The firm heretofore has managed to avoid being tainted by scandal even when its fingerprints were all over a corporate crime scene.
By Yves Smith and cross-posted from Naked Capitalism
The New York Times published a major story yesterday on how the consulting powerhouse McKinsey got itself eyeball-deep in a corruption scandal in South Africa that has become the focus of a major government investigation. It has led major multinationals operating in South Africa like Coca Cola to cease doing business with McKinsey there.
Among other things, as the Times explains, the firm got about $100 million in performance payments for performance that may not have even occurred from a state-controlled energy company Eksom. It got the assignment in connection with a local partner that was controlled by an Indian family, the Guptas. The Guptas in turn used their connections with then South African president Jacob Zuma to loot various state-owned entities. Oh, and on top of everything else, McKinsey’s contract was illegal.
McKinsey no doubt hoped the scandal would not get that much play outside Africa, despite its size and the fact that there is no way McKinsey can pretend to distance itself from what happened. The Financial Times has run some good pieces on the scandal as it unfolded, and if my recollection is correct, at least one was a lead story, but this is apparently the first account that covers the full terrain of the scandal and focuses hard on what decisions and actions various members of the firm took.
At the end of this post, we’ve reproduced the text of an e-mail McKinsey sent to former partners right before the story went live. You can see how defensive and aggrieved it is. It insinuates that the famously business-friendly Times has an anti-globalist, anti-commerce agenda.
It is also notable what this e-mail does not do: it does not discuss any reforms that McKinsey has put in place to prevent this sort of misconduct from happening again. It instead fixates on the progress the firm has made in “restoring our reputation.” The former partner harrumphed about the tone-deafness of the close, which was hand-wringing that the Times had the bad taste to release their expose “we approach Values Day in many parts of the world.” As he put it, “If you have values one day of the year, you don’t have values.”
McKinsey heretofore has managed to avoid being tainted by scandal even when it had its fingerprints all over the crime scene. McKinsey was the moving force being what may still stand as the biggest value-destroying acquisition of all time, Time Warner’s purchase of AOL. The board turned down McKinsey’s “dare to be great” speech in favor of the deal four times. Unfortunately, it relented on McKinsey’s fifth go. McKinsey was also deeply involved in Enron, to the degree that it was touting Enron as a model. Many alumni have remarked to me that they don’t understand how McKinsey escaped being dragged into investigations.
More recently, McKinsey has tried to shrug off important stories by Pulitzer Prize winner Gretchen Morgenson, now at the Wall Street Journal, and Tom Corrigan, on how McKinsey has become heavily involved in advising parties to major corporate bankruptcies, yet has routinely flouted legal requirements to disclose conflicts of interest, including investments by its in-house retirement funds…