McKinsey
Our
strategy is basically the education I had through McKinsey.
-
Former Valeant Pharmaceutical, CEO, Michael Pearson, Financial Times.
Short-term capital will beget short-term
management through a natural chain of incentives and influence.
-
McKinsey & Company, Managing Director, Dominic Barton, Financial Times
By J.M. Hamilton (8-7-16)
You can’t make this stuff up.
On the heels of writing my last piece on the U.S.
Chamber of Commerce, and how it acts against the interests of ordinary
Americans on a daily basis, the Washington Post
came out with a story, Thursday, showing how the Chamber is suing the Obama
Administration for attempting to put the brakes on tax inversions. Tax
inversions are where multinational corporations enjoy all the advantages of
U.S. citizenship (the rule of law; the best democracy money can buy; and a
military that is at war w/ the world to protect global trade routes), without
paying for it. No, said multinational, in this case Pfizer, rips off the
American consumer and taxpayer daily (the U.S. is the only Western democracy
that does not cap drug prices), and enjoys patent protections enforced by U.S.
courts and free trade agreements (in essence a monopoly), and then has the
audacity to bitch about paying taxes.
The
Chamber and its éminence grise, Mr.
Donohue, loves to fall back on the tired old argument that the U.S. has the
highest corporate tax rate in the world, and therefore, Pfizer is entitled to
dodge taxes, via foreign inversion. But the Chamber, conveniently, fails
to mention that for the uber wealthy, and the corporate tax code in
particular, is loaded w/ enough loopholes to sink the ship of state. Pfizer
of course, pays at a tax rate nowhere close to 35%, but Pfizer sure likes
to make monopolistic profits in this country, and does so daily.
One could easily argue that the Chamber’s actions are
Anti-American and unpatriotic. Once again, the Chamber is lobbying’s super
villain, that is to say, an evil rapacious machine – making arguments – that
its corporate contributors and members wouldn’t dare make, for fear of
offending the American public and stockholders.
If the
Chamber is lobbying’s bête noire, than McKinsey & Company is the consulting
world’s equivalent. McKinsey & Company is based in New York
City, and its global consulting empire, as recently as 2014, was said to
generate $8.3 billion in revenue.
McKinsey
is privately held by 1,400 partners, and employs 17,000 workers worldwide.
Additionally, it is the wheelhouse for 9,000 consultants, many of them MBAs or
persons possessing graduate degrees, if not doctorates. It not only
counsels the Fortune 500, but many of its consultants end up running the
companies they advise. C-Suites
and boardrooms are littered w/ former McKinsey associates and executives.
And just because an associate or partner leaves for greener pastures doesn’t
mean those McKinsey ties are severed. As revealed earlier this year in
the Financial Times,
McKinsey also operates a $9.5
billon dollar hedge fund for its employees and partners, that helps insure
continued loyalty, and partnership, even after an employee leaves.
To give one some idea of McKinsey’s clout and power, a
recent Forbes
article, quoting from the book
The Firm,
observed:
“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.”
So with all this consulting going on, and consolidation in
industry after industry into cartels and monopolies, isn’t there a conflict of
interest? Many observers and writers say that the McKinsey business
model produces an inherent conflict of interest. One of McKinsey’s key
offerings is industry benchmarking, or “best practices,” where a company can
see what industry peers are up to. Conveniently omitted are competitor
names, but if there are only three or four players left in a given industry
it’s not hard to figure out, thanks to McKinsey, who is employing said “best
practices.”
Hmmm... sounds like collusion defined, via an
intermediary.
There’s
more… McKinsey is the master consultant of financial engineering practices that
have devastated many advanced economies. Need to cut staff to boost
the bottom line, bring McKinsey in for a study. Consultation on M&A
and industry consolidation, and the resulting “synergy,” McKinsey is there to
hold a multinational’s hand. If one was nefarious, and looking for the
Xanadu of insider information – in industry after industry – McKinsey affords
an ocean of data and information.
Perhaps that’s why so many McKinsey alumni have landed in
hot water, or have flirted with disaster. McKinsey’s consultants and
partners are consummate insiders, possessing information that would allow them,
or friends, to make a killing in any number of markets: stock, bonds,
commodities, futures, derivatives, and swaps.
Rajat
Gupta is perhaps one of the more infamous McKinsey alums, brought down by
insider trading. Information Mr. Gupta picked up, by sitting on the board
of Goldman Sachs, was shared with a hedge fund operator. Mr. Jeff
Skilling learned a thing or two from McKinsey, before moving on to help cook
the books at Enron
(accounting gymnastics
were employed that brought that company to ruin). Tidjane Thiam, who
presently runs Credit Suisse, has suffered some risk management problems as of
late, and Credit Suisse has reported close to a billion dollars in losses in
late 2015 and early 2016. Looks like some Suisse trading positions went
south, in some illiquid markets. Before running Credit Suisse – you
guessed it – Mr.
Thiam was a McKinsey employee. To be sure, not all McKinsey alums
have come to a bad end. Mr. Sundar Pichai and Ms. Sheryl Sandberg, of
Google and Facebook fame, respectively, appear to have done very well.
However,
if there is one person who epitomizes the McKinsey ethos, and what that ethos
has done to the American & advanced economies, it is former Valeant
Pharmaceutical CEO, Michael Pearson. In news reports, we learned that
Mr. Pearson surrounded himself w/ friends from McKinsey, when he took over
Valeant Pharmaceutical. Then he did a tax inversion deal - the Chamber
and Mr. Donohue are presently raving about - to dodge paying U.S. taxes.
But what Mr. Pearson did next is right out of the McKinsey playbook: he
loaded up Valeant with a debt tsunami; acquired drug company after drug company
(often at or near market peaks); a
la Enron, he was alleged to have cooked the books, with some shady
accounting and drug wholesalers; Mr. Pearson stripped the labor force of
Valeant and its acquisitions; gutted R&D; and jacked up the price of
medicine in a manner that
Jeffrey
Shkreli could appreciate.
If
this seems all too familiar to many Americans, it’s not only because what Mr.
Pearson did epitomizes the McKinsey way, but it is also the business model for
an entire industry, otherwise known as private equity. Hedge
funds too, love the McKinsey model, and more than a handful of hedge
funds took a severe beating when Valeant’s stock tanked. But fear
not…. Mr. Pearson – who once was a paper billionaire – enjoyed a nice severance
package, while Valeant’s stockholders are said to be taking epileptic medicine
to calm their seizures.
All this information (shared for the price of a consulting
contract), all this industry consolidation, the incestuous board room & C
suite relations, the cult like embrace of McKinsey’s current and former
consultants and partners… and the $9.5
billion dollar hedge fund McKinsey operates (amazingly, has only lost money
once in 25 years), w/ all appropriate firewalls and protections against
impropriety (we are solemnly assured)… If there ever was a company that
personifies all the economic problems America faces today, it, likely, could be
summed up in one word: McKinsey.
Conflict
of interest magnified exponentially, and a cadre of elite insiders rigging
the game for themselves and a select few: McKinsey & Company?
And now, wait for it… Here comes the punch line…. There
appears to be some remorse.
Per a recent Bloomberg
piece, McKinsey – in light of Brexit, and the American electorate’s near rabid
response to anything smacking of an establishment politician - is having
a quiet reflective moment. With both U.S. political parties rebelling
against free trade, embracing Glass Steagall, and rejecting globalization and
the resulting U.S. pink slips - the consultant firm was such a strong advocate
for - McKinsey appears to have turned the corner. To be sure, McKinsey, per
a recent write up assures us, the organization still finds value in
offshoring, immigration, trade, and so forth, but these things must be done
with more “sophistication.” Lest
advanced economies and Western democracies blow up like a city block with a gas
leak, as McKinsey’s Senior Partner, Richard Dobbs, recently put it.
I guess crushing the labor force, and with it aggregate
demand, in a consumer driven economy, isn’t particularly brilliant, especially
in the long run.
Copyright JM Hamilton Publishing 2016
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