When McKinsey Comes to Town: The Hidden Influence of the World's Most Powerful Consulting Firm

by Walt Bogdanich

John J. Lawler, who taught in the University of Illinois’s School of Employment and Labor Relations, believes management consultants mainly serve to legitimize the goals of their clients.85 “Clients like to be told they are doing the right thing,” Lawler said, adding that management techniques viewed as best practices “are very often propagated by consulting firms and thus these techniques become largely institutionalized in the business world.”

McKinsey was not held to account for what happened at U.S. Steel and Disneyland. No one sued the firm. No government agency accused it of wrongdoing. Consultants were simply doing what they were paid to do: give advice, not orders. As a result, if something bad happened, the spotlight didn’t shine on them. They took no credit publicly when their clients did well, and for years they accepted no blame when their recommendations sent companies off the road into the ditch.

his transformative moment occurred when he was assigned to help a client fire fifteen hundred of its employees worldwide—“not because it was struggling, but because they wanted to make more money,”43 Karma said. “Get them out of the door as quickly and efficiently as possible without any litigation.”

McKinsey isn’t eager to advertise its reputation as the consulting industry’s most prolific job slasher.

“All too often in the choice between the physical health of consumers and the financial well-being of business, concealment is chosen over disclosure, sales over safety, and money over morality. Who are these persons who knowingly and secretly decide to put the buying public at risk solely for the purpose of making profits and who believe that illness and death of consumers is an appropriate cost of their own prosperity.”25 For his strong words, Judge Sarokin was removed from the case.

McKinsey also consulted for a group widely viewed as a tobacco industry front group—the Foundation for a Smoke-Free World.71 Founded in September 2017, the nonprofit organization asserted that its goal was to reduce deaths and disease from smoking while assuring potential donors that its board was independent with no ties to the tobacco industry. That statement was noteworthy for what it did not say—that Philip Morris International started the group with donations of $8.4 million.72 Of that, more than $400,000 went to McKinsey.73 PMI was the group’s sole donor, and McKinsey was the sole consultant.

Giridharadas called it “the Aspen Consensus,” a belief that “the winners of our age must be challenged to do more good.”13 But there was a caveat, he said. “Never, ever tell them to do less harm. The Aspen Consensus holds that capitalism’s rough edges must be sanded down and its surplus fruit shared, but the underlying system must never be questioned.”

just like with tobacco, any work done for fossil fuel companies over the last quarter century by the highly educated cadre of McKinsey consultants was done with the full knowledge that the product their client sold was irreparably harming the world.

“Turning a coal mine into a diamond in 6 months.” Set to peppy music, the video, since taken down, describes a recent McKinsey job for what appeared to be an Asian client that resulted in a coal mine increasing production by 26 percent, he said.

he declined, in keeping with the McKinsey policy that allowed consultants to turn down assignments if they had ethical qualms. But in passing on the assignment, Edstrom lost a chance to build ties with senior managers, and that ultimately led to more time “on the beach,” McKinsey-speak for a consultant with no client work. Edstrom believed the policy of letting consultants opt out of projects on ethical grounds was a cop-out, freeing McKinsey as a whole from taking a stand.

Edstrom questioned his superiors about the disconnect between McKinsey’s public statements about curbing carbon emissions and its work with coal companies. In response, he was told, “If we don’t serve coal clients, BCG [Boston Consulting Group] will.”

“There is a commonly used phrase for hypocritical eco-marketing used to make a business or product appear more ‘sustainable’ than it actually is: ‘greenwashing.’”

McKinsey would continue to serve the big polluters because, they said, the firm couldn’t help them decarbonize if they didn’t have a relationship. “How can we not serve fossil fuel clients if we’re going to be relevant?”

The consultants recommended weakening parts of the Sarbanes-Oxley Act of 2002, a law designed to prevent the type of corporate fraud that resulted in the bankruptcy of Enron, at the time the biggest in U.S. history. Enron’s chief executive, a former McKinsey senior partner, went to prison for his role in that scandal. Barely a year after Schumer and Bloomberg showcased the McKinsey report, it disappeared. And no one wanted to resurrect it as Wall Street slipped ever more deeply into an economic abyss not experienced since the Great Depression. News articles, bestselling books, and award-winning documentaries have explored the origins of this catastrophic breakdown. The culprits are many: bankers with a lust for bigger profits, regulators ignoring those they were supposed to protect, and compromised politicians. These autopsies seldom mention McKinsey.

In 1967, Walter Wriston, the new chief executive of New York’s First National City Bank, concluded that his institution—better known as Citibank—had outgrown its old organization. He asked his close friend the management expert Peter Drucker what he should do. Drucker said he should hire McKinsey, and he did just that. The consultants recommended reorganizing the bank around business sectors, like corporate or retail banking. The McKinsey partner Dick Neuschel warned Wriston the change would turn the bank’s staff against each other. “You don’t have the guts to do that,”12 Neuschel said. Wriston thought that was a bizarre and annoying sales pitch, but hired McKinsey anyway. The day the McKinsey men walked through the doors of Citibank at 399 Park Avenue, the days of the 3-6-3 rule had effectively ended. On Christmas Eve 1968, Citibank started rolling out the McKinsey plan.13 Fifteen months in the making, it organized the bank into functional rather than geographic lines, with new divisions for big corporate accounts, small and medium-sized businesses, and retail customers. The system was called “matrix management,” and Drucker likened it to “trying to play basketball, tennis, and soccer on the same court with the same people at the same time,”

measured solely by profit growth, McKinsey’s work was a success. In 1972, Citibank, with its McKinsey-designed organizational structure, overtook Bank of America as the most profitable American lender.15 McKinsey was soon selling matrix management to banks across the country, including to David Rockefeller’s Chase, Wriston’s archrival.

McKinsey’s banking work earned the ire of Paul Volcker, the Fed chairman at the time of the Continental rescue, who quipped to the president of the Federal Reserve Bank in Dallas that “in his day he knew a bank was headed for trouble when it grew too fast, moved into a fancy new building, placed the chairman of the board as head of the art committee, and hired McKinsey & Co. to do an incentive compensation study for senior officers.”25 The

Fed chairman wasn’t alone in questioning McKinsey’s advice. Warnings were coming from inside the firm as well. In their book In Search of Excellence, Tom Peters and Bob Waterman wrote that the best companies avoided using the matrix or had abandoned it. Calling it “the modish but quite obviously ineffective structure of the seventies,”

Lowell Bryan thought he had a solution, an idea so big that in the annals of financial history it ranked right up with the invention of double-entry bookkeeping in fifteenth-century Venice. If McKinsey could own this new idea—he called it a “technology”—banks all over the world would be clamoring to hire the firm. Bryan’s big idea: the securitization of credit. While he did not invent securitization, he became one of its biggest, most visible promoters.

In 1968, Fannie Mae, a company created by an act of Congress to promote home ownership, was given the power to buy up conventional home mortgages from banks, bundle them into tradable securities, and sell those securities to investors.36 It injected a big shot of liquidity into the mortgage market.

McKinsey consultants began churning out articles and books that extolled the benefits of credit securitization. In 1988, the firm published Bryan’s Breaking Up the Bank, which put securitization at the center of a completely overhauled banking system. A second book, Securitization of Credit, by the McKinsey consultants James Rosenthal and Juan Ocampo, offered a how-to guide for companies and banks that wanted to employ the “technology.” The McKinsey trio of Bryan, Rosenthal, and Ocampo also published journal articles that would soon be cited by the Federal Reserve as it explored the new phenomenon of securitization. The Journal of Applied Corporate Finance devoted its Fall 1988 issue to securitization, with McKinsey consultants writing three of the nine articles.38 Securitization, Bryan said, could free companies—not just banks, but any company—from the straitjacket of their balance sheets.

There were, of course, the obligatory notes of caution. Bryan acknowledged that securitization wasn’t simple.43 Its success depended on the competence and, to some extent, the good faith of all parties and that “if too many deals are poorly underwritten and if large defaults and losses result, this promising new technology could, at worst, hasten a credit collapse.”

“In theory, securitization should serve to reduce credit risk by spreading it more widely,”58 Secretary of the Treasury Tim Geithner and Larry Summers, Obama’s top economic adviser, wrote in 2009 as they were making the case for new regulations. “But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.”

“Securitization was based on the premise that a fool was born every minute,”61 Joseph Stiglitz, the Nobel Prize–winning economist at Columbia University, said in October 2008. “Globalization meant that there was a global landscape on which they could search for those fools—and they found them everywhere.”

Central to the goal of reducing payouts was preventing policyholders from hiring lawyers, she said, because “represented” clients on average got payouts multiple times bigger than claimants who didn’t hire legal help. “We were told that Allstate was going to change the way claims were handled so that claimants could not get lawyers,” Reed said. In other words, beat down the opposing counsel by fighting every motion in court, making it so time-consuming and expensive that lawyers would reconsider filing suit against Allstate. This was the “boxing gloves” part of the strategy. “More people without representation would mean larger profits for the company,”16 she said. McKinsey was telling Allstate to turn its claims center into a profit center. The words merit italics because what McKinsey did at Allstate fundamentally altered America’s insurance industry.

At Allstate, profit soared more than sixfold in the decade after McKinsey’s program was put in place. Its share price more than quadrupled, handily beating out the broader markets. The pay of Allstate’s top five executives, tied to the share price just as the McKinsey partner Arch Patton had envisioned half a century earlier, shot up.

Meanwhile, the percentage of premiums paid out on claims declined. Allstate executives and shareholders were becoming fabulously rich by reducing payouts, preventing many policyholders from getting all the money to which they were entitled.

Congress wanted to know whether policyholders were being harmed by Allstate’s quest for higher profits. In 2007, J. Robert Hunter, an insurance expert with the Consumer Federation of America, told members of the Senate Judiciary Committee that McKinsey’s advice was leading to lower claims payouts. Hunter urged the committee to examine whether hiring the same consultant—McKinsey—was tantamount to collusive behavior on the part of insurers, who have a limited exemption from antitrust laws. Few private-sector industries get such exemptions.

special purpose vehicle called Cactus, which removed debt from the company’s balance sheet.18 Enron bundled $900 million in loans that it had promised to pay natural gas producers, securitizing the lot and selling it off to investors, including General Electric.

While McKinsey was never implicated in Enron’s illegal activity, many inside the firm and out wondered why such smart people could not grasp the danger of becoming so deeply involved with a company that had difficulty explaining exactly how it earned money. Keeping Enron as a client also raised questions about the quality of the firm’s risk managers, a vulnerability that would surface over and over in the following years.

In time, Enron’s remarkable success was revealed to be little more than an illusion. The company collapsed after the public learned that its finances were based “on a web of fraudulent partnerships and schemes, not the profits it reported to investors and the public.”20 McKinsey’s official history put the best face on the scandal, calling it “a black comedy, in which the firm begins as a sober advisor, becomes enthusiastic advocate and ends up as one of the many unwitting victims.”

The firm advised one of the world’s most famous sports books, William Hill, which paid the firm in recent years almost $40 million, according to company records.24 In that same period McKinsey also took in $14 million for advising Caesars Entertainment, the giant casino operator. Caesars eventually bought William Hill,

Had the players known all that McKinsey was doing, there might have been greater dissension not only on the team but around the league. Former QuantumBlack employees told the authors of this book that they were secretly using medical information to predict lower-body injuries. “It was very hush-hush internally at the team, working directly with the team doctor,” one former consultant said. “They didn’t want the players to know.” Should a player be identified as likely to be injured, the consultant said, that could impact contract negotiations.

A new generation of video equipment produced massive amounts of granular data on every pitch and every batted ball. As a result, some long-held assumptions about how to win games were challenged. Now batters were instructed to hit the ball to certain parts of the field, and to swing up to produce more home runs. Pitchers were told to spin the ball more, creating movement that made the ball more difficult to hit. The most extreme practitioners of baseball analytics believed that the entire game could be reduced to numbers, uncontaminated by human sentiment, emotions, or, as it would turn out, even ethics. The question lurking beneath all this was at what point does data analysis cross over from helping athletes perform better to dehumanizing their sport.

Meanwhile, McKinsey, recognizing that it had saddled the wrong horse, retracted the article praising Luhnow’s “analytics, organization, and culture.” Rather than own up to its poor judgment, the McKinsey Quarterly offered this lame and largely fact-free explanation: “‘How the Houston Astros are winning through advanced analytics’ was removed in light of subsequent developments suggesting that factors beyond data analytics were significant contributors to the Astros’ success.” In other words, they cheated.

Bell Pottinger, one of London’s most influential public relations firms, fanned racial divisions in South Africa in a ploy to divert attention from a client’s corrupt public contracts.22 The publicists did this through fake Twitter accounts and by stirring anger about “white monopoly capital”23 in South Africa.

Almost overnight, the purchase price jumped nearly $1 billion. Fine said the higher payments involved “extraneous factors which in many cases are impossible to explain.”53 In fact, he added, “they are not explainable.” Another McKinsey senior partner was incredulous. “I’ve never heard that the price goes up after negotiations,”54 he said. “You have an offer on the table and the executive negotiates the price upwards?” McKinsey was not blameless in this fiasco. The firm had overestimated consumer demand for the locomotives, causing Transnet to buy overpriced locomotives that it didn’t need.55 Unlike Transnet, however, McKinsey actually profited off its flawed forecast by securing the job of fixing the problem it helped to create. Its new assignment: cut costs and boost revenues.56

Douglas told of a bizarre request a couple of years earlier from Vikas Sagar to help write someone’s MBA thesis. That someone turned out to be Siyabonga Gama, the notorious chief of the freight rail group when McKinsey worked on the locomotive procurement. Although Douglas expressed reservations, he went ahead and wrote at least two chapters with assistance from McKinsey personnel. For his work, Douglas received around $7,000 billed to two different Transnet accounts, not including the value of contributions from other McKinsey employees. McKinsey immediately recognized the specter of a possible violation of the U.S. Foreign Corrupt Practices Act

Sagar, by dint of his personality, preferred to deal one-on-one with clients, excluding even his colleagues.65 Office elders warned Sagar that acting alone was irresponsible, but they mostly looked the other way. If Sagar’s methods contributed to higher year-end bonuses for partners, then they were willing to accept his unorthodox practices.

committee considering whether McKinsey should get paid based on the impact, such as a percentage of achieved cost reductions. The panel called that unwise, because it might incentivize the firm to tell clients to reduce costs when that was not in the client’s interest. “Doing that,” Skilling said, “could destroy”80 the firm. McKinsey eventually rejected that view because clients asked for it and competitors were using it.81

To press the issue, Fine arranged two meetings with Sagar and Wood at Tashas, a restaurant in Melrose Arch, an island of high-fashion retail stores, alfresco dining, a hotel, a gym, and business offices. “Who are the investors?” Fine demanded. Wood responded with a few names. Upon googling those names later, Fine became even more concerned. They were politically connected, he concluded. The idea that McKinsey’s due diligence on one of its biggest projects consisted of a partner googling names showed how ill-prepared the firm was to take on this assignment.

Budlender demanded an explanation. Benedict Phiri, a McKinsey lawyer, said he would discuss the matter with his colleagues and get back to him. Week after week went by with no reply, despite frequent reminders from Budlender. Finally, two and a half months later, McKinsey said it would be “inappropriate” to respond to Budlender’s “informal”101 inquiry.

The National Prosecuting Authority turned up the heat by publicly condemning McKinsey for enabling corruption. The NPA concluded that the firm had been instrumental “in creating a veil of legitimacy to what was otherwise a nonexistent unlawful arrangement.”

Barton’s successor, Kevin Sneader, thought it was important to visit Johannesburg, where he hoped to extinguish any remaining embers of anger. Speaking to a business group early on a Monday morning in July 2018—two weeks after The New York Times published a critical article about the firm’s work in South Africa—Sneader used the word “sorry”119 eleven times. “The stories written about us in South Africa hurt deeply as they strike at what we value more than anything else—the trust we have built with our clients through the judgment, character, and reputation of our people.” Sneader admitted that McKinsey was too distant to grasp the rising anger in South Africa. “Our governance processes failed. Our commercial approach led to a fee that was too large. We did not admit we were wrong. And worse, we did not say sorry quickly enough and clearly enough.”

McKinsey sought to defuse the discovery of the two additional tainted contracts by agreeing to a commission request to refund more than $40 million from those contracts—even though the firm and the commission asserted it was not complicit.135 That elicited praise from the commission for being a “responsible corporate citizen.”136 Together with the Eskom refund, McKinsey was now on the hook for more than $100 million. The commission’s praise angered David Lewis, executive director of Corruption Watch, a South African advocacy group. “To pay back your fee simply because you were caught with your bloody hands in the till is, frankly, not restitution,”137 Lewis said. “They are involved in such dodgy activity across the world that I think there are grounds to remove their license to operate, certainly in this country. That would be the appropriate level of reparation.”

Indeed, the firm’s revenues almost doubled in a decade to more than $10 billion, prompting The Economist to conclude, “The firm’s employees revel in the aura of the old McKinsey—of autonomy, discretion and intellectual prestige—while embracing the growth, profits and power that have come in more recent years. Rarely do they doubt whether they can have it all.”

advised the state-owned oil company, Aramco, as it underwent a massive expansion and also won business to help the kingdom plan its transition from a nation of Bedouin nomads to a modern, urban economy.2 More than forty years later, McKinsey’s work in Saudi Arabia still revolves around those two pillars, the closest thing in consulting to a perfect hedge: advising Aramco and the Energy Ministry and helping the government move away from an economy totally dependent on Aramco’s oil.

McKinsey announced that it had bought Elixir. It was a very rare acquisition by McKinsey, which for the first nine decades of its existence had mainly relied on “organic” growth, eschewing mergers and acquisitions, even though it often advised and advocated for them for its clients. McKinsey “never buys anything like this anywhere in the world,” said one former McKinsey partner who worked in the region, speaking about Elixir. “The word was that it was purely for the relationships.”

McKinsey employees acting essentially as government officials would be problematic enough in a democracy. To be doing it in an absolute monarchy where its de facto leader jails or kills his political enemies made McKinsey unusually vulnerable to the whims of a despot.

A new technique—“sentiment analysis”—mined social media posts for keywords, allowing companies to measure attitudes about their products. McKinsey got excited about the technique, mentioning it in multiple reports. So did the Saudis; a group of Saudi scholars called it “opinion mining.”23 The Saudis latched onto the fact that sentiment analysis had potential way beyond determining how people felt about their pizza delivery experience. In a country like Saudi Arabia, where it seemed everyone was chatting on Facebook, Instagram, or Twitter, it could be used by the government to take the public’s temperature and smoke out influential malcontents.