An Army of Pete Buttigiegs

McKinsey consultants have packaged capitalism for decades, offering a glimpse into the moral compass of the ruling class.

McKinsey's clients include nine out of ten of the world’s biggest companies, and it has the ear of elected officials, royals, and demagogues the world over.

In 1935, the mammoth retailer Marshall Field’s was bleeding cash. And so the company’s board of directors decided to bring in a man who had established a name for himself as a corporate makeover guru  — James O. McKinsey.

McKinsey, sporting his signature blend of accounting, law, and management expertise, studied Marshall Field’s books for a few months and recommended that it liquidate its wholesale division, close its less profitable stores, and cut 1,200 jobs. Eager to make sure the transformation was a success, McKinsey put himself in charge of implementing the changes  — a restructuring that came to be known as “McKinsey’s Purge.”

“Mac” didn’t survive his first foray into actually running a company  — he died in 1937 from pneumonia. But the power of “The Firm” (as McKinsey insiders call it) to shape companies and governments has only grown stronger in the nearly one hundred years since its founding. Today, McKinsey & Company is a global powerhouse employing thirty thousand consultants in sixty-five countries and boasts alumni in the C-suites of more than seventy S&P 500 companies. Its clients include nine out of ten of the world’s biggest companies, and it has the ear of elected officials, royals, and demagogues the world over.

James O. McKinsey (1889–1937). (Wikimedia Commons)

McKinsey is best known for helping institutions  — from pharmaceutical companies to government agencies  — find value, often through cost cuts. As Duff McDonald, author of The Firm: The Story of McKinsey and Its Secret Influence on American Business, contends, “McKinsey has been the impetus for more layoffs than any other entity in corporate history.”

The Firm is about much more than slashing jobs, however. As C. Wright Mills wrote in The Power Elite, “The power elite are not solitary rulers. Advisers and consultants, spokesmen and opinion-makers are often the captains of their higher thought and decisions.” McKinsey is a captain of ideas, inculcating corporations and governments with its vision of how organizations should be run.

The role of ideas in capitalism is often glossed over. The behaviors, strategies, priorities, and assumptions of corporate leaders are often assumed to be the rational by-products of profit-seeking impulses  — “best practices” arising in response to market signals. There is obviously some truth to this. But institutions such as corporations and government agencies are, for better and for worse, also highly influenced by the prevailing capitalist zeitgeist — a zeitgeist that McKinsey has played a key role in formulating over the decades.

In the two decades following World War II, Keynesianism and the Cold War were key shapers of corporate identity. Executives valued security, predictability, and expanding market share, which they believed were best achieved through lifetime employment, avoiding risky financial ventures, and plowing profits back into brick-and-mortar expansion and acquisition. In these years, US companies grew into massive enterprises, raising questions about how to effectively manage them.

McKinsey was there with an organizational model  — the decentralized multidivisional form, or M-Form  — to help corporations like Chrysler, Raytheon, and General Foods manage their kingdoms. McKinsey also began exporting its know-how to European firms, who, McDonald writes, were terrified of an American invasion but desperate to capture their corner of the market. Siemens, Hitachi, the Bank of England, Royal Dutch Shell, and Renault all became “McKinseyized.”

But as competition increased and the contradictions of the Bretton Woods model heightened in the 1960s, corporate profits stagnated, and the American conglomerate model became suspect. Big companies suddenly seemed plodding and uninspired. Futurists like Alvin Toffler and Warren Bennis touted a new vision of the corporation  — smaller, lean, flexible  — and McKinsey operationalized it.

As Louis Hyman argues in Temp: How American Work, American Business, and the American Dream Became Temporary, consultants played a central role in the dramatic corporate restructuring of the 1980s. McKinsey’s consultants, reports, and books encouraged firms to trim the fat of middle management and replace lifetime employment with outsourcing, project work, and temps. Risk minimization strategies shifted from reducing turnover and reinvesting revenue to cutting jobs and maximizing shareholder value. Instead of defining themselves by their industry, McKinsey encouraged CEOs to identify their goals with profit-making alone.

Somehow, cutting the fat never extended to consultants, though. Hyman says that “by the 1980s, the most powerful American corporations typically had a continual set of consultants advising them on matters of business strategy . . . Consultants were the business strategists for the corporations, instead of the corporation’s senior leadership.”

These days, the capitalist zeitgeist is shifting once again. The belief that maximizing shareholder value would bring the greatest rewards for individuals and communities took a beating after the 2008 financial crisis. But McKinsey is already ahead of the curve, pivoting to the wonders of data analytics and artificial intelligence. Its website emphasizes The Firm’s expertise in “data translation,” helping companies use algorithms and machine learning to boost revenues and growth.

While McKinsey is often associated with corporations, from the very beginning, its advice has been eagerly sought by political leaders. At the same time that it was helping executives manage multidivisional firms in the 1950s and ’60s, it was developing lucrative relationships with government agencies. President Dwight D. Eisenhower, for example, hired the firm in 1952 to advise him on filling executive branch positions. Dozens of government agencies, from the Department of Defense to NASA, hired McKinsey consultants to streamline workflow and develop their organizations.

Indeed, the global political reach that McKinsey enjoys today was already being established in the postwar decades. Britain and Germany made extensive use of its consultants. So did Julius Nyerere, the longtime socialist president of Tanzania. In the early 1970s, Nyerere had a team of McKinsey consultants working for him on developing blueprints for the postcolonial transition.

Today, public sector consulting is a $9 billion industry in North America. McKinsey has raked in $20 million from the US Immigration and Customs Enforcement agency alone in recent years. Former President Barack Obama hired McKinsey to help ICE streamline deportations, and Donald Trump kept the company on, expanding its role to find ways to cut costs in his crackdown on illegal immigration. According to a ProPublica investigation, McKinsey’s recommendations for ICE included spending less money and food, medical care, and supervision for detainees.

What is McKinsey’s special sauce? Why are companies and countries so eager to call upon it? McDonald says that The Firm’s success isn’t rooted in the novelty of its ideas and recommendations. “The great open secret of the McKinsey business model,” he argues, “is that a large part of its success has come by reselling the insights of others.” For example, “the primary product McKinsey sold, for several decades, was a customized version of the decentralized, multidivisional organization structure pioneered by the likes of DuPont.”

Instead of surefire plans for success, McKinsey’s prestige, burnished by its pipeline to graduates from Harvard Business School and other elite institutions, gives companies cover to implement dramatic restructuring plans. Calling up McKinsey lets executives off the hook for unpopular decisions, such as IBM’s mass layoffs and elimination of lifetime employment, which devastated the surrounding community in Upstate New York.

McKinsey has actually given a lot of bad advice over the years. In the case of Tanzania, for example, Brian Van Arkadie cites McKinsey’s “poorly thought out external proposals for administrative reform” as an important factor in the country’s inability to develop a competent bureaucracy.

AT&T, General Motors, and Swissair crashed and burned after hiring the consulting firm, and who can forget Enron? CEO Jeffrey Skilling, a former McKinsey consultant, brought the consulting firm in on an almost continuous basis in the years leading up to the energy company’s epic collapse in 2001 and Skilling’s twelve-year imprisonment for nineteen counts of fraud, insider trading, and criminal conspiracy.

The Firm denies any wrongdoing in the Enron case, but it’s difficult to say what its role was in the scandalous mismanagement and greed displayed by Skilling and his compatriots. The difficulty is due in part to McKinsey’s intense secrecy about its activities. It is not publicly traded, it doesn’t divulge how much its partners earn, and it doesn’t say who its clients are. Clarity comes only when people go digging, and when they do, the results are often unsettling.

ProPublica went digging. It investigated McKinsey’s boast that its “restart” housing program at Rikers Island had cut violence by 50 percent at the jail complex. Anthony Shorris, Mayor Bill de Blasio’s top deputy, hired McKinsey in 2014 following a string of media reports about the brutality of life at Rikers, where fights, stabbings, and assaults by guards were common. New York City paid McKinsey, who had no experience restructuring jails or prisons, $27.5 million over three years to test a new anti-violence strategy.

McKinsey claimed its “restart” program was a great success. But ProPublica’s investigation revealed that the improvement stats were a fabrication. McKinsey and prison administrators stacked the “restart” houses with Rikers’s least violent prisoners. Moreover, instead of finding ways to reduce skyrocketing violence in the prison, McKinsey encouraged guards to expand the use of tasers, shotguns, and K9 patrol dogs.

The company doesn’t just lie about its efficacy. It also lies about being a “disinterested expert”  — its promise to maintain a strict fire wall between the consulting work it does for its clients and the financial returns it gets from investing in these same firms. The first time McKinsey breached this fire wall was in the 1990s, when top McKinsey executives were caught insider trading. McKinsey was embarrassed by the scandal and swore future vigilance. But a series of subsequent investigations revealed that conflicts of interest were still par for the course.

McKinsey’s secret hedge fund appears to be a key player in these cases. McKinsey Investment Office, or MIO Partners, manages roughly $25 billion for McKinsey employees, alumni, and retirees through a series of smaller hedge funds, various shell companies, and an offshore location in the English Channel island of Guernsey, where it keeps a large part of its holdings. Not much is known about MIO Partners and its investments, however. Nor is the relationship between MIO and McKinsey clear. But what is known doesn’t look good.

Recent revelations show that McKinsey has been double-dipping in its bankruptcy dealings. In Virginia, a coal company, Alpha Natural Resources, hired McKinsey to help it generate a bankruptcy restructuring plan to, among other things, figure out how much it would need to pay its secured creditors. The problem is that McKinsey, through its hedge fund MIO, was one of those secured creditors, a conflict of interest great enough that a federal judge ordered a reopening of the case.

A similar problem occurred in Puerto Rico. McKinsey was hired by Puerto Rico (and has so far been paid $50 million) to help the territory generate an exit strategy to manage its crippling debt and get on a path toward growth and development. Unfortunately for Puerto Rico, McKinsey had a material interest in making sure the island paid off its secured creditors  — it was one of them, with at least $20 million in Puerto Rican securities.

According to the New York Times, the plan McKinsey sold to Puerto Rico “was surprisingly generous to the owners of those sales-tax bonds. They were offered new bonds that would be valued at either 93 percent or 56 percent of what the old ones originally were worth, depending on the terms of the old bonds.” After all is said and done, it looks like McKinsey’s hedge fund (through its subsidiaries) will double its original investment in Puerto Rican, bonds while the island and its inhabitants continue to struggle.

The frequency of McKinsey’s conflict of interests in its bankruptcy advising reached the point where the firm was forced to settle with the US Department of Justice in 2019, agreeing to pay $15 million to resolve previous complaints. The settlement is only a fraction of the fees McKinsey has earned, however, not to mention the money its hedge fund has earned through the restructuring plans.

Sometimes, the opposite problem occurs: McKinsey is “disinterested” when it clearly shouldn’t be. In 2015, the company investigated how the public viewed the economic austerity policies the Saudi government was implementing at the time. McKinsey produced a report that included the names of three individuals who had criticized the regime on Twitter. Shortly thereafter, one of the people named was arrested, while another said that his brothers had been imprisoned and his cell phone hacked.

The Firm professed “horror” that its report may have been used for evil. Not horrified enough, apparently, to prevent it from attending a huge investment conference in Saudi Arabia shortly after the Saudi government was implicated in the murder and dismemberment of journalist Jamal Khashoggi in 2018. The Saudi government is one of McKinsey’s top clients.

McKinsey will take money from just about anyone. Ukrainian billionaire Rinat Akhmetov hired the company to extol the virtues of Viktor Yanukovych to the Ukrainian people and the world. McKinsey did so, running forums in New York and Washington about how Yanukovych would modernize and grow Ukraine’s economy. Instead, Yanukovych robbed the country blind and fled to Russia. No problem. McKinsey simply hired itself out to his replacement.

When onetime Democratic presidential candidate and McKinsey alum Pete Buttigieg was asked about the potential ethical implications of working with some of McKinsey’s more disreputable clients, he said, “I never worked on a project inconsistent with my values, and if asked to do so, I would have left the firm rather than participate.” McKinsey apparently doesn’t force its employees to consult for clients they have moral qualms about.

But there seem to be plenty of consultants at McKinsey who have no problem working for companies and politicians that put money and power above all else  — and McKinsey helps them get more money and power. Just look at revelations about The Firm’s connection to Purdue Pharma, the maker of OxyContin. A recent Massachusetts lawsuit argued that McKinsey was a central player in the state’s opioid epidemic, coaching Purdue on “how to ‘turbocharge’ sales of OxyContin, [and] how to counter efforts by drug enforcement agents to reduce opioid use.” McKinsey was also, according to the lawsuit, “part of a team that looked at how ‘to counter the emotional messages from mothers with teenagers that overdosed’ on the drug.”

McKinsey has refused to admit guilt in its dealings with Purdue and other pharmaceutical companies, but in February, it agreed to a $574 million settlement with the attorneys general of every US state except Nevada to fund opioid treatment and recovery programs. The Firm’s contribution to an epidemic that has killed nearly a quarter of a million Americans, however, didn’t stop governments around the globe from enlisting its help in managing the coronavirus pandemic. In the United States alone, state and federal agencies awarded the company more than $100 million in COVID-19 contracts. America’s ruling class may express occasional dismay at McKinsey’s misdeeds, but at the end of the day, the consulting firm’s growing list of crimes and misdemeanors elicits little more than headlines and token gestures. Indeed, as former global managing partner Kevin Sneader, who was ousted early this year by the company’s senior partners for his apparently overzealous reform efforts, boasted: 2020 was McKinsey’s “best recruiting year ever.”