Is McKinsey and Company a Threat to Democracy? Michael Forsythe Shares His Reporting

Key Highlights

• Introduction – 0:35
• Who is McKinsey & Company? – 3:14
• Is it McKinsey Anti-Democratic? – 17:55
• Working with Autocrats – 34:17
• Can McKinsey Change? – 44:33

Podcast Transcript

What do you think of when you hear McKinsey? Some of you might not think of anything. It’s only in the last few years that the work of McKinsey has become a topic of public discussion. But I’m sure others have mixed feelings. Some likely have purely negative impressions. 

McKinsey & Company is possibly the embodiment of what many call the knowledge economy. They don’t make any products. Instead, they provide ideas. It influences some of the most powerful corporations and governments. It’s also transnational. Its clients include state owned enterprises in China as well as the Saudi government. 

Naturally, a company with this much influence on powerful decision makers has its share of controversies and scandals. Michael Forsythe and Walt Bogdanich delivered many of the reports on those scandals for The New York Times. Recently, they wrote a book that offers a bigger picture examination called When McKinsey Comes to Town: The Hidden Influence of the World’s Most Powerful Consulting Firm.

But is McKinsey & Company a threat to democracy? My conversation with Michael Forsythe reflects on McKinsey’s work with autocrats and corrupt regimes. We also consider the history and values of McKinsey, because I wanted to get a sense of whether the company has simply made mistakes or whether its controversies uncovered something about what it stood for. In the end, I don’t think I have a clear answer. In some ways this is disappointing, but in others it is remarkable that I am even posing this question. I think you’ll find this episode is different from other episodes, but shares many of the podcast’s typical themes. 

Now if you like this show, please support tell your friends and colleagues about the show. Many of you are starting a new semester as a student or as a faculty member. Please tell others about this podcast. I’m really depending on word of mouth from people like you to help spread the show to new listeners. I also want to thank Mia Suzuki and Stan Masters for their help with the show. If you’d like to contact me, please email jkempf@democracyparadox.com. But for now… This is my conversation with Michael Forsythe…

Michael Forsythe, welcome to the Democracy Paradox.

Michael Forsythe

Glad to be here.

jmk

Well, Michael, I loved your book, When McKinsey Comes to Town: the Hidden Influence of the World’s Most Powerful Consulting Firm. It’s a fascinating book about a company that I’ve heard a lot about. I’ve heard about McKinsey for years now, but it’s one of those companies that different people have different ideas when they hear the name McKinsey. So, you’ve done a lot of reporting on them. You’ve probably, I would assume, thought a lot about them. When you hear the name McKinsey, what comes to your mind now?

Michael Forsythe

Strangely enough, after years of reporting on them, when I hear the word McKinsey, I still think of a very, very prestigious consulting firm that attracts some of the brightest people in the world to its ranks. Having said that, it’s pretty clear from our reporting that when you harness some of the world’s smartest people to do the bidding of clients who sometimes do not have the world’s best interests at heart, it can do incredible damage. So, it’s complicated. You know, we have some very warm feelings towards some of the people who helped us write the book at McKinsey. We have friends who work at McKinsey now that we’ve made in the course of writing the book.

It’s too simplistic to call it an evil company. There are certainly a lot of very good people that work there. It’s just the system itself and the corporation itself and the system that it’s embedded in is what causes the problems.

jmk

In the last chapter, there was this fascinating quote from an anonymous McKinsey consultant. They kind of flippantly say, “There is no secret society shaping every major decision in determining the direction of human history. There is, however, McKinsey & Company.” And I think that encapsulates the way that a lot of us think about McKinsey & Company. That there’s this organization that has tremendous influence in so many different companies and so many different parts of the globe. Why don’t you just explain a little bit about how pervasive their influence is and maybe how it got to this point?

Michael Forsythe

So, Justin, I would assume that most of your podcast listeners are not conspiracy theorists. I hope not. I’m certainly not a conspiracy theorist. But that anonymous McKinsey person who’s actually, interestingly enough, probably about to out himself, so you’ll know the author of that very soon. You know, he’s got a point. The thing is McKinsey’s everywhere. They work for governments around the world. They work for companies. They work for nonprofits. They work for just about everyone from democracies to dictatorships, although they’re trying to change some of their criteria there after a series of reports about their work with authoritarian countries. But the fact is there are few organizations that are everywhere. You can look at a company like Ford or GM or Apple and they’ve got global influence, but they are still just one company. This company, McKinsey, works with everybody.

So, there’s a huge difference and obviously there are other consulting companies in the world, but McKinsey says they’re the best, they’re the most prestigious, and they are recognized around the world as being the most prestigious, the first among equals, or the top dog in the very elite management consulting industry. So, they’re the ones who are whispering into the ears of CEOs. They’re the ones who are talking to the deputy directors of government agencies or the directors of agencies like ICE and the FDA. It’s hard to think of another organization in the world with that kind of reach now.

jmk

Mike, something that I’ve struggled to get my head wrapped around is that McKinsey & Company bring in a lot of very young people into the organization and they churn and burn those employees. I mean, literally their business model is to bring in extremely bright young professionals and then more or less move on to the next crop of bright young professionals. It’s almost as though people are expected to graduate from McKinsey. And what I have a hard time wrapping my head around is that these are young professionals with little to no work experience, almost no experience within the sector that they’re consulting for, and if you told me in operating a business that I needed to bring in young college grads with no work experience and no experience in my business sector to solve problems that my extremely experienced team couldn’t solve, I’d probably say you were crazy. So, how does a company like McKinsey really convince customers that it can actually deliver value?

Michael Forsythe

Yeah, it’s a really good question. McKinsey tackled this problem back in the 1950s in trying to think of how to set up an organization. The company is called McKinsey, but the real founder that most people recognize is a guy named Marvin Bauer. McKinsey himself, James O. McKinsey, died a very young man and Marvin Bauer took over the reins and was the leader of the company for a big part of the 20th century, the late 20th century. The idea they came up with is to get them young, preferably from places like Harvard and especially the business school there, especially the top 5% of the business school at Harvard, which is what are called the Baker Scholars. So, the best of the best.

They actually were biased against hiring experienced people, because in their view, these experienced people would have biases and maybe not look at things as objectively as somebody who’s just really smart, but very young and inexperienced. So, it sounds counterintuitive and I’m not here to justify McKinsey’s business model, but it certainly has worked for them to bring in these people. Why does it work? Because A they’re very smart and B, they work like crazy. There are many instances of McKinsey teams coming in and almost overwhelming whatever organization they’re in with their very long work hours. They call it a toolkit. They are given some analytical tools, ways to look at companies. They are trained a little bit in McKinsey bootcamps before they go into the boardrooms.

They do have some experienced people leading them. People with more experience. So, just like in the military, there are ranks in the consulting world. The lowest being the business analysts, which are people who have undergraduate degrees and then you have got the associates who usually have an MBA, but then the people with more experience, the engagement managers, and especially the partners do have some experience generally in those industry groups. So, that’s how it works. It’s a long way of answering that. It still completely baffles a lot of people and certainly over the decades some of these very young McKinsey consultants have come up with some pretty wacky ideas that are rejected by whatever company or government organization has hired them. But by and large, companies keep hiring them and there’s obviously many reasons for that.

jmk

After studying them, after reporting on them, do you think that they actually provide value or do you think it’s a lot of smoke and mirrors?

Michael Forsythe

So, I think sometimes they do. There are instances, especially I think in the way of knowledge diffusion. The example I like to cite on how they could create value is actually an example from China. There’s a company called Ping An Insurance. You’ve probably never heard of it. But it’s actually by market capitalization, I think in the top five insurance companies in the world. It went from nothing in the late 90s to what it is now. It is the dominant insurance company in China, which is kind of quasi-private. McKinsey for decades, for more than 20 years, has been taking the knowledge from its insurance practice, especially in the United States and passing that knowledge over to Ping An and Ping An in McKinsey world is famous for basically doing anything McKinsey tells them to do. It’s actually worked out pretty well for Ping An.

It’s kind of funny, because I’m not here to advertise for McKinsey. The book we wrote is extremely critical, but fair is fair. I think in some cases they certainly do add value. There’s also another rationale for hiring McKinsey, which is to give the C-suite, you know, the CEO, COO, CFO, whoever, some cover for doing some unacceptable things or some pretty hard things like cutting jobs. For example, they can use McKinsey to basically have them write a report, a study, whatever, that says they need to cut jobs, which is exactly what they were hired to do, to justify these hard decisions.

That way the CEO can say, ‘Hey, it’s not just me. McKinsey said, we’ve really got to do this. So, you know, I’m sorry, we have to lay off all of you. But hey, we looked at it. We had the smartest consulting company in the world look at it and boy, you know, I’m sorry, but you’re going to have to go elsewhere.’ So, that’s another reason that even if they’re not super effective, they’re still a really important tool for companies. It certainly gives them some cover.

jmk

One of the impressions I get from the book is that McKinsey’s very focused on short term solutions, things that will get a real pop in terms of profitability in the short run, but they don’t always think long term. I think that might actually be an outgrowth, now that I’m talking about it, from the fact that they’re hiring young and experienced people. People that can see how to be able to make profitability but don’t fully understand the long-term implications of it because they haven’t been through multiple business cycles yet so they haven’t really seen how past efforts to do similar stuff have really had an impact.

I think it gets back to the idea of values which is something that McKinsey talks a lot about. I mean, it feels like McKinsey is very focused on spreadsheets and data, but doesn’t really take into account the values of their clients when they’re giving advice. Am I being too harsh on McKinsey when I say that?

Michael Forsythe

You know, we’ve talked to more than a hundred x-McKinsey or current McKinsey employees for this book. A lot of people say that the IQ of the average McKinsey consultant is very high, but their EQ is somewhat lacking. Yes, they are wedded to spreadsheets, to PowerPoint slides, the numbers don’t lie, and they are wedded to this short-term analysis. But in their defense, and I feel very funny saying that, but they’re a creature of their clients as well. So, the American corporate mindset of the last 40, 50 years has increasingly shifted to quarterly results and shareholder capitalism and if there’s one thing that’s been consistent about McKinsey over the 97 years of their existence is they do go with the big trends in business and they embrace them.

So, you’ll see McKinsey now just talking all about AI and just trendy things. Back in the fifties, their big schtick was this form of corporate organization called the M-form, the multi-divisional system of corporate governance, which was really championed by General Motors under Alfred Sloan. This was back in the thirties and forties. It was very successful for them and very successful for General Electric. McKinsey took those ideas and spread them around the world, especially to post-war Europe. That form of corporate organization is not a quarter-to-quarter kind of thing. This is a deep structural change in a company and the way it’s run with the idea of it running more efficiently and having more autonomy at lower levels.

This is what was McKinsey’s big thing, but then in the seventies and eighties with the financialization of the American economy, the rise of shareholder capitalism, that became the new religion and McKinsey just ran with that. So, they often are doing their clients bidding, but they’ve bought into this quarter-by-quarter analysis.

You know, you see this in so many American companies. Sometimes the difficulty is to look beyond the next quarter. Certainly, McKinsey’s been a big part of that. What so many of these McKinsey people say is their work is what they call an accelerant. It speeds up whatever a company or a government organization wants to do and if that’s job cuts and looking at boosting profit for the next quarter, well by God, that’s what they’re going to do.

jmk

At the same time, I got the impression from some of the chapters in your book that McKinsey isn’t just responding to trends that exist out there, but they’re really shaping some of those trends. I mean, I think the chapters on executive pay really kind of emphasize the way that McKinsey can actually shape the way that the business world thinks and the trends that the business world accepts at the same time.

Michael Forsythe

This is where you get into the idea of an accelerant. We did a chapter on Wall Street. It’s probably one of the chapters that hasn’t gotten a lot of attention. It’s very interesting, because McKinsey didn’t invent the idea of securitization of assets. You know, Fannie Mae, Freddie Mac, starting the late sixties were taking mortgages, bundling them and turning them into securities, which were traded on Wall Street and it provided this incredible boost of liquidity to the property market and the residential real estate market in the United States. I don’t know how much in the weeds you want to get, but in the 80s, they really wanted to become an intellectual force, a company of ideas. And one of the things they latched onto was securitization and they became the evangelists of asset securitization.

Clearly, there were some very good reasons to do this kind of work, but they said, well, let’s also do it for auto loans. Let’s do it for credit card debt. Let’s show banks how to do this, because if you’re going to start doing asset securitization, you need to change your fusty old ways, you old fashioned bank and start thinking a little bit more like an investment bank. We’re going to show you how to do it. It became a big business for McKinsey. They helped spread this idea around the world.

McKinsey says very stridently that you can’t blame us for what happened and we all know what happened when the securitization of assets just got out of control and you had these CDOs, collateralized debt obligations, and certainly they didn’t invent it. They didn’t start the fire, but they were an accelerant. So, you’re right. A lot of times they do really spread and propagate ideas. CEO pay, as you mentioned, is another extremely good example. They were spreading the good news back in the 50s.

The race to the top of executive pay was really accelerated by McKinsey’s work in executive compensation back then and we all know the results of that now with these huge, huge wealth gaps. So, it’s an incredible amount of influence and they really are an accelerant and a driver of ideas as well as latching on to the latest trend.

jmk

Mike, I feel like your book can really be approached from a few different directions. I’ve heard a lot of podcasts really latch on to the business aspect of the book. I mean, you’ve been on the Motley Fool podcast. You’ve been on a lot of different podcasts and been discussed in a lot of different platforms. One of the big themes is from the business aspect and maybe even economics aspect. I’d like to shift to talk about how it affects politics and more importantly, democratic politics.

One of the things I want to return to is this way that they select people that work at McKinsey, because it feels like it’s a model of hyper credentialism. The idea that if you are a Rhodes Scholar, if you went to the right school, if you’ve got the right check marks behind your name, that you’re qualified to be a McKinsey consultant and qualified to give certain advice. But if you have the experience in the industry, if you’ve worked your way up and came from those alternative routes, you’re not really qualified. In fact, oftentimes they recommend firing you from the job because you are part of middle management and you don’t need to be there providing that kind of advice anymore. Do you feel like this hyper credentialism is fundamentally anti-democratic, this hyper credentialism that’s, I feel, a key part of the McKinsey model itself?

Michael Forsythe

Yeah. Wow. That’s a really good question. First of all, is it a key part of the McKinsey model? I would say emphatically, yes, and I don’t think McKinsey would necessarily disagree with that. McKinsey people describe themselves as insecure overachievers. What does that mean? The way I understand it is these are stars. These were valedictorians of their high school class, often went to an Ivy league school or Oxford or Cambridge or someplace like that. They have made their parents proud their whole lives. They get to graduate either from undergraduate or business school and they want to have a job that’s as prestigious as the school they went to. Something again that their parents and grandparents and everybody can be very proud of.

McKinsey is one of the few companies, maybe Goldman Sachs in banking, McKinsey in consulting, maybe Apple or Google that provides that. Instead of taking the risk and going to some startup after you get your MBA, going someplace unusual that people say, ‘What is that?’ They want the prestige of working for McKinsey and that I think is credentialism at its core. Certainly, there are so many ex-McKinsey people that have gone into government and have gotten very high in government. Pete Buttigieg comes to mind as an ex-McKinsey person. It’s certainly a credential that opens a lot of doors, not only at other Fortune 500 companies to get really senior high paying jobs there, but also, it’s something that can help in government as well.

So, you do see around the world, a lot of these McKinsey alumni in very senior places. You also see this tendency among elites in governments to hire McKinsey, because they want the prestige of hiring this iconic consulting company and not just in the United States, although you certainly see it there, not only in the federal government, but in state level governments as well. There are some examples in the book, in Missouri and Arkansas, and especially Illinois, where they get wedded into McKinsey, but overseas as well.

One thing that’s not in the book, but is actually in the German version of the book. We have an extra German chapter and it talks about the defense minister in Germany a few years ago, who is now the president of the EU, Ursula von der Leyen. McKinsey hired two of her kids, while she was the defense minister. They were working there and befriended or they were friends with a senior McKinsey person who came in and was hired to run procurement for the defense ministry. It was quite a to do in Germany and it just shows you these ties.

Another thing that was in the German chapter that I wish we had put in the US version of the book is that a lot of these elites around the world, we’re talking about the super billionaires, view McKinsey as a finishing school for their children and want their kids to go and have a few years at McKinsey before they go back and run the company. There are several examples of it. I know Elon Musk, I think, is the richest guy in the world again.

But when Tesla was down in the dumps in its stock price, I think this guy, Bernard Arnault in France was the richest guy in the world for a while. He runs LVMH, those luxury brands. He sent a couple of his kids to McKinsey before they came back to the company. There’s a very rich family in India that does the same thing. I think Justin, I’m probably getting a little off the topic, but it’s just to illustrate how McKinsey is so embedded in the world’s elite. There are just so many examples of McKinsey people in government and obviously in corporate boardrooms as well, and it all comes back to the schools they went to.

You know, McKinsey has a special program to attract Rhodes Scholars into McKinsey. Pete Buttigieg was one of those. I started making a spreadsheet of McKinsey people who were Rhodes Scholars and I had to stop. It got too long. The current head of McKinsey is a Rhodes Scholar. The guy who was head two guys before him, this guy Dominic Barton, a Canadian who after McKinsey became Ambassador to China for Canada, He was a Rhodes Scholar.

jmk

One of the reasons I bring it up is because i think it gets at the heart of who McKinsey is and the type of culture that they impart on the people that join its ranks. You mentioned Pete Buttigieg. I mean, he’s somebody who is associated with the Democrats. He’s considered to be maybe center left. He’s considered to be fairly liberal though. There’s a lot of people that have joined McKinsey that associate themselves with the left and consider themselves to be liberal and enter politics oftentimes and talk a lot about democracy. But McKinsey itself comes across to me as having a somewhat anti-democratic spirit behind it.

The idea that the advice of certain people should matter more than the advice of others, even if those other people have different types of experiences, different types of backgrounds, different types of understanding that maybe somebody who went to Harvard or was a Rhodes Scholar might not really have. I don’t know. I mean, it just feels like it’s got an anti-democratic spirit and I think that’s important because they do so much work for governments in the United States and around the world. In fact, a lot of government regulators, you mentioned in the book, hire McKinsey. What are they hiring McKinsey to do? What value does McKinsey bring to a government agency at the state level or at the federal level?

Michael Forsythe

Yeah. Okay. There’s a lot of questions in what you said and a lot of really interesting points. I do think just to answer the core of your question. It’s clear that McKinsey’s been an accelerant in pushing income inequality in the United States and around the world for many, many reasons. This elitism, that we know best because we’re the smart McKinsey people, has been a part of that. They’ve been evangelists of shareholder capitalism and they have devised policies at companies which extract money from the poor and give it to the company shareholders. I think one example in the book that we point out is Allstate, which was just pretty clear that the way they redesigned the company and the claims processing system at Allstate resulted in fewer payouts or more money basically going into company profits and less money in general proportionally going to pay claims.

That was just one example. CEO pay is obviously another example. They have been evangelists there also. I keep saying that word evangelist, but it really is true, offshoring, especially in the nineties and into the Bush administration. So, in many company slide presentations they would have would always have a few slides on offshoring and say, ‘Hey, you guys might want to consider moving to China or India because you can make them cheaper overseas. Look what this other company did when they moved their tool making or whatever over to China.’ We know the effects of that in the United States on working class people, especially.

To get deeper into this elitism thing and the ‘we know best,’ ‘mind your own business because we’re the smart people,’ what’s fascinating and we point out in the book is that McKinsey works for these companies, for example, pharmaceutical companies, and also for the regulators of the pharmaceutical companies. Until 2021 they worked for the tobacco companies and also the regulator for the tobacco companies, the FDA. So, the idea that they can do that, when you think about it, it’s just staggering. States like Illinois hiring McKinsey to design and to help manage its Medicaid program.

But so many of the Medicaid administrators, the administrators of that program, the people who are hired to basically take those block grants of money and administer them are these big healthcare hospital companies that are big, giant McKinsey clients, companies like Anthem. They’re not just McKinsey clients. They are the biggest McKinsey clients, as in the top five moneymakers for the company. And it’s not just the United States that’s going on. We point out in Britain, the same situation. So, you have this company that’s working for both sides, the regulator and the regulated. Those companies are doing very well.

So. the other part of your question is what are they doing for these government regulators? A lot of times they’re going into places like the FDA and their tasks are to reorganize departments, re-envision how a department’s supposed to work, how it can better function, say overseeing the drug industry or something like that, which is a real problem because obviously the drug companies are primo McKinsey clients. A lot of times their work is a matter of reorganization or in the case often of the Pentagon or ICE, trying to save money for these organizations, just like they would with a company. They will often go in and try to figure out how to cut corners, maybe that’s not the right word, but anyway, to find some savings in the spreadsheets.

With ICE, their tasking was to try to help ICE speed up the deportation processing time. Get people who have already been designated for deportation out of the country. This is not me talking. This is what ICE said they were hiring McKinsey for, and this is what McKinsey’s own internal system says they were working for. They were brainstorming ideas on how to hire more officers for ICE, for example, how to get more people out on the field. There’s just so many things that they do. It really runs the gamut from this bread-and-butter management organization, re-envisioning how you organize your department or your division in government to cost cutting.

jmk

So, there’s a lot there to unpack, obviously. I don’t want to just breeze over some of these topics, but I really want to kind of drill in on the fact that they’re both working with big companies, particularly in the medical industry, and at the same time working with the regulators who are regulating those companies. And what particularly bothers me is we know for a fact that they have worked with companies in the past, found solutions, and then kind of plug and play those solutions into their competitors in the past so while they say that they’re always looking at the client’s best interests, and they might really be doing that every time that they’re taking on a client, they’re not afraid to take the solutions that they found with one company and apply it somewhere else.

I don’t know why we should believe that they’re not taking the work that they’ve done with government regulators and then advising their other clients in ways to be able to work around those regulations. I mean, it just would make too much sense. It would be too easy for them to do it and it seems to make sense based on how they’ve designed their past business model working with other companies in the past.

Michael Forsythe

Yeah, it totally makes sense. We wrote a little bit about this in the chapters on Purdue Pharma. Then after we finished, pretty much turned in the book, we got access to a slew of documents from McKinsey regarding their work with Purdue Pharma and we wrote a couple of stories last year in the spring and into the summer detailing McKinsey’s work with Purdue, you know, they’re the makers of OxyContin. They’ve obviously run into a lot of problems because of the perception that they were contributing to the massive opioid crisis we have in the United States. And then McKinsey was there to advise them on how to increase their sales.

It was one of these slide decks where they are pitching for some work with these opioid makers. They’re saying, ‘One of the reasons is we have a lot of regulatory experience.’ These companies live and die by their ability to get approval from the FDA for drugs. One of the things they were advertising was, ‘Hey, we have all this deep regulatory experience with the FDA. We’ve worked on so many projects.’ So indeed, they were touting that experience with the regulator to their private sector clients and, in this case, with an opioid maker. Then further to that, there were people who worked on the Purdue project for McKinsey, working with Purdue and also some of the other opioid makers who were also working, maybe not simultaneously, but then they would go to work on a McKinsey project in the FDA or vice versa.

Then the third thing that was so interesting that we wrote about was that when Trump became president and I think this would have been in early 2018, so it would have been a year in. I think there was an incoming HHS secretary, Alex Azar. McKinsey had a relationship with this guy and McKinsey put together a memo to give to Alex Azar and his staff. Azar was actually working in Indianapolis, I think, for Eli Lilly. He was to be the incoming HHS secretary and they were writing this memo.

One of the sections of the memo was about the addiction crisis to opioids and what HHS could do to help combat the opioid crisis. That section was reviewed by the McKinsey senior partner who was overseeing the work at Purdue Pharma and he watered it down. He literally watered it and we could see. We had the drafts. So, we could see him doing this. Those are three examples of the cross pollination of the regulator and the regulated and McKinsey’s in the middle there. You also talked about companies and McKinsey for many decades has not made any secret of the fact that they work for multiple companies in the same industry. A lot of times the other companies will want to hire McKinsey, because they want to find out what the other company’s doing. So, McKinsey’s the glue between them.

McKinsey does say they have firewalls and that one team can’t talk to another team. You know, one example would be in Australia. You have two very big mining companies. I think Rio Tinto being one and the other one, BHP. So, they’re both based in Melbourne and the McKinsey consultants working for one can’t go to the side of the office where the other one’s working. Their special cards, apparently, will only allow you access to certain things. There’s literally walls that keep the teams apart.

But again, getting back to the Purdue documents. That same guy who is editing that memo for Alex Azar was working for Purdue Pharma and at the same time he’s working for Purdue Pharma, he was working for Endo Pharmaceutical for their opioid product. How can you be working for two competitors at the same time? You’re not supposed to do that, but he was.

jmk

So, Mike the podcast oftentimes looks at democracy from many different places around the world. In fact, I probably spend more time talking about democracy in other places than I do in the United States and McKinsey is global as well. How closely does McKinsey work with autocrats in other countries?

Michael Forsythe

So, until very recently, they worked quite closely with them. We’re talking about autocrats like the Chinese government being the biggest and the baddest, the Saudi government, many ministries in the Saudi government, countries like Azerbaijan, the previous oligarch ridden Ukrainian government, Yanukovych – this is a guy who was like basically kicked out of there back in 2014 because he was so terrible… McKinsey was working for him – Orbán in Hungary, autocrats around the world. Since we’ve been writing so much about this work, they have set up new criteria. Now McKinsey will say that they are not allowed to work for the defense ministries, the interior ministries and justice ministries of autocracies.

There is a lot of scrutiny of their work, but a lot of times the ministries that make the autocracies work and viable and continue year after year after year are not the defense ministries. They’re the economy ministries or things like that. For example, in Saudi Arabia, so much of the work McKinsey’s done has been with the ministry of economy and planning there to this day. In the book, we detail some of the reporting that other Times reporters have done and us too on their work looking at Saudi Arabia’s social media scene, identifying people who are critical of the Saudi government, putting in a slide deck and then either by coincidence or not coincidence, after this slide deck comes out some of those dissidents and their families are targeted by the Saudi state.

Corrupt governments as well that are democracies or are democracies like South Africa and Malaysia are also McKinsey clients. McKinsey worked very closely with the Malaysian government under the previous prime minister, Najib, who is a colossally corrupt guy. He’s convicted now and was doing projects with them including one project where they were pushing to have a Chinese company take this big infrastructure job in Malaysia. The Chinese company had just done a big assignment and this was a big state-owned company in China. McKinsey had done work for them as well and that company is now in the center of this corruption scandal in Malaysia over embezzled funds.

jmk

So, Mike in your reporting did you find any evidence that McKinsey provided advice that involved actual human rights violations or efforts to discourage democracy activists or to even contribute to democratic backsliding in different countries?

Michael Forsythe

Yeah, I mean, certainly, Saudi Arabia is no democracy. It’s never really had a big democratic movement or anything, but the now infamous slide deck they made certainly cannot be interpreted any other way other than identifying people who are critical of the Saudi government and literally putting them in slide decks. I think that was a very clear example.

Unfortunately, we didn’t get into this in great detail at all. We didn’t get into detail in the book. We did write about it a little bit for the newspaper back in late 2018 – their work for Yanukovych. In Ukraine, it was mostly while Yanukovych was a candidate for president, which he won. They did work to polish his economic credentials. Yanukovych isn’t by no means a democrat, a democrat with a small d. He was an incredibly corrupt pro-Russian politician there. So, they polished up his image on managing the economy. The guy who was working on the political side was a guy named Paul Manafort. So, it was Manafort for the politics, McKinsey for the economy, for this very anti-democratic person. So, there’s that.

I think in South Africa as well, McKinsey stumbled into, and I’m being generous there, a big corruption crisis scandal there that wound up toppling the last president of South Africa and McKinsey was taking enormous fees from a state-owned utility and a state-owned railroad and port operator. This was part of a crisis that could really undermine South African democracy. McKinsey apologized for that, paid back some of the money. McKinsey’s also agreed to pay more than $600 million in a settlement for its work with Purdue Pharma. This was a settlement with state attorney generals in the United States.

But yes, getting back to authoritarian countries and also corrupt governments: Were they purposefully trying to undermine a democratic movement or a democracy? I think that’s a stretch. We don’t have evidence of that, but you know, McKinsey in these countries hires the elite. So, in Saudi Arabia, many of the sons and some of the daughters of ministers were hired to work at McKinsey. So, McKinsey is hiring the elites in a non-democratic country who have large stakes in keeping that system. If you’re the son or daughter of a Saudi minister, not only your livelihood, not only your wealth, but your life is dependent on the continuation of the House of Saud as the rulers of Saudi Arabia. So, in some cases these elites from these autocracies or theocracies are the people who are working at McKinsey.

jmk

They don’t just work with ordinary autocracies. I mean, they also work with China. In fact, they’re working a lot with China. You mentioned earlier that they’re not going to work with the defense departments in a lot of these other countries. But we’ve recently found that issues of national security are much more pervasive in today’s economy than we previously thought. I mean, there’s a lot of technology that has dual use aspects that both apply to private industry as well as defense. It’s hard to really draw a line as to what exactly is a national security threat and what exactly is something that’s just an economic tool that’s used in the private market. Do you feel that McKinsey provides advice to some of these other countries, particularly maybe a China or even a Russia that has compromised American interests in the past?

Michael Forsythe

We actually talk about this in the book on China. Right now, just to update you and the readers and listeners here, I mean, right now, US Consulting companies in China are having some problems. There’s a lot of suspicion of foreign companies, especially American companies in China right now and consulting companies are kind of in the thick of it. There were some Chinese employees of Bain that were detained recently, if I’m not mistaken. So, there’s a focus on them in China. But for the past decade or so McKinsey has really been deep in China. We talked about McKinsey being an accelerant.

They’ve been a real champion of pushing some of these marquee Chinese policies, which are often at odds with US policy. There’s a policy they have called the Belt and Road policy, which is building ports, airports, railways around the world with Chinese money lent from Chinese banks and development banks that extend China’s influence and also strengthens trade ties between these mostly developing countries, but sometimes European countries and China. McKinsey wrote a lot about that. It was actually touting that idea to some of its clients around the world that you should really work with China and maybe hire a Chinese company because that’ll help you improve your relations with China, specifically Malaysia, I’m talking about in this case from one of the slide decks we uncovered.

But McKinsey’s also was working with this big state-owned Chinese company called China Communications Construction Company or 4Cs as the Defense Department people call it here in the US. One of their subsidiaries was building those islands in the South China Sea. Those artificial islands were basically turning the South China Sea into a Chinese lake. That had a personal resonance with me because I used to be a US Navy officer in the 7th fleet out in the Western Pacific and had been through that area many times as a navigator on a guided missile cruiser. The idea that a McKinsey client, one of their subsidiaries, was building these militarized islands with their dredging machines, really kind of rubbed me raw, especially because McKinsey’s even bigger client would be the Pentagon.

So, the Pentagon’s interests, US national security interests, and the interest of this Chinese client of McKinsey are really at odds. Again, it gets back to the fact that McKinsey in China, in order for it to do well, had to hire elites in China and often these elites in China were actually also Baker Scholars from Harvard Business School, really smart people. But one of these Baker scholars, right around the time he graduated, married the daughter of the prime minister of China, this guy Wen Jiabao. This is how elite we’re getting in Chinese circles. Again, these people are not thinking about the Pentagon. They’re not thinking about US national security when they pick their clients. They just aren’t.

They are products of the system in China. Often extremely well educated, sometimes liberal minded in the fact that they went and studied in the US for so long. But their success depends on them getting clients. Those clients are often state-owned companies. You have to toe the line in China. So, they’re not seeing some of these conflicts that are much easier for people like you and me to see. You know, how can you be working for this company that’s building these islands while at the same time working for the Pentagon? How can you be doing that? A person in China is not going to see that as smart as they are.

They’re not going to see any problem with having a party in Xinjiang, just about 4,000 meters away from a detention camp where these Uyghur minority Muslims are being detained. They’re not going to notice that. So, yeah, that’s just the work they’re doing in China, which is obviously the biggest autocracy in the world, by many measures, the most effective autocracy in the world.

jmk

Mike, your book highlights a number of different problems at McKinsey and you’re reporting The New York Times, to be honest, has highlighted a lot of different issues at McKinsey as well. So, this is something that’s been going on a long time and a lot of other investigative reporters have also found many different issues and reported on problems at McKinsey and really brought them into some hot water in recent years. If McKinsey decided to hire McKinsey to solve its problems, to kind of fix things, would it actually see these different issues as problems? I mean, what would they advise McKinsey to do differently from what it’s doing today?

Michael Forsythe

Yeah, that’s a very good question. I mean, to answer it, I think McKinsey has tried to address some of these problems. This was under their previous managing partner, a guy named Kevin Sneader. Kevin Sneader tried under his watch and as we were writing all these stories and as some of our competitors like ProPublica were also writing incredibly searing stories, they tried to change. They said they changed the way they select clients and choose work and that there’s more people reviewing this now to see if there’s conflicts of interest to see if these match, something we haven’t talked a lot about, but these McKinsey values. They’ve implemented this. So, maybe in a way McKinsey has hired McKinsey to look at some of these problems.

You know, a lot of companies have corporate statements and things. McKinsey has this list of values. Some of them are very laudatory like working with integrity, kind of bland, but also giving young people at McKinsey the obligation or the right to dissent, to say, ‘Hey, we’re doing something wrong.’ Certainly, some of them have done this and we’ve written about it in our book. But the number one value in McKinsey, the one that always comes at the top of the list is to put your client’s interests above the firm’s interests. This hasn’t changed as far as we know. So, if McKinsey comes in and does a study of itself, but doesn’t change that – which sounds really good, doesn’t it? I mean, put the client’s interests above the interest of the firm. It sounds laudatory.

But if that client. is a bad actor in any way and you are putting their interests first, that could lead to some bad outcomes, for example, helping to spread an opioid crisis, for example, helping to spread vaping for their client, Juul. So, the jury’s out, but what’s very sobering is that this managing partner, Kevin Sneader, who it was under his watch where these were implemented, was denied a second term. They have three-year terms as managing partner and a new guy came in, another Rhodes Scholar. This had not happened in almost 40 years, more than 40 years, actually that a managing partner hadn’t been allowed at least one more three-year term. It was very unusual.

So, I think the jury’s out on whether McKinsey really can advise itself. They’ve certainly made some effort to address some of these stories that we and other reporters have written in the last few years. I’m not a cynical person. I do believe that there’s a lot of good people in the world and there’s a lot of good intentions, but I really would have to say that I’ll believe it when I see it, if we see a real change at McKinsey. And not just there, but other consulting companies on how they approach this kind of work.

jmk

Well, Mike, let me ask you a follow up then about McKinsey’s values, because it’s really easy for people who’ve never worked in the private sector to kind of dismiss a company’s values. But I actually do think that they’re very important. I think that when a company sticks to its values and its mission statement, it thinks long term about its value and it’s oftentimes when a company veers away from those founding values and those mission statements that it runs into problems, not just in terms of future achievements, corruption or in terms of greed, but sometimes even in terms of profitability. Because when a crisis happens, its customers don’t think it stands for anything anymore.

What you just described, though, sounds like the problem isn’t so much that McKinsey has veered away from its values as the fact that some of its values are part of the problem. So, do you think that the problem is that McKinsey’s gotten away from some of its other values or do you think that some of McKinsey’s core values are part of the problem that’s led to it to make some of these mistakes or some of these controversies, if you will?

Michael Forsythe

It’s a really good question. Obviously, I do think that the most prominent core value, which is to put the client’s interests above the firm’s is contributing to this problem. Again, it’s very laudatory and you can see why they would say that. You can see why that would also be a good value to have for a lot of work. You want to look out for your client’s interests, be a fiduciary in a way, and that’s great. But again, it depends on the nature of the client. I think there are a lot of, especially older McKinsey types we talk to that do lament the fact that McKinsey has strayed from some of its earlier values. I think a little bit of that is Monday morning quarterbacking. Your typical older people criticizing younger people.

Certainly, a lot of big mistakes were made at McKinsey in previous decades as well in the seventies and the eighties. We write about that too. But it’s true that the company got so big, the American economy became so financialized and the pay of bankers got so high that these very smart people at McKinsey, who were roommates maybe at Harvard with some Goldman guy, were now seeing this Goldman guy making millions of dollars a year while they were only making two or three hundred thousand dollars a year, God forbid. They wanted more. They wanted more of a piece of the pie.

So, their pay started going up and in order for McKinsey to support those ever-increasing salaries for their partners and senior partners, especially, they had to feed the beast, which means the company had to grow and expand. It expanded to more than 30,000 consultants in more than 65 countries. A small firm, even up into the seventies and eighties, where most of the senior partners knew each other, became this very impersonal big firm where it was much easier for bad decisions to happen, for McKinsey to pick bad clients, for McKinsey to not turn down work because to turn down work would mean to forego millions of dollars in potential fees.

So, I think there was some straying away from some of the earlier values, but that was more of a function of the fact that it was a smaller company that was still under the influence of Marvin Bauer who pushed these values and pushed these ideas of integrity, which McKinsey does take very seriously. So, there was some straying from that. A lot of that is a function of the growth of the company and the massive expansion of this company in the last 40 years.

jmk

Well, Mike, thank you so much for taking the time to talk to me today. The book one more time written by yourself and coauthor Walt Bogdanich is When McKinsey Comes to Town: The Hidden Influence of the World’s Most Powerful Consulting Firm. Thanks so much for writing it. Thanks so much for sharing these insights from your reporting and thanks for joining me today on the podcast.

Michael Forsythe

Oh, it’s my pleasure. Yeah, this is great. I really enjoyed it.

Key Links

When McKinsey Comes to Town: The Hidden Influence of the World’s Most Powerful Consulting Firm by Walt Bogdanich and Michael Forsythe

“How McKinsey Lost Its Way in South Africa” in The New York Times by Walt Bogdanich and Michael Forsythe

Follow Michael Forsythe on Twitter @PekingMike

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