Today’s Corporate Criminal: McKinsey
Corporate bankruptcies are a goldmine for lawyers and consultants. The costs for large corporate bankruptcies like Enron, WorldCom, United Airlines, and Lehman Brothers run into the hundreds of millions of dollars. For consulting companies like McKinsey, these bankruptcies are easy money. Yet, apparently, for McKinsey, that money wasn’t easy enough. The company has been hit with numerous charges for advising on bankruptcies without disclosing its investments in those entities, allowing the firm to advise for a reorganization that would protect and benefit those investments. It is essentially the classic case of being on both sides of a deal.
McKinsey is already under fire for its involvement in the Puerto Rico debt restructuring at the same time the firm has holdings in Puerto Rico bonds. While that situation would normally require a public disclosure of the potential conflict from the company, the Puerto Rico restructuring is done under different regulations because the territory is not subject to US bankruptcy law and such a public disclosure was not required. Regardless of the lack of requirement, as one law professor declared, “It’s a conflict of interest. They are making decisions that will determine how much money is given to themselves”. As it turned out, based to some degree on McKinsey’s advice to the oversight board, the bondholders received a remarkably good deal, receiving 93% or 56% of par value depending on the actual bonds held. While that was a windfall for bondholders like McKinsey, it is a disaster for the citizens of Puerto Rico who will be on the hook for those debts.
Earlier this month, a judge re-opened a two year old bankruptcy case, citing the possibility that McKinsey had defrauded the bankruptcy court in a coal company reorganization. In reopening the case, Judge Kevin Huennekens declared “These are some of the most serious allegations that I have ever seen…We have got to get to the bottom of this”.
The reopening of the case is all due to a disgruntled gadfly investor, Jay Alix, who became disenchanted, to say the least, with McKinsey when it consistently outmaneuvered his own reorganization firm, Alix Partners. Ever since then, Alix has devoted lots of his time into investigating McKinsey’s practices. In this case, Alix has claimed that McKinsey had an undisclosed indirect stake in some of the coal firm’s secured debt while acting as an adviser on the reorganization plan. He further alleges that the bankruptcy plan that emerged created a $50 million windfall for McKinsey’s secured credit stake, presumably at the expense of other creditors. The Office of the United States Trustee supports Alix’s allegation and has also requested that the judge claw back the $20 million in advisory fees McKinsey made in the case.
Alix has made similar charges involving another coal company in Colorado. And again his charges are backed up by federal authorities, in this case the Department of Justice. The DOJ filed a motion alleging McKinsey had “pervasive disclosure deficiencies” and recommended that it be removed from the reorganization and pay back any fees it had already been paid. Once again, the disclosure problem involved indirect investment in the coal company that was held by a separate division that managed money for McKinsey former and current employees.
McKinsey claims that those division’s investments are confidential and hidden from the consulting side of the business by the proverbial Chinese wall, which time has shown is often as porous as the President believes our southern border to be. The potential conflict of interest is clear and there is no reason for the bankruptcy court not to be made aware of that. That disclosure would probably not prohibit McKinsey from consulting on the reorganization but it would allow the bankruptcy judge to perform informed and effective oversight.
If all that wasn’t bad enough, Alix has now accused McKinsey of different misdeeds in another bankruptcy case, this one involving a renewable energy company, SunEdison. In this case, it was clear that SunEdison was heading toward bankruptcy and McKinsey, who had done prior consulting work for the company, wanted to make sure they would get paid for that work before it went into receivership. As part of the standard procedure in ensuring that assets aren’t improperly stripped from the company in the months just prior to bankruptcy, an email was discovered that showed a McKinsey partner working with SunEdison to have those payments flow through SunEdison entities that were not going to be part of the bankruptcy and which McKinsey had actually done no work for. The plan involved voiding McKinsey’s original bills to SunEdison for $37 million and then billing the related SunEdison entities not part of the bankruptcy for the same amounts. The partner’s email stated “Acknowledge that this is not ideal .We should anticipate spirited opposition from some PMs [Project Managers] that we will need to push through”.
Alix also alleges that McKinsey entered into another undisclosed agreement with the former SunEdison chief executive who formed a new company that purchased $35 million in SunEdison assets during the bankruptcy for $6 million.
Of course, all these bankruptcy shenanigans pale in comparison to what McKinsey does on the international stage. As opposed to the bankruptcies in the US, it appears McKinsey’s actions overseas have not broken any laws. But it is also clear that the company is not particular about the clients it works for and how actions recommended to those clients might run counter to American and general humanitarian interests.
The New York Times had a recent expose that described some of McKinsey’s most questionable foreign interactions. In Ukraine, the company was doing similar work to Paul Manafort, pursuing an effort to rehabilitate the image of twice-convicted criminal and wannabe autocrat, Viktor Yanukovych, painting him as a kind of liberal reformer. In fact, both McKinsey and Manafort were being paid by the same Ukrainian oligarch with suspected criminal ties. Hundreds of Ukrainians died in the successful revolution that drove Yanukovych from power.
McKinsey also does extensive business with Chinese companies, providing services for nearly one-quarter of the country’s top 100 companies. One of those companies is responsible for building the artificial islands in the South China Sea in a direct attempt to control one of the world’s most important shipping lanes and is seen as a direct challenge to US interests in the Pacific as well a destabilizing influence for Southeast Asia generally.
More importantly, McKinsey is heavily involved in advising those companies that work on China’s Belt and Road Initiative. In many countries, this involves Chinese companies building or upgrading infrastructure in less developed countries under rather onerous terms. In Sri Lanka, the terms were so onerous, the country ended up passing ownership of its largest port to the Chinese.
In Malaysia, McKinsey once again managed to be on both sides of a deal. It was advising the Malaysian government on the feasibility of a new rail line and recommended that it be built using the funding and expertise offered by the Belt and Road Initiative. Of course, the company that was selected to build the rail link was one of the Chinese companies advised by McKinsey. In fact, nearly half of the contractors in the Belt and Road Initiative are McKinsey clients.
All this is sadly just standard corporate graft these days. Other McKinsey work is being actively used by autocrats and dictators to monitor and eliminate opposition voices. In China, this work involves what McKinsey bills a “smart cities” but what is in essence a Big Brother operation that will allow the government to exert even more strict political control.
McKinsey’s work in Russia is also problematic. One of its clients, VEB bank is under sanction and whose chief executive Jared Kushner met with immediately after the 2016 elections precisely because, according to Jared, he had a “direct line to the Russian President”. Two other sanctioned Russian banks, Sberbank and VTB, are also McKinsey clients.
But by far the greatest damage McKinsey may have done is in Saudi Arabia. The company does extensive business in the country with over 600 projects over just a five year span. Its report to the government about how Saudi policies were viewed by the public helped the Saudi identify three important influencers who drove negative coverage. One was arrested by the Saudis, two immediate family members of another were also arrested, and the third’s twitter account was shut down. McKinsey’s response echoed Captain Renault in Casablanca, saying it was “horrified by the possibility, however remote,” that their report was used to target these individuals. That incident, of course, had no real impact on any future McKinsey actions as it dutifully attended the Saudi investment conference held in the immediate aftermath of the regime’s murder and dismemberment of Jamal Khashoggi.
The McKinsey people involved in all these projects are not stupid, just brazen, greedy, and filled with the knowledge that they and the company will never seriously be held to account. A McKinsey partner knows damn well that the changing the billing to an entity that the firm did no work for is illegal. The firm as a whole knows damn well that disclosure of any potential conflict of interest is paramount. A McKinsey partner knows damn well that being on both sides of a deal is a serious conflict of interest. A McKinsey partner knows damn well that an autocratic government will use resources McKinsey provides to suppress any opposition. Yet they all engage in this behavior to get the fees and with the knowledge that no one will stop them anyway.
A professor has written that management consultants are “the black box of authoritarian governance”. While there is no doubt that these companies also do good work, firms like McKinsey are participants in and abettors of the global kleptocratic class that works either outside the restrictions or with the acceptance of any real legal and political oversight. They feed the inequality and corruption that is now rampant worldwide. It is the challenge of our times to break the power of this class and the structures that support them.
