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Will Rajat Gupta Destroy McKinsey?

Wednesday, 2 Mar 2011 | 11:22 AM ET
Rajat Gupta
Umesh Goswami | The India Today Group | Getty Images
Rajat Gupta

McKinsey & Co is reeling from the revelation that the Securities and Exchange Commission believes one of its most high-flying alumni gave corporate secrets to a hedge fund manager who is now accused of being at the center of a large and complex insider trading scheme.

For a firm that thrives on its reputation, proximity to misdeeds of this sort could be fatal, according to former McKinsey consultants who spoke on the condition of anonymity.

Rajat Gupta stands accused of violating insider trading rules by leaking confidential information about two companies—Procter & Gamble and Goldman Sachs —on whose board’s he was serving. So far a lot of the public attention has been focused on Gupta’s roles at Goldman and P&G.

But Gupta has a far longer and more important connection to the world’s most prestigious consulting firm, McKinsey. He worked at the firm for 34 years, eventually rising to become its managing director—the McKinsey equivalent of chief executive. He was elected to the top job at McKinsey by his fellow partners at the firm for three consecutive terms—the maximum allowed by the firm’s rules.

Now some of those partners and other consultants feel betrayed and baffled that the man they trusted to run McKinsey. The McKinsey alumns and staff are a tight knit group, who literally refer to their firm as “The Firm”—like Harvard Law School graduates refer to their school as “The Law School.”

“If true, it’s an absolute betrayal,” were the words that one former McKinsey consultant used.

McKinsey’s clients are attracted by its reputation for excellence and discretion—and its stellar network of alumni. Its consultants often refuse to even disclose who their clients are.

If the charges against Gupta prove true, it could be a mortal threat to the firm. Even if there’s no evidence that confidentiality was breached while Gupta was at the firm, being led by a man who would later leak insider information would be devastating. If Gupta is shown to have engaged in similar actions while he was at McKinsey, that could be the end for the Firm.

“At that point, I think we go the way of Arthur Anderson,” another former McKinsey consultant said, referring to the once-prestigious accounting company brought down by its connections to Enron.

If you ask McKinsey consultants about the culture of the firm, they always bring up Marvin Bower. He ran McKinsey in the 1950s and 1960s and is regarded as a paragon of ethics and professionalism. He helped elevate consulting into a serious and prestigious profession, rivaling law, investment banking and accounting for the top graduates of top universities.

“If the charges are true, Gupta has brought shame and dishonor to the house of Bower,” one person said.

“It’s very, very bad for the firm, no matter what happens,” another person said.

In fact, because McKinsey depends so heavily on its stellar reputation, it could suffer more than most firms from an insider trading scandal.

“For the former boss of such a firm to be found double-dealing would deal a more profound reputational blow than the usual insider-trading scandal. Traders and hedge-fund types are expected to scrap for every bit of momentary advantage to make their money… But elite consultants, and McKinsey foremost among them, consider themselves in a different class,” a writer for the Economist’s Newsbook explains.

Ironically, McKinsey might want to look to its own client advice to weather this storm.

In June, 2009, McKinsey published an article in the McKinsey Quarterly entitled “Rebuilding Corporate Reputations.” It advised financial services companies on what to do in the wake of the financial crisis. It might be time for McKinsey to start rebuilding its reputation now—before any serious damage is done.

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