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Is McKinsey a partnership? It's how it thinks about itself, how it governs itself, and how it presents itself to clients and potential recruits. According to Kevin Sneader, who led the management consulting firm from 2018 to 2021, it really is “one of the world's leading partnerships.”
But the meaning of the partnership is coming under scrutiny, both externally because of a lawsuit filed in a New York court and internally as a result of a governance review launched after two tumultuous leadership elections.
In the narrow sense, McKinsey is not a partnership: In fact, according to the firm's official internal history, it was incorporated in New York about 70 years ago in search of financial flexibility and tax advantages.
But the partnership's constraints remain: They insist on calling themselves a firm (usually with a capital F), and their heavy-handed internal democracy has sometimes irritated leaders (so much so that Sneader was unceremoniously booted from his job). Like a real partnership, partners are required to risk capital by investing in the firm, and the money they make each year reflects their share of the annual profits. In lean years, like 2008, they may be required to contribute capital through capital calls.
That's enough to give the firm fiduciary duties to its partners and among each other, according to a lawsuit filed by Arnab Ghatak, a former senior partner in McKinsey's health care practice. Ghatak was fired on the eve of a $574 million settlement with U.S. states that had alleged the firm's advice to opioid manufacturers contributed to the addiction epidemic. McKinsey said he was fired after “communicating about document deletion,” referring to the embarrassing emails that became public.
“Ghattak, who is a licensed physician and says he focused on projects promoting highly addictive opioids, claims he did not delete any documents and that the firm is defamatory by implying that it did. He also claims the firm conducted bogus disciplinary proceedings to make him a scapegoat and breached its fiduciary duties as a partnership.”
McKinsey said it stood by its decision to fire Ghattak and statements about him when the lawsuit was filed, but initially did not comment on partner issues, so partners will likely be interested in the firm's formal legal arguments, which were filed over the weekend. McKinsey argued that the firm had no fiduciary duty to its partners.
“I'm sure they would prefer not to have to deal with this issue,” said Gatack's lawyer, Dan Kaiser. “Taking the position in open court that it's not a partnership could frustrate the partners, who maintain that it is a partnership and that they have fiduciary duties to one another. It would of course raise marketing problems.”
The past two leadership elections have already revealed unrest among McKinsey's 750 senior partners over the way Mr. Sneader and his successor, Bob Sternfels, have introduced more centralized oversight and control and corporate-style decision-making in response to the opioid settlements and other reputational crises. Mr. Sternfels won a second term by a narrow margin in February.
McKinsey's supporters say the firm needs to modernize its decision-making after revenue doubled over the past decade. A recently launched governance review has mooted measures such as lengthening terms for executives and changing election rules. As a first step, the firm separated a “shareholders council” of prominent partners from management and made it more like a traditional board of directors tasked with overseeing executives. Other tweaks are also under consideration. Any parallels to the firm's last governance review a decade ago could be contentious.
At least this time, it seems less radical. Most of the current generation of leaders are unlikely to favor doing away with the partnership altogether, even if some partners privately have doubts about the future. McKinsey has grown into an organization with 46,000 employees in 65 countries and a reach that goes far beyond its historical core of strategy consulting. As a result, if McKinsey needs to make more traditional corporate decisions and is starting to feel like working for a corporation, why not sell shares to private equity or go public on the stock market?
Another firm that once claimed the title of “the world's leading partnership” is Goldman Sachs, which just celebrated its 25th anniversary as a public company. Who would have guessed that McKinsey would still be operating as a partnership in 25 years' time?
Email: stephen.foley@ft.com
