves with a 'holy water' very much like the blue-chip investment banking firms.'' You can find McKinsey consultants sprinkling that holy water around on a regular basis at half the companies in the FORTUNE Global 500. And after more than 30 years of aggressive overseas expansion, McKinsey today is itself truly a global firm, with a non-American majority controlling its shareholder committee and the real possibility of electing a non-American as managing director in the near future. The Firm derives 60% of its revenue -- and probably even more of its profit -- from outside the U.S. and expects future growth to be fueled by such fledgling markets as Russia, Eastern Europe, China, and India. Partly because of that global growth, McKinsey is now caught up in a passionate internal debate over where it should go from here. The Firm, most partners admit, has reached one of the watersheds in its history. ''We grew too fast in the Eighties,'' says New York office manager Don Waite, a leading candidate to take the helm next year. ''It strained the fabric of the place.'' As Michael Patsalos-Fox, a new-generation 40-year-old director in London, puts it, ''There are some very sophisticated things that keep McKinsey together, and they will be strained in the coming years.'' To Peter Foy, 53, a member of the old guard in the same office, the big challenge is ''how to evolve without losing our values in spite of the scale and complexity of the organization.'' Such debate always heats up around election time, which is now approaching. Next spring, as they do every three years, McKinsey's 151 senior partners -- known as directors -- will cast an open-ballot vote to decide who among them will become managing director, succeeding Gluck. He has overseen six years of spectacular growth, but firm bylaws prohibit him from standing for reelection because he would turn 60 during his next term. McKinsey partners really don't know which of seven or eight potential directors will be leading them into the 21st century. Whoever wins, governance is ''the key issue'' this time round, says Ron Daniel, who was managing director for 12 years and once described the job as ''like trying to herd cats.'' Adds Daniel: ''We don't need a caretaker, and we don't need somebody on a power trip.'' In fact, governance frequently comes up as an issue at McKinsey. Depending on which partner you talk to, The Firm is either the exemplar organization of the future -- a nonhierarchical, decentralized group of knowledge workers connected by shared values and a multitude of informational axes -- or it's a once intimate partnership grown way too large and diffuse with no real chain of command. Peter Foy openly advocates change. ''I think we now have to evolve into a more professionally managed institution,'' he says, ''with a more directive management approach than the laissez-faire freedom of an entrepreneurial partnership. It's a price we're going to have to pay.'' But in Zurich, Lukas Muhlemann, who at 43 is mentioned by some directors as a potential top guy, fears too much command and control. ''I wouldn't like to have some real bossy managing director,'' he says. The Firm's culture has always accommodated this kind of broad diversity of opinions, as well as a number of apparent paradoxes. McKinsey earns much of its money showing other companies how to become more efficient yet in its own affairs scorns efficiency, choosing to run itself through a seemingly endless chain of committees. The Firm attracts high-performing achievers with egos large enough to block the sun, then requires those egos to subordinate themselves to the collective. The Firm places itself above discussing money as a motivation, yet senior partners often earn as much, or more, than the CEOs they advise. Partners talk about one another with a sense of personal affection and admiration usually heard only at Hollywood roasts -- ''a bunch of guys committed to making a difference and having a hell of a time,'' says Gluck. Yet The Firm's Darwinian up-and-out system culls partners from its ranks with the ruthlessness of a three-star chef culling asparagus spears at a farmers' market. The resulting personality of a McKinsey consultant, therefore, is an unusual blend of studied arrogance overlaying deep-seated insecurity. As Firm lore has it: ''McKinsey is a very kind place. McKinsey is a very cruel place.'' From a client's perspective, McKinsey is basically a problem-solving place. Some of its work -- a repositioning strategy for a client in the telecommunications industry or the retooling of a technology company's new product development process, for example -- can be highly sophisticated. But much of the time The Firm merely reorganizes sales forces or designs by-the- numbers downsizing to reduce overhead. Either way, corporate chaos and market mayhem are great for business, which goes a long way toward explaining McKinsey's recent hothouse growth. Say you're the management of Delta Air Lines -- in fact, a new client -- and you're losing buckets of money on your recently acquired European operations. You're feeling shareholder heat. So you announce to Wall Street: ''We have hired McKinsey.'' Such an announcement sends out several messages: ''We know we have a problem. We're doing something about it. We hired the most expensive help we could find. Give us some time, okay?'' More typically, though, McKinsey enjoys a long-term -- but not continuously billable -- relationship with top management at a client company. (It has one, for example, with Time Inc., the Time Warner unit that publishes FORTUNE.) The Firm will already have worked for the client on various projects, perhaps identifying potential market segments and then figuring out the cost structure required to beat the competition. Now the CEO, or his COO, or even a division head at a very large company, may have decided, say, that he can't move on effectively with the organizational structure he has in place. Who better to talk it over with -- for free -- than his old friends from McKinsey? Frequently, the partner who serves as your primary contact is a generalist, linked to your company because your headquarters are in his office's territory. If, however, he isn't well versed in the problem currently weighing on you, your old friend will invite one or more new friends -- specialist colleagues -- in to talk things over with you. They will likely come from one of the two dimensions that complement McKinsey's geographic structure: functional expertise (disciplines such as market research, corporate finance, and au courant stuff like core-process redesign) or industry expertise (aerospace, automotive, banking, whatever). At this point it's all very casual and cordial, no meter running. Once the chatting ends and you hire The Firm, things formalize quickly. The local partner assembles an engagement team of four to six people. At least nominally, the expert he brought in to chat with you may be part of it. To coordinate the effort, he assigns an ''engagement manager'' -- not a partner but an associate with three or four years' McKinsey experience. This is typically someone who has survived the sweatshop conditions endured by rookies and proved he can travel constantly, sleep little, perform brilliantly, and inspire the immediate confidence of much older clients who might otherwise wonder why they're paying so much money to wind up with a 29-year-old greenhorn MBA in their face -- but who is also still busting his hump because he has only two or three years left to make partner. The other team members usually include two or three junior associates: a ''quant jock,'' who may do calculus in his head; a ''business analyst,'' possibly a 3.9 engineering graduate from Duke who knows computers and is willing to work 18 hours a day; and probably someone with knowledge of either your industry or your company. Most of these folks physically move onto your premises, where you provide them with an office, a phone, a secretary, and some lockable files. When it gets down to work, the team avoids touchy-feely stuff and tries to limit its analysis to ''the proof or disproof of things that matter,'' says Jim Balloun, a senior director in Atlanta. The entire process, he adds, is ''hypothesis-driven.'' A hypothesis could be, for example, ''Our Japanese competitors are dumping their office machine product. They can't possibly be selling it at a profit.'' Or ''People who sell big orders make more money for the company.'' Your engagement team will test such hypotheses before it moves on to recommending solutions. The team may interview suppliers all over the world and discover that, in fact, the Japanese are buying the power supply for their machine from your own supplier for $60 less because you are employing outdated , purchasing procedures. Or it may discover that, in fact, some of your largest sales orders are your least profitable. The secret, says Balloun, ''is in the rigor. These things are proved and disproved with facts, not opinions.'' All the while, of course, the clock is running, usually at a rate of between $200,000 and $300,000 a month plus all expenses. At project's end, the team -- after preparing senior management ahead of time to avoid undue embarrassment -- will present its findings in a standard dog-and-pony overhead-projector show, then leave behind its recommendations, usually in a bound blue book of 100 pages or so. ''They don't dance around. They're very direct and outspoken,'' says Vic Pelson, an executive VP at AT&T. Pelson, who has used all the major-consulting firms, maintains that ''none has been more helpful than McKinsey.'' If that sounds like the flow of holy water, it is. AT&T and Pelson fit the profile of a satisfied McKinsey client -- a big blue-chip company, a long-term relationship, and all sorts of intersecting social and philanthropic connections that help solidify the good feeling. The successful McKinsey consultant must strive to be very much a part of the elite corporate world inhabited by his client. Every McKinsey partner of any weight is expected to involve himself heavily in pro bono activities that put him in constant contact with the top leadership of his community. Consider Ron Daniel's outside-the-firm resume. He is a member of the Harvard Corp. and treasurer of the university. He is on the board of the Brookings Institution, and he has been an adviser to Yale, Duke, and Stanford, as well as Harvard. Gluck is on New York Hospital's board of governors. In Amsterdam, office manager and director Mickey Huibregtsen is chairman of the Netherlands Olympic Committee. In Britain, Peter Foy is engaged in an effort to convert the old Oxford jail into a new college at Oxford University. In Atlanta, Jim Balloun will soon become chairman of the Woodruff Arts Center. In Stockholm, office manager Christian Caspar is a member of the Royal Swedish Academy of Engineering Sciences. In Tokyo, director Kenichi Ohmae, while not busy reforming Japanese politics, plays clarinet. These activities are openly part of McKinsey's relationship-driven approach to marketing -- an activity that partners claim, with an absolutely straight face, The Firm never engages in. In fact, while McKinsey may shun direct solicitation of clients or cold calls as tacky and ineffective, it is a marketing juggernaut -- albeit a low-key, tasteful juggernaut. Example: McKinsey for years philosophically avoided touting its partners' specific expertise, taking the high-ground stance that its only specialty was problem solving. As the world changed, though, clients began to balk at paying consultants to educate themselves on their particular industries. So about 15 years ago, McKinsey decided to incorporate what it calls systematic knowledge building into its institutional portfolio. And today McKinsey positions itself as the repository of all business information and theory worth knowing. A favorite line repeated within The Firm is that ''we do more research on business issues than the business schools at Harvard, Stanford, and Wharton combined.'' Gluck estimates that McKinsey's annual expenditures on knowledge building top $50 million, much of it spent on conferences, research projects, and intrafirm communication. McKinsey also runs what amounts to its own business press, churning out, in addition to its widely followed McKinsey Quarterly, hundreds of pamphlets, magazines, papers, and articles a year. Partners last year individually published a dozen books, many of the authors no doubt hoping to duplicate the publishing careers launched in the Eighties by two famous now-ex-McKinseyites from the San Francisco office: Tom Peters and Robert Waterman, co-authors of the astronomically successful In Search of Excellence. Though Peters and Waterman left McKinsey -- in a dispute partly over whether profits from their book should have gone to them individually or into the McKinsey pot -- The Firm's culture does make room for a few media superstars such as Tokyo's Ken Ohmae, whose identity is closely linked to McKinsey's image in the important Japanese market. The postscript to one of Ohmae's recent books, The Borderless World, shows just how highly The Firm can regard itself. Ohmae, a nuclear engineer by training, closes his book with a manifesto calling for a new world economic order based on something called an interlinked economy. The statement is signed by himself, Gluck, and Herbert Henzler, the major-domo of McKinsey's German practice, and carries an earnest footnote, delivered without a hint of self-consciousness: ''This statement, the product of many dinner conversations and debates, is one we each embrace and believe to be the best possible course for all countries and governments to follow.'' Well, world, what are we waiting for? Let's get right on it. ''I think The Firm takes itself a little too seriously,'' says Waterman, who spent 21 years as a McKinsey consultant. ''For what it does, it's probably the best in the world. But in the grand scheme of things, maybe what McKinsey does just isn't as important as it thinks.'' After leaving, Waterman says he realized some things about his years at The Firm. ''McKinsey thinks it sells grand strategies and big ideas,'' he says, ''when really its role is to keep management from doing a lot of dumb things. They do great analysis, but it won't get your company to the top.'' The genesis of In Search of Excellence, he says, came from his and Peters's frustrating realization that, as McKinsey consultants, they weren't working with a lot of the truly great, innovative organizations. ''We had gotten bored working for big, okay companies that would pay big money, accept our recommendations, and then do a half-assed job of implementing them.'' But doesn't the McKinsey culture encourage consultants to speak up to clients? ''Yes,'' says Waterman, ''but they don't pay you to lose clients.'' Which raises another question: If McKinsey is so great, why have so many of its long-term, mainstream clients gone down the shooter? Specifically, McKinsey has taken a lot of heat for its heavy involvement with the disastrous restructuring of General Motors in the early Eighties. In her book Rude Awakening: The Rise, Fall and Struggle for Recovery of General Motors, Wall Street analyst Maryann Keller asserts that many GM employees believed McKinsey was a ''fly in the ointment of the reorganization, rather than an enabler.'' Officially, McKinsey has nothing to say about GM. The two subjects it categorically refused to discuss for this article were anything relating to specific clients, and anything about how it charges for its services (for more on that, see box). But privately, several senior directors shared some thoughts on McKinsey's role at the auto giant. They claim the situation was so hopeless -- and GM's management so unresponsive -- that senior consultants recommended more than once that McKinsey withdraw from the engagement. But for whatever reasons, The Firm stayed the course. ''We told them like it was. We weren't passive at all. We told them to take their medicine,'' says one senior director. ''It's like being a doctor. You do the best you can, but if the patient won't quit smoking, he still dies. This is a problem the world over. Corporate executives are not risk takers. They don't see trouble clearly until they're going down the drain.'' As North America chairman of The Firm's client impact committee, Pete Walker, a New York director, oversees the constant evaluation of how much difference McKinsey's work actually makes. It's a definite black mark for a consultant to bring in a lot of revenue but be unable to demonstrate a big financial benefit for clients. Says Walker, with typical McKinsey humility: ''It's almost never that we fail because we come up with the wrong answer. We fail because we don't properly bring along management. And if a company just doesn't have the horses, there are limits to what we can do.'' Satisfied clients appreciate McKinsey's concern for impact. ''They are very strong on adding more value to the bottom line than they cost,'' says Entergy's Lupberger. ''If they get behind on that, you can sense they really feel pressure from home.'' In truth, a McKinsey consultant feels pressure from home on everything. This particular issue -- whether you're adding value to the bottom line -- would come before Walker's committee, which then passes its findings along to the committees that select new partners and new directors, as well as to those that rank existing partners to determine their compensation. A senior partner on one of these personnel committees may devote as much as six weeks a year to flying around the world evaluating other partners. The criteria for evaluation are essentially firm impact, personal impact, and client impact. ''It's a rigorous, constant microscope that we have everybody under,'' says New York manager Waite. ''It's impossible to feel secure here.'' Which committee one sits on, or more important, chairs, is a not-so-subtle indication of where one stands in The Firm. It would be highly unlikely for someone to be elected managing director who isn't already a powerful committee chairman or major office manager. And all committee chairmen are chosen by the managing director, who, in turn, serves at the pleasure of the directors. Other than the governing shareholders committee, the various personnel committees are traditionally the most prestigious since they, in effect, preside over The Firm's up-or-out policy, which accounts for an attrition rate of about 17% a year. One of five consultants who join The Firm goes on to become a partner; one of ten makes it to director. Some leave because they don't like it; others go because they're asked. ''We have a process designed to produce a certain kind of person,'' says Gluck. ''To do that, we hire ten times the number we need.'' Beyond the obvious sin of losing valuable business -- which McKinsey barely admits to as a criterion -- numerous so-called value transgressions can bring down the ax, including a persistent lack of helpfulness to other partners or a self-promotion seen as too relentless. ''They may get arrogant,'' says Gluck, ''or they may just not be good enough. But the main cause is obsolescence. They don't spend enough time renewing themselves.'' Or they may make mistakes. Says Waite: ''Everybody makes mistakes, and we know that. But if you string a bunch together, that's no road to success.'' Or they may just get tired. The consensus inside The Firm is that a McKinsey consultant peaks somewhere around age 45, he gives up weighty committee responsibilities by his early 50s, and he must sell back his shares and settle into a reduced role by 60. When a partner's time comes, says Gluck, ''we say: We love you. We want to be your friend. We'll help you any way we can, but your partners don't think you're cutting it anymore.'' Gluck also admits that in recent years five partners have been dismissed for violating The Firm's strict code of ethics involving such issues as conflict of interest in investments -- the best evidence of all, he says, that you can trust McKinsey. Not all is peace and love within The Firm's family. Five years ago, 16 consultants left McKinsey's then 60-person Milan office, mostly in solidarity with a partner who had been forced out. ''We had a bad egg, and we took too long to get rid of him,'' says Gluck, who complains that even after the partner left ''the factionalism lingered.'' So much so that this year, when The Firm decided to rehire an ex-partner in Milan, some 15 more people left. Gluck has also learned the hard way that McKinsey's culture doesn't mix well with outside cultures. In 1989 he attempted a wholesale acquisition of talent in the information technology field by buying a small New York company, Information Consulting Group. ''It was really a nonevent,'' says Gluck of the $10 million acquisition. ''But you never saw such an uproar in The Firm. The organism tried to reject the transplant.'' Many of the ICG people have since left, though some have become partners, and Gluck argues that the attrition rate from the acquisition wasn't much higher than that of McKinsey overall. One theory as to why the McKinsey culture normally functions so well comes from a man who has worked for several other major consulting outfits as well as The Firm. ''McKinsey preconditions its culture to work through its hiring practices,'' he says. ''Basically they hire the same people over and over. At other consulting firms there's a lot more diversity.'' In fact, the vast majority of those who run the firm are men who graduated near the top of their class from one of seven major business schools -- Chicago, Harvard, Stanford, MIT's Sloan, Northwestern's Kellogg, Pennsylvania's Wharton, and Insead in France. Out of 465 partners, only 21 are women and just two are black; out of 151 directors, three are women. To which Ron Daniel, the former managing director who has done as much as anyone to shape the modern McKinsey, replies, in effect, so what? ''The real competition out there isn't for clients, it's for people,'' he says. ''And we look to hire people who are, first, very smart; second, insecure and thus driven by their insecurity; and third, competitive. Put together 3,000 of these egocentric, task-oriented, achievement-oriented people, and it produces an atmosphere of something less than humility. Yes, it's elitist. But don't you think there has to be room somewhere in this politically correct world for something like this?'' (A point of view even more revealing when you consider that Daniel is one of the few senior McKinsey directors who is actually a visible Democrat residing on the Upper West Side of Manhattan.) Nowadays, the younger directors at The Firm -- men like 37-year-old Larry Kanarek, who manages the Washington, D.C., office -- aren't shy about saying they want McKinsey to commit more seriously to diversity. Says he: ''We have to accelerate our drive to make this place more attractive for women and minorities, not only because it's the right thing to do but out of self- interest. What are we doing to our competitive advantage if we preclude ourselves from 50% of the talent out there?'' Recently, according to one partner, The Firm approached presidential first pal Vernon Jordan for help in formulating a strategy for expansion into South Africa. He was friendly enough until he asked the inevitable question: ''How many black partners do you have?'' After hearing the paltry answer, he is said to have replied, ''I'll try to help you, but for God's sake, man, if you want to do business in Africa get yourself some black partners.'' Along with questions of gender and racial diversity, some high-profile Firm directors are outspoken in their belief that, given the increasing demand for help in revolutionizing corporate cultures, McKinsey continues to overemphasize the ''quantitative'' in its hiring. In other words, ''Do you know how many service stations there are in Chicago?'' -- a traditional question somehow designed to demonstrate a candidate's problem-solving abilities -- may no longer be the most suitable query for potential hires. ''At McKinsey, hard guys are better,'' says longtime director Jon Katzenbach. ''Issues like organization and leadership are thought of as soft. Unfortunately, that's where client demand is increasing. We have major corporations asking us to help them change their culture; we need to make major changes in our own culture.'' McKinsey's dilemma, says Katzenbach, ''is that we're really good at tapping into intellectual smarts, as measured in quantitative and conceptual ways. But in our search for bright guys, we throw out a lot of creative ones. We've got to be less cookie-cutter in our hiring.'' A related dilemma: Traditionally, McKinsey has called itself a top- management consultant, steering away from what is dubbed ''implementation,'' the actual putting into place of a consultant's recommendations. This sort of work was viewed within The Firm as the proper venue for more ''proletarian'' consultants such as Arthur Andersen or A.T. Kearney. No longer. Says director Chuck Farr: ''Our value added today has to be that we make things happen.''
SENSIBLE ENOUGH, but a drastic departure for McKinsey. Says Steingraber of A.T. Kearney: ''All of a sudden we see evidence McKinsey is holding itself out as willing to work on implementation. But if you visit their clients, and go down a level or two below the CEO, you'll find they get black marks in this area. They're not good at achieving buy-in from the ranks. That arrogance they carry stirs up a lot of resentment.'' The men from McKinsey may be arrogant, but they've been badly whipped once before -- in the early Seventies -- and the senior directors haven't forgotten the experience. In those days the upstart Boston Consulting Group began boldly marketing corporate strategy ''products'' with scintillating names such as the growth-share matrix and the experience curve. McKinsey, which philosophically eschews ''flavor-of-the-month'' consulting ideas, stuck to its position of ^ merely marketing its allegedly superior intelligence. The Firm wound up watching BCG eat not only its lunch but its breakfast and dinner as well. All the partners still around from those days admit to feeling seriously threatened by the loss of business. ''We didn't renew our intellectual capital, we came to market with a dated product, and we got our ass handed to us,'' is an accurate quote synthesized from the collective comments of every single survivor from that era. ''Our young directors have never experienced anything humbling like that. We hope they won't have to.'' Some within McKinsey, like Katzenbach, believe that to avoid such a fate it may be necessary to start marketing ''product'' and try to sell the next big idea. ''My client is interested in a new flavor-of-the-month concept on high- performance teams,'' he says. ''I can sell him. The issue is: How do I sell my partners -- the classic skeptics?'' Mickey Huibregtsen of the Amsterdam office defends McKinsey's bias against such concepts: ''A lot of us feel that if the only tool you have is a hammer, everything starts looking like a nail. We are committed to knowledge building, but we reject the standard idea.'' For some time to come -- both before and after next spring's election -- the halls of McKinsey will be reverberating worldwide with debate on such issues. And as choices are made, and the McKinsey of the next century begins to unfold, no one will be paying closer attention than the man who set it all in motion more than half a century ago: Marvin Bower. Normally, the history of a hoary institution like McKinsey resides in a body of mythology passed down by several generations, carefully sculpted to invoke the spirit of some legendary founder. But in McKinsey's case, a quick trip to a retirement community in sunny Boca Raton, Florida, miraculously positions you face to face with the firm's fountainhead. At age 90 -- and still very clear-minded -- firm patriarch Marvin Bower is the living, primary history of McKinsey & Co. And much of what McKinsey is today harks back to the early 1930s, when Bower -- armed with both a law degree and an MBA from Harvard -- signed on with a hard-selling lawyer/ CPA/University of Chicago management professor named James Oscar McKinsey. On their office door, ''Mac'' McKinsey and his five partners -- one of whom was A.T. ''Tom'' Kearney -- called themselves ''consultants and engineers,'' but Bower remembers that in those days the firm mostly audited its clients' books. Mac McKinsey, however, was keen on the emerging science of management, and -- only a few years after he hired Bower and adopted him as his protege -- McKinsey left the firm to accept a temporary position running and restructuring Marshall Field & Co. Marvin Bower stayed on and ran the New York office of the promising little consultancy until 1937, when McKinsey surprised everyone by dying of pneumonia at 48. In the aftermath, Bower and A.T. Kearney disagreed over how to run the firm. In 1939 the two finally split up, with Kearney keeping the Chicago office and eventually naming it for himself -- A.T. Kearney & Co. -- and Bower naming the New York firm for his departed mentor -- McKinsey & Co. Like everything that Bower does, the tribute also had a practical purpose. ''I had seen the problems that having your name on the door caused Mac,'' Bower says. ''A client would come in and say, 'We assume Mr. McKinsey will be working on this study personally.' I didn't want anybody dictating to me how I was going to spend my time. So I had no interest in calling it Bower & Co., or even McKinsey-Bower. I wanted my freedom.'' Bower's ''big idea'' -- like most notions that create or transform entire industries -- was simple, one he still articulates in a short sentence: ''My vision was to provide advice on managing to top executives and to do it with the professional standards of a leading law firm.'' At a time when the image of management consulting was just barely above that of a racket, Bower, inspired by a brief stint at what is now the law firm of Jones Day Reavis & Pogue in his hometown of Cleveland, believed McKinsey could elevate it. Not unlike other great business culture builders -- IBM founder Tom Watson or Wal-Mart's Sam Walton, to name two -- Bower laid down a short set of principles, which, when recited to outsiders, sound a bit like the Boy Scout Oath. But also like those other two titans, Bower pounded his principles home so hard, so often, so repetitively, that they actually did finally define the institution. It is from them that the holy water flows. In short, the rules are these: A McKinsey consultant is supposed to put the interests of his client ahead of increasing The Firm's revenues; he should keep his mouth shut about his client's affairs; he should tell the truth and not be afraid to challenge a client's opinion; and he should only agree to perform work that he feels is both necessary and something McKinsey can do well. Along with the professional code, Bower insisted on professional, as opposed to business, language, which is why McKinsey is always The Firm, never the company; jobs are ''engagements''; and The Firm has a ''practice,'' not a business. Just as IBM's Watson had a thing for white shirts, Bower had one for hats, insisting that every McKinsey consultant wear one -- except in San Francisco, where executives didn't wear them. He also mandated that everyone wear long socks because he thought it inappropriate to show ''raw flesh'' in business settings. ''Everyone kidded me about it,'' he says, ''but they did it.'' Incredibly, the hat rule lived until the mid-1960s, when the men from McKinsey made a nod toward flower power and declared a permanent state of hatlessness. They still wear long socks. Another fascinating Bowerism that has stuck at McKinsey is the cultural attitude toward the public discussion of money. It simply isn't done. Even though those who knew him when describe Bower as among ''the most client- hungry consultants who ever lived,'' he vigorously maintained -- and still does today -- that ''if we do the right work for the client, we'll make more money if we don't think about it.''
WHILE SOME maintain that supersalesman Bower's anti-greed aphorisms always contained a certain amount of hypocrisy, he did perform one act in the history of The Firm that permanently set him -- and McKinsey -- apart from its competitors. In an era when other consultants were taking themselves public, or selling out to larger companies, McKinsey was basically Bower's to sell, which he could easily have done at some huge multiple of earnings. Instead, around the time he turned 60, in 1963, Bower sold his shares back to The Firm for book value, setting an example for his partners to follow. It was a defining moment in The Firm's culture. Bower still has strong opinions on several major issues facing today's McKinsey. He agrees with those who say The Firm overrates the analytical and underrates the intuitive in its hiring. And he comes down squarely on the side of those who believe McKinsey must remain a self-governing partnership, going so far as to add: ''Business should move in our direction. Command and control is out of date because it doesn't involve people, and you can't run a business today unless all the people are involved in thinking about serving the customer.'' Surprisingly, when asked to look back and describe which period in McKinsey's history has worried him most, Bower replies, ''Now.'' It is greed that he has on his mind. ''Have we grown too fast?'' he asks. ''Have we begun to think too much about money because we've got so much coming in?'' The danger, according to Bower, is this: ''People who make a lot of money get to thinking about having four homes to keep up, or maybe they want to buy a yacht. If an individual consultant has to make a professional decision on the spot and he has too many obligations, I worry that he is likely to make a decision to attract a client who shouldn't be attracted.'' Greed has had other consequences, according to some former McKinsey partners who left The Firm disenchanted. The seeds of internal discontent were sown in the early Eighties when, they say, McKinsey decided to make a big distinction between partners and directors. ''The message came in the early 1980s, when the directors all went off and partied with their wives, and the partners were sent stag to the Dutch coast for an all-training meeting,'' says one former partner. ''They obviously decided that to keep that generation of directors around, they had to pay them more to keep up with Wall Street and corporate America. Those were the guys who built the firm that's there today, and they've done a great job. But when they moved the carrot of director ahead a few years, a whole generation of younger partners left. And the younger partners who stayed weren't necessarily the best.'' These issues are exacerbated, ex-McKinseyites say, because the ratio of the highest paid to the lowest paid has risen from 20 to 1 in the past to 50 to 1 today. The top job -- Gluck's -- is believed by most in the industry to pay around $3.5 million, with senior directors earning between $2 million to $2.5 million. A junior director earns in the neighborhood of $800,000 a year, and a junior partner around a quarter of a million. So far, McKinsey's very lucrative economic engine has been driven by rapid growth. But competitors say The Firm has already realized that, with a revenue base now in excess of a billion dollars, it can hardly expect to keep tripling in size every decade. Its only choice, goes the argument they use when recruiting against McKinsey at the top B-schools, is to promote fewer partners and directors, thus making The Firm less attractive for up-and-coming young consultants.
Such talk makes Gluck furious. ''Even if our economics stay exactly the ; same, with no growth,'' he says, ''the economic opportunity for any young partner entering The Firm today is better than it's ever been before.'' Jim Balloun, who is scheduled to make a speech at the upcoming directors' conference on the future of The Firm, thinks the answer lies in hiring fewer associates to begin with. ''We already know our clients would like more contact with the partners. They've told us that,'' he says. ''So why not reduce the ratio of associates to partner to 3 to 1 from 6 to 1?'' Says another observer, who worked at McKinsey and two other consulting firms: ''I think the culture there is pretty fragile today. The question is whether the money is the mortar that holds the culture together, or vice versa.''
BY ALL appearances, McKinsey's dilemma is just another classic management challenge, one that calls for rigorous analysis and has high stakes riding on the outcome. Rest assured of this: If the men from McKinsey can't solve it, it won't be because they can't afford it, or because they haven't had enough experience, or because they aren't smart enough. It will be, more likely, because of what Marvin Bower has feared ever since he got into the consulting racket: because greed rears its ugly head.
April 22nd, 1994 Business Today Article:
WHAT TOOK RAJAT TO THE TOP
Several partners, consultants, and directors at McKinsey--as well as McKinsey's clients and alumni--were interviewed to identify the specific factors for Rajat Gupta's rise to the top:
- Intelligence: Was a brilliant student at IIT-D and Harvard
- Vision: Has always seen the big picture very quickly
- Integrity: No doubts about his dedication to his clients
- Track Record: Did exceptional work in Scandinavia and in Chicago
- Experience: Experience in India, Europe, and the US will be handy
- Loyalty: Has worked with McKinsey for 20 years
- Patience: Low-key approach is refreshing
- Hard Work: Willing to work at a problem until the job's done
- Team Play: Spends time building teams and working by consensus
- Creative: Uses unusual methods to arrive at solutions
- Open: Always available to offer advice
- Maturity: Is one of the youngest in most settings
- Humility: Has a down-to-earth approach and did not lobby for the job
Scandal taints McKinsey
Ex-CEO's insider tip-offs put firm's reputation, client roster at risk.
By Aaron Elstein
Updated: March 8, 2011 1:49 p.m.
In November 2008, with the world's financial system in free fall, Rajat Gupta made some strikingly prescient remarks. “Every organization is vulnerable to a sudden shock,” the former chief of McKinsey & Co. told an audience in Dubai. “There's only one thing that's predictable about crises: Sooner or later, almost every organization will endure one.”
It's McKinsey's turn.
The world's most prestigious management consultancy was shaken to its core last week when federal authorities charged Mr. Gupta with insider trading for giving a hedge fund manager confidential information about Goldman Sachs and Procter & Gamble when he served on their boards. The allegations--which Mr. Gupta's lawyer calls "totally baseless"--came a year after another McKinsey executive pleaded guilty to passing along tips to the same hedge fund. The cases are devastating for a blue-chip firm whose reputation rests not merely on providing corporate leaders with smart advice but also safeguarding their secrets.
“It's sickening,” said former McKinsey partner Gary MacDougal, now an independent adviser to state governments. “For those who know and love the firm, whose lives were transformed by it, this is very, very hard to deal with. It's like a death in the family.”
McKinsey partners are the high priests of capitalism. Armed with PowerPoint presentations, they tell businesses how to operate more efficiently or tell countries how to act more like companies. The terminology pioneered by what its employees reverentially call “The Firm” reaches deep into the corporate realm: McKinsey was the first to describe customers as “clients” and projects as “engagements.” Its 23,000 alumni include Morgan Stanley CEO James Gorman, former IBM CEO Louis Gerstner and former American Express CEO Harvey Golub.
More like a master key than a job
“A job at McKinsey is like someone giving you a master key—there's not a door in the world that doesn't open,” said Anat Lechner, a professor of management at New York University and a McKinsey alumna. “It's like working for Goldman Sachs, maybe even better.”
McKinsey became a force under the legendary Marvin Bower, a Cleveland lawyer who in 1939 acquired the 18-employee firm, which specialized in accounting and what was then called “management engineering.” Bower led it until 1967 and remained a presence until he died in 2003, at age 99.
“The thing that will cause people to come to us is because, like the doctor, they can put themselves in our hands and know we are going to treat them in their interest,” Mr. Bower told partners in a 1964 speech.
About two-thirds of the 1,000 largest companies now put themselves in McKinsey's hands for advice on strategy and solving complex problems. The firm's ethical compass steered it through the insider-trading scandals of the 1980s unscathed. It did take a public relations hit when Enron collapsed in 2001, because the energy giant was a prize client and its CEO a McKinsey alumnus who heartily endorsed the firm's theories about “loose-tight” management and “asset-light” portfolios. But that was a mere blip.
Between 1998 and 2010, Mc-Kinsey's revenues tripled, to $6.6 billion, and head count doubled to 17,000, according to Forbes data. Not even the economic collapse of 2008 affected the firm, with revenues growing 36% between 2007 and 2009, thanks partly to its restructuring business.
Yet McKinsey faced a challenge in “the war for talent”—a phrase it coined in 1997—as Wall Street pay reached the stratosphere. For instance, New York University M.B.A.'s recently reported that while those who went to consulting firms drew 17% higher salaries last year than those who went to investment banks or hedge funds, bonuses for the latter were nearly double those of the former.
The lure of Wall Street-like pay may be one reason that confidential client information began leaking out of McKinsey. According to his lawyer, Mr. Gupta didn't profit from passing along tips to hedge fund manager Raj Rajaratnam, whose trial is set to begin Tuesday. But, Anil Kumar, the McKinsey executive who in January 2010 pleaded guilty to insider trading, agreed to return $2.6 million in investment profits and cash payments from Mr. Rajaratnam.
Plenty of people at other highly regarded companies have violated their clients' trust for short-term gain. Executives at IBM and Intel have pleaded guilty to insider-trading charges brought as part of the sweeping federal investigation. Two former Deloitte & Touche partners were also charged with insider trading last year.
McKinsey has always seen itself as special, however. “Fundamentally, what we have is our reputation,” Mr. Gupta, who worked at the firm for more than 30 years, told a London audience in 2003.
The alumni are watching anxiously to see how much business heads out the door. Some believe McKinsey should begin a public campaign to make clear that it understands the seriousness of its problems and is working to resolve them. McKinsey declined to comment.
“This is not something you can easily move past,” Ms. Lechner at NYU said. “It's like your girlfriend lied to you. If she lied about one thing, maybe she's lied about other things.”
Clarification: Rajat Gupta's attorney denies all allegations against his client. That fact was not clear in an earlier version of this article, originally published online March 6, 2011.
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Why the Rajat Gupta scandal won't hurt McKinsey
October 26, 2011: 11:27 AM ETFORTUNE -- The perp walks continue. This morning, 62-year old Rajat Gupta, the former managing director of consulting powerhouse McKinsey & Company, turned himself into the FBI to face insider trading charges. Specifically, the feds allege that Gupta, in his role as a board member of Goldman Sachs, illegally passed on inside information to Raj Rajaratnam, a former hedge fund manager who was sentenced to 11 years in prison earlier this month.
Also this morning, Preet Bharara, the U.S. Attorney for the Southern District of New York, announced a six-count indictment against the former consulting luminary, while the SEC reinstituted a civil case it had previously dropped. The charges against Gupta mean that the reputations of two of the most influential firms in the world—McKinsey and Goldman Sachs—are up for another of their periodic rakings over the coals.
The anti-banking contingent of the media has focused on the "involvement" of Goldman Sachs (GS) in this case, with the hope that somehow this news tarnishes the Wall Street titan. Sorry folks, but that's unlikely. As a non-executive board member, Gupta was nothing but an outside advisor to Goldman, and his possibly having sold their secrets to his Sri Lankan pal Rajaratnam says nothing whatsoever about the bankers, except that they clearly picked the wrong man for their board.
Then there are those enjoying a little schadenfreude at McKinsey's expense. If Goldman reeks of moneyed arrogance, McKinsey reeks of intellectual arrogance—the latter capable of producing just as visceral a response as the former. Those who have competed unsuccessfully against McKinsey or perhaps been a victim of its well-known downsizing advice have been licking their chops at just what this means for the fabled consultancy itself.
Short answer: Not much. While researching my upcoming book on McKinsey—to be published by Simon & Schuster in spring 2013—I have spoken to several dozen of the firm's current and former consultants over the past year-and-a-half about the whole Gupta mess. They're mortified, to be sure. But their most valuable asset—their client list—has been sympathetic. Business hasn't suffered at all.
McKinsey's psychological hold on its clients actually beggars belief. When consultant Anil Kumar—a Gupta protégé—pled guilty to actually selling McKinsey client information to Rajaratnam early last year, you might have expected the firm to lose a significant swath of their clientele. Not so. The firm still counts as clients a number of companies whose information Kumar was selling.
In a conversation I had with a McKinsey alum who is now a high-level executive at one of Wall Street's largest players, he suggested that the biggest fallout vis-à-vis McKinsey from the Gupta debacle would be to the firm's own psyche. And he's right—there are few firms that become as intertwined with their employees' self-image as McKinsey, and the fact that one of its former leaders has quite possibly repudiated every important value a McKinsey consultant holds dear has caused internal soul-searching. Ask a client's CEO, though, and he will likely tell you this: every CEO goes to bed at night worrying about a bad apple in their ranks—be it a rogue trader or a rogue consultant. As long as it's just a rogue, though, and not a systemic cultural issue, then the response is far more likely to be pity than anger.
(See also Rajat Gupta: Touched by scandal from Fortune magazine last year.)
News of this story first broke almost a year and a half ago, when Gupta abruptly stepped down from Goldman's board. (He also stepped down from his board seat at Procter & Gamble (PG) Many at McKinsey supported Gupta in that "he's innocent until proven guilty" kind of way—but the shock was still palpable. When actual wiretaps emerged this March, the firm decided to cut off relations with Gupta entirely. Current managing director Dominic Barton personally called Gupta to tell him he was now persona non grata at the firm. Needless to say, Gupta was not happy.
Which brings me to my final point. If this doesn't mean much for Goldman or McKinsey, despite the urgent wishes of some, what does it mean for Gupta himself? I'd say it's only going to get worse form here. The indictment against Gupta, released this morning, is pretty damning. The man could barely put the phone down after telephonic board meetings ended at Goldman before speed-dialing Rajaratnam to (allegedly) give him the news. In one instance, it took him 16 seconds. In another 23 seconds. (The man is 62. Give him a break if he loses a step or two as time passes.)
Specifically, the government has alleged that Gupta told Rajaratnam about Warren Buffett's $5 billion investment in Goldman in September 2008, after which Rajaratnam quickly bought Goldman shares. Second, that Gupta tipped Rajaratnam about Goldman's first-ever quarterly loss as a public company in October of that same year.
According to the Wall Street Journal, Gupta's lawyer Gary Naftalis has drawn a very clear line in the sand when it comes to his defense. Gupta "did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo," Mr. Naftalis said.
Here's where this kangaroo court comes out on those claims. One: he probably didn't trade in any securities. That's too bad for him. If he had, he might be using some of those profits to pay for his own defense. Two: he almost certainly did tell Rajaratnam things he shouldn't have. On October 24, 2008, for example, wiretaps had Rajaratnam telling a colleague "I heard yesterday from somebody who's on the board of Goldman Sachs that they are going to lose $2 per share. The Street has them making $2.50."
The most interesting part of Gupta's apparent defense revolves around what one means by the word "profit." Naftalis keeps repeating that because Gupta never received any money or direct benefits from Rajaratnam, he can't possibly be guilty of insider trading. Naftalis is being a lawyer here, and nothing more. Because he was technically an insider, Gupta will likely be charged in the "classical" definition of insider trading, where pecuniary benefit is a necessary prerequisite to guilt. But there's precedent in other kinds of insider trading cases—the so-called "misappropriation" type—in which "personal benefits" can mean much more than money.
Which brings me to the obvious fact about Gupta, and, by extension, McKinsey. Unlike the Wall Street trader who wants nothing but money, Gupta was a consultant. And the coin of consultants is influence, not cash. Unfortunately for Gupta, the man whose influence he was currying is now in jail. Perhaps Rajaratnam will be able to do him some favors if they find themselves on the same cellblock.
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