Opinion

Felix Salmon

How Rajat Gupta corrupted McKinsey

By Felix Salmon
May 19, 2011

Just how corrupted was the culture of Rajat Gupta’s McKinsey? Suzanna Andrews reports:

McKinsey had a culture of superiority, says one longtime client, who declined to be identified, adding that consultants at the firm really seemed to think they were better than anyone else in the business world. This CEO is still shocked recalling an incident in the late 1980s, when a McKinsey team offered to provide him with a road map of what his competitors were doing. When asked how they could produce such information, he was told that McKinsey also worked with his competitors, but he could trust McKinsey to know what was confidential information and what was to be kept private. He says arrogance permeated the firm. The usual rules seemed not to apply. When this CEO listened to a wiretapped phone call from July 2008, in which Gupta relayed to Rajaratnam the details of the Goldman board’s discussions about buying a commercial bank, it sounded to him just like Gupta consulting a client.

Gupta seems to have been directly violating internal McKinsey rules for years:

As the managing director and then as senior partner of McKinsey for four more years before he retired, he ran his own consulting business on the side — a violation of McKinsey rules…

While Gupta was devoted to his philanthropy in India, his quest to amass great wealth led him to lapses in judgment, says Bala Balachandran, dean of the Great Lakes Institute of Management in Chennai, India, and a friend for almost three decades.

“He wanted a billionaire’s life and the question for him was how could he become a billionaire in a short time,” Balachandran says.

If Andrews’s CEO was shocked by what a presumably-representative McKinsey team would do in the course of normal business, one can only imagine what Rajat Gupta and Anil Kumar got up to at Mindspirit, the company set up by their wives (!) to consult for InfoGroup CEO Vin Gupta — or what services Gupta provided to Genpact which resulted in him getting 81,405 stock options at a strike price of less than a buck apiece. Genpact, whose sole client is GE, another McKinsey client, is currently trading at $16.88 per share, which means that Gupta’s options in the company are worth well over a million dollars.*

And Andrews does put forward one explanation of why Gupta might have been giving such valuable information to Raj Rajaratnam. It’s not because he was being paid for it directly, but rather because he had much bigger ambitions: he was negotiating with Rajaratnam for a 10 percent to 15 percent stake in the Galleon International Fund in exchange for attracting investors and becoming the fund’s chairman. And the wiretaps don’t end there:

Listening to the pleading tone in Gupta’s voice as he pitches himself to Rajaratnam is almost painful. “I can be helpful in Galleon International, by the way—not Galleon International, Galleon Group,” he says, apparently angling for a bigger job. “I mean you’ve given [me] a position in Galleon International, that’s good enough. I, I … ,” he breaks off.

It seems clear that Gupta had various personal crises and issues which obviously aren’t reflective of McKinsey as a whole. But at the same time, this quiet man who described himself as a servant to McKinsey’s partners was clearly never going to crack down on any of them if and when they started pushing the envelope in terms of fishing for clients by trading in confidential information. Unless and until some heads start rolling within McKinsey, it’s fair to assume that many of the most successful Gupta-era partners remain. And we’ve been given precious little reason to trust in their integrity.

Update: Gail Marold of Genpact responds in the comments, saying that Gupta provided no consulting services beyond his capacity as a director. And although Genpact did start life as a division of GE, it now gets 62% of its revenue from non-GE clients.

Comments
3 comments so far | RSS Comments RSS

“Genpact, whose sole client is GE,”

Uh, no. Started that way–it’s a GE spinoff–but has consulting relationships with a bunch of other firms. And that was before it bought Headstrong at the end of last month.

Posted by klhoughton | Report as abusive
 

Felix,

fwiw, years ago Nicholas Lemann wrote a long annihilating essay about consulting firms that included some choice quotes from Rajaratnam.

Lemann’s piece was such a beautiful take-down its still worth rereading today.

http://www.newyorker.com/archive/1999/10  /18/1999_10_18_209_TNY_LIBRY_000019363

Posted by dedalus | Report as abusive
 

Felix, on behalf of Genpact, I must clarify the inaccuracies in your post. First, I have provided the following statement to Bloomberg Markets and Businessweek, the originators of these feature stories on Mr. Gupta:

“Rajat Gupta was a non-voting advisory director for Genpact from 2005-2007 and a voting director and chairman of our board from March 2007 to March 2011. Contrary to what is stated in these recent articles, Mr. Gupta was not at any time engaged by Genpact to provide consulting services in his individual capacity. Mr. Gupta’s association with Genpact has always been public information and all compensation paid to Mr. Gupta by Genpact for his services as a director has been fully disclosed as required by the rules of the US Securities and Exchange Commission. “

Further, the options that Mr. Gupta received from Genpact during his time as an advisory director were designed to not vest until he became a full-time director, as he did in 2007.

Second, as background, Genpact (NYSE: G) is a $1.2B global business services company that was founded as a division of GE in 1997, now with more than 400 clients around the world and more than 48,000 employees now that we recently made a $550 acquisition of Headstrong. Per our year-end 2010 financials, revenues from GE businesses comprised 38% with 62% coming from other global clients. We continue to increase our revenues from both GE businesses and global clients.

It is important that the facts are reported correctly. Thank you very much.

Gail Marold
Genpact Public Relations
gail.marold@genpact.com
919-345-3899

Posted by gailmarold | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •