Can clients still trust the mighty McKinsey?

March 4, 2011

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — Can clients still trust the mighty McKinsey & Co? That’s something they should be asking after the U.S. Securities and Exchange Commission, as part of its insider trading crackdown, accused Rajat Gupta, the elite management consultancy’s former chief, of betraying Goldman Sachs’s secrets.

The quality of the private partnership’s advice has always been fair game, though not often publicly. Jeffrey Immelt, the General Electric chief executive, told the New York Times in December that the consulting firm offered costly dud advice in 2007, downplaying the risks of a financial crisis. But being wrong is a minor sin, and it’s not much of a figleaf for Immelt, either.

The Gupta charges are potentially much more damaging. The SEC alleges he leaked inside information on Goldman and Procter & Gamble, whose boards he sat on, that netted the Galleon Group hedge fund, founded by the indicted Raj Rajaratnam, tens of millions of dollars. Gupta’s lawyer denies the claims.

Gupta worked at McKinsey for 34 years until 2007 and the association continued thereafter. He was the firm’s managing director, equivalent to its chief executive, from 1993 to 2003. It seems fair to ask to what extent he became a product of the firm, or vice versa. Putting a generous spin on the SEC’s detailed allegations, Gupta enjoyed gossiping with his peers about what he was involved in — even confidential matters.

For McKinsey clients, that’s potentially even more alarming than the case of Anil Kumar, a former director of the firm, who pleaded guilty to fraud and conspiracy in January last year in the same broad insider trading probe being conducted by U.S. authorities. He admitted accepting $1.75 million to reveal secrets about clients to Rajaratnam and knowing the information was being used for trading.

McKinsey’s reputation rests on its ability to keep secrets. Consultancies, unlike investment banks, don’t provide access to financial markets. All they offer is counsel, which relies partly upon confidences revealed by their clients. According to McKinsey, “Our clients should never doubt that we will treat any information they give us with absolute discretion.” The allegations against Gupta make it hard for clients not to wonder.

Comments

It is a pity that some top executives or CEOs create problems or financial loss to thousands of investors when they betray the trust [the foundation on which investments are made by the investors and it is hard earned money for them]. The simple punishment for them [with time bound persiod of 30 days] to cut their right hand and forget the man].
The comments are most welcome.
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