From Forbes, Peter Cohan ,
McKinsey alumni lead many organizations.
Sadly for the firm’s reputation at least three of those executives — Valeant’s to-be-replaced CEO, Michael Pearson; Enron’s former CEO Jeff Skilling, and McKinsey’s former Managing Partner, Rajat Gupta — have run into significant problems.
This brings me to a question: Is the conduct that trashed the reputations of these alumni a McKinsey bug or a feature?
Before getting into this question, a disclosure – in business school I received a job offer from McKinsey’s New York office and chose to work elsewhere.
But I still had the benefit of many of McKinsey’s great ideas — not the least of which isThe Pyramid Principle — a technique developed by Barbara Minto who taught it to me.
The idea is that CEOs face hundreds of possible issues on which to focus their attention.
Minto advocated that decision-makers consider three topics to pick the most important one:
It is no accident that I framed the start of this blog along the lines that Minto suggested (though the question I selected should have had a yes/no answer to be consistent with her approach).
To answer that question, it is worth pointing out that McKinsey alumni occupy prominent leadership positions.
According to Duff McDonald’s 2013 book, The Firm, “A few years ago, more than 70 past and present CEOs of Fortune 500 companies were McKinsey alumni, and in 2011 more than 150 McKinsey alumni were running companies with more than $1 billion in annual sales. A 2008 study by USA Today calculated that the odds of a McKinsey consultant becoming CEO of a public company were the best in the world, at 1 in 690.”
Among these is Morgan Stanley CEO, James Gorman, a former McKinsey senior partnerwho has presided over a 22% decline in its stock price since taking over in January 2010
There are three other prominent business leaders who are McKinsey alumni (none were partners) and two of them — Google CEO Sundar Pichai and Facebook COO Sheryl Sandberg — still enjoy good reputations.
The third — Credit Suisse CEO since July 2015, Tidjane Thiam – enjoys a prominent position but it seems that he is presiding over some unpleasant surprises at the investment bank he runs.
Thiam said last month that he was caught off guard by large, risky positions by the bank’s traders and did not learn of the problems — that forced the bank to take $1 billion in writeoffs – until January 2016, according to Bloomberg.
But Credit Suisse’s Chairman, Urs Ronner, said on March 31 that “Credit Suisse managers were aware of the trading positions,” according to Bloomberg.
But let’s look at the travails of three former McKinsey partners.
Valeant, the Quebec-based drug company that’s restating its financial results, in negotiation with lenders from whom it has borrowed $30 billion, and under investigation by regulators, has suffered a 73% plunge in its stock price in 2016, according to the Economist.
But Valeant — whose former CEO, Michael Pearson worked at McKinsey for 23 years, describes itself as “bringing value to our shareholders.”
Pearson’s McKinsey career was capped by years as head of its pharmaceuticals practice. His theory about the industry was that ”it wasted too much money not just on R&D but also on personal secretaries, public relations, and investment banking advice,” according to Bloomberg.
Valeant asked Pearson what to do and he suggested it “cut its research spending, to concentrate first on dermatology and then on growing through acquisitions,” wroteBloomberg.
Valeant offered the CEO job to Pearson which he took in 2008. As Bloomberg reported, he acquired other drug companies, cut staff, raised drug prices, and got Valeant into a complicated relationship with mail order pharmacy, Philidor.
After he graduated from Harvard Business School, Rajat Gupta joined McKinsey as a consultant and rose up the ranks to become its managing partner.
But with one quick phone call in September 2008 Gupta threw much of it away. And the results of that decision led him in June 2014 to FMC Devens in Ayer, Mass. where he sat until his early release on January 5 to detention with an ankle bracelet at his home in Westport, Conn.
Gupta was released from that a few days early on March 11, according to IndiaWest.
A Kolkata, India native, Gupta was orphaned as a teenager. He graduated with a B. Tech in Mechanical Engineering from India Institute of Technology, Delhi in 1971 and entered Harvard Business School – graduating with an MBA in 1973 after which he spent 34 years at McKinsey.
He became Managing Partner in 1994 and held that position until 2003, leaving the firm in 2007.
Along the way, he was a member of the board of public companies like Goldman Sachs and Procter and Gamble. But in June 2012, “he was convicted of insider trading and sentenced [in October 2012] to two years in jail and a $5 million fine,” according to theEconomist.
Gupta could have faced eight years in jail; however, Judge Jed Rakoff let Gupta off with a relatively light sentence. Rakoff said that “Gupta is a good man. But the history of the country and the world is filled with good men who do bad things,” noted the Economist.
Gupta was convicted of calling Raj Rajaratnam, a former hedge fund manager who is serving an 11 year sentence at FMC Devens, to share a market-moving piece of information he had just learned in a Goldman Sachs board meeting.
Rajaratnam – in whose hedge fund Gupta had invested $13 million, according to the Times, used the information leaked to him by Gupta 23 seconds after leaving a Goldman board meeting – that Warren Buffett had agreed to pay $5 billion for preferred shares of Goldman Sachs – to buy 175,000 Goldman shares ahead of the 6 p.m. public disclosure of that news – yielding Rajaratnam a $1.2 million profit, according to the Financial Times.
Enron’s former CEO Jeff Skilling – now serving a 14 year prison sentence (reduced by a decade) for cooking Enron’s books from which he will be released in 2017 – was a former McKinsey partner.
Skilling oversaw a human resources policy that featured high turnover in employees, investment in hiring highly-pedigreed talent and off-balance-sheet financing.
Skilling also hired McKinsey to architect Enron’s decade-long expansion from a natural-gas-pipeline company into a complex trader of water, timber, and high-speed broadband.
A McKinsey senior partner, Richard Foster, attended six Enron board meetings between October 2000 and October 2001, according to the Guardian.
Should you invest in a company that’s run by a former McKinsey partner?
You might not want to invest, but these three examples suggest that you could trade.
The strategy? Buy shares on the announcement of that CEO’s appointment, enjoy the rapid run up in the stock price, and then sell when the CEO’s face graces the covers of the leading business media outlets.
Remember two things they might not teach you at McKinsey: