The revelation that there may have been a “third man” at McKinsey with connections to the alleged insider trading schemes of Galleon founder Raj Rajaratnam casts a shadow across the reputation of the famous consulting firm. How deep does the corruption run?
Eric Piermont | AFP | Getty Images
Rajat Gupta
If the allegations by the Securities and Exchange Commission against former Galleon chief Rajat Gupta are true, we know that McKinsey was lead by a man who was willing to betray the very corporations who had entrusted him to sit on their board of directors. It would mean that for nearly a decade McKinsey was led by a deeply corrupt man.
Another former McKinsey partner, Anil Kumar, has already pleaded guilty to passing information to Rajaratnam in return for bribes.
Now a third man has been brought into the mix. Kara Scannell of the Financial Times reports:
Jonathan Streeter, a federal prosecutor, told the jury that they would hear a recording of a phone conversation Mr Rajaratnam had with his brother “talking about plotting to get inside information from a consultant at McKinsey”. He said Mr Rajaratnam tried to get the person, described by the hedge fund trader as “dirty”, to “play ball” by possibly placing the person’s wife on the Galleon payroll.
Clients of McKinsey have to be wondering if the famous consulting firm has devolved into a snakepit.
“Three McKinsey consultants all channeling confidential information to a single hedge-fund manager who wasn’t even a client? That’s not bad apples, it’s a culture of corruption. At this point it’s unimaginable that it wasn’t happening elsewhere as well,” Felix Salmon writes.
John Gapper at the Financial Times warns that “McKinsey now faces a crisis of corporate reputation which it needs to address in order to avoid its brand being badly tarnished.”
It may seem extreme to draw conclusions about an entire firm from the actions a few individuals. But it’s not. Individuals at the top set the tone and establish the culture of a firm. When they are morally compromised, the ethics of the firm rot. Far more than any regulation or official supervision from government authorities—it’s the ethics embodied by a firm’s leadership that will determine whether the firm as a whole is ethical.
Take Lehman Brothers. It’s more than apparent that the personal character of Dick Fuld had a lot to do with the shenanigans that helped accelerate that firm’s demise. And Fuld’s dishonesty was apparent early on. According to former executives, back when Lehman was owned by American Express, the bond traders were required to report their daily profits and losses to the “upstairs” management.
Afraid that the American Express executives would become aware of how much risk the traders were taking, the traders started fudging the numbers. On days they made a lot of money, they didn’t report all of it. On days when they lost money, they concealed the losses with the unreported profits from the prior day. It made the daily profits and losses look smooth. They called it “Dick’s Reserve.”
Is it any wonder that decades later, Lehman executives would be discovered to have used accounting gimmicks to make the firm’s balance sheet look healthier than it was?
Gupta’s lawyer says he hasn’t done anything wrong. Rajaratnam pleaded innocent of the charges against him. We don’t know who this “third man” is.
But right now, McKinsey is looking very, very bad. If the corruption started at the top, it's a good bet it spread throughout the firm.
_______________________________________
Questions? Comments? Email us atNetNet@cnbc.com
Follow John on Twitter @ twitter.com/Carney
Follow NetNet on Twitter @ twitter.com/CNBCnetnet
Facebook us @ www.facebook.com/NetNetCNBC
