10-2 Consulting Module

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DEFINING CAPITALISM’S CHARACTER: TOM PETERS VERSUS MCKINSEY1

Gerard Seijts and Thomas Watson wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

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Copyright © 2022, Ivey Business School Foundation Version: 2022-03-25

In early 2021, McKinsey & Company (McKinsey), the world’s pre-eminent consulting firm, agreed to pay US$573 million2 to end US state-level investigations into claims that it had helped exacerbate a global opioid crisis.3 Tom Peters, an influential and highly respected management guru, knew that organizations made mistakes and that individual employee actions did not always reflect a company’s values. Nevertheless, he felt “personally soiled” by how far his former employer had been willing to go in helping US drug maker Purdue Pharma LP (Purdue) increase sales of OxyContin, a narcotic-based painkiller that helped drive an opioid epidemic responsible for hundreds of thousands of tragic deaths, including 19,355 in Canada.4 Peters was particularly disgusted by McKinsey’s recommendation that Purdue consider reducing distributor reluctance to sell the drug by paying rebates based upon fatality and addiction statistics.5 In a commentary published by the Financial Times, McKinsey’s highest-profile former consultant publicly wondered what he should do, noting: “As a McKinsey alumnus, my reaction [to the scandal] was simply: ‘Dear God!’ My decades of pride in the firm evaporated as I read of the settlement. In fact, I asked a colleague, in earnest: ‘Should I remove McKinsey from my CV?’”6

Condemnation of McKinsey’s opioid work was far from universal because its advice to Purdue came with a statement noting that McKinsey’s recommendations were subject to appropriate legal and regulatory review by Purdue prior to implementation. As one Reddit user put it: “Can someone explain just exactly what McKinsey [has] supposedly done wrong? I mean, OxyContin was approved by the FDA [Food and Drug Administration], and the manufacturer had the right to sell it. McKinsey was supposedly just helping to market and to boost sales. That sounds like that they are doing their jobs.”7 But as far as Peters was concerned, there was no question as to what McKinsey did wrong: it had hit a “new low” for capitalism by ignoring the moral responsibility of business while helping an unethical client aggressively promote the wide-scale use of a highly addictive drug to maximize profit.8

Determined to distance himself from this behaviour, Peters spent 2021 attacking the values of the firm that had launched his career. As he told his 171,000 followers on Twitter, “I will continue to publicly beat on McKinsey until I see a genuine expression of remorse the magnitude of which approaches the magnitude of the catastrophic behavior.”9

In addition to promoting the Hulu drama series Dopesick, which chronicles the pain and suffering brought on by the criminal misbranding of OxyContin, Peters blasted McKinsey’s culture for being what he called

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dangerously tied to a narrow definition of corporate purpose that dominated capitalism for decades before becoming widely seen as the antithesis of acceptable corporate behaviour in recent years.

This heated dispute between the world’s most prestigious consulting firm and its highest-profile alumnus raised a timely question for business professionals: in today’s evolving marketplace, at what point, if any, should organizations and individuals who shared Peters’s point of view cut ties with anyone (e.g., employees, partners, or suppliers) who had the skills and commitment required to excel at generating profits but lacked what it took to willingly forgo opportunities to increase revenue when such opportunities (even legal ones) threatened the well-being of individuals, society, or the environment?

CAPITALIST DRUG DEALERS

Crime of the Century, Alex Gibney’s 2021 documentary on the opioid crisis, was a searing indictment of big pharma’s drive to maximize profits by downplaying the addictiveness of synthetic opiates, which set the stage for the wide-scale abuse of prescription drugs while creating additional demand for big pharma products in the illicit street drug market.10 As movie reviewer Nick Allen put it:

This is a saga comprised of enormous greed, hundreds of thousands of Americans addicted to prescription pills with heroin-like dosages, sales reps entering Faustian bargains, [and] parasites with medical degrees who run ‘pill mills.’ . . . The drug lords here aren’t like Tony Montana or Walter White, but are corporations like Purdue Pharma.11

Based in Connecticut, the Purdue Frederick Company was founded in 1892 by doctors John Purdue Gray and George Frederick Bingham. In 1952, when the company was still a relatively small concern, offering products ranging from tonics to earwax remover, it was acquired by Arthur, Raymond, and Mortimer Sackler, a trio of sibling doctors who, while working in a psychiatric hospital treating thousands of patients with shock therapy, decided to go into business after becoming convinced that drugs were the future of medicine. Leaving his brothers in charge of manufacturing, Arthur acquired a medical advertising business and revolutionized how drugs were sold, using ethically challenged marketing practices. In addition to using misinformation to sell drugs, he pioneered the idea of enticing doctors to promote medications to other doctors. After making a fortune promoting addictive tranquilizers like Valium, Arthur died before OxyContin was launched, but the tactics he developed influenced marketing strategies deployed by Purdue under Sackler family control.12

Prior to launching OxyContin, Purdue generated significant revenue from MS Contin, which, like other early opioid-based prescription painkillers, was targeted at cancer patients—a limited market. With MS Contin facing competition from generic drug makers, Purdue, under the direction of a new generation of Sacklers, moved to increase profitability by introducing OxyContin in 1996, billing the much stronger opioid-based product as a revolutionary medical breakthrough by insisting it was safe for wide-scale use and could relieve pain for 12 hours (much longer than competitor medications), eliminating the need for pain sufferers to take medication in the middle of the night.13 Doctors were told that one pill in the morning and one at bedtime provided patients with “smooth and sustained pain control all day and all night.”14 At the time, the medical profession widely considered it irresponsible to treat non-cancer patients with opioids due to their addictive nature. But Purdue assured the market that a slow-release coating significantly reduced the risk of abuse and addiction. Despite having no legitimate evidence to back up these claims, Purdue sales representatives told doctors that the risk of addiction for patients with chronic pain seeking long-term relief was “less than one per cent.”15

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When OxyContin was approved, industry influence on the US FDA already had critics concerned with the oversight of drug approvals. In Purdue’s case, the process was called into question by the company’s relationship with the FDA, since the official responsible for reviewing OxyContin’s safety ended up working at Purdue for a significantly higher salary.16 For whatever reasons, the FDA approved misleading labelling that suggested clinical studies had found the risk of addiction for prescribed use “very rare” and OxyContin’s delayed absorption reduced the drug’s “abuse liability.” Using its FDA approval to support its unfounded claims, Purdue then targeted general practitioners lacking expertise in drug abuse with what the New York Times called “the most aggressive marketing campaign ever undertaken by a pharmaceutical company for a narcotic painkiller.”17

From 1996 to 2001, more than 5,000 physicians, pharmacists, and nurses attended all-expenses-paid events at vacation resorts, where they were recruited to promote OxyContin as safe. As the drug became a blockbuster money-maker, with sales increasing from $48 million in 1996 to more than $1 billion in 2000, rates of addiction also began to skyrocket, with OxyContin not living up to its branding.18 With the painkiller often wearing off earlier than the 12-hour mark, legitimate users started popping more pills to counter feelings of withdrawal. Meanwhile, illicit street demand took off as people realized that a heroin- like high could be achieved by simply chewing OxyContin tablets or crushing them into powder. By 2003, the US Drug Enforcement Administration concluded that the company’s “aggressive, excessive and inappropriate” marketing “very much exacerbated” the abuse and criminal trafficking of OxyContin.19

In May 2007, after years of misleading doctors, patients, and regulators, Purdue pleaded guilty to federal criminal charges of misbranding and agreed to pay approximately $600 million in fines and other payments, which, as the New Yorker noted, was then the equivalent of about six months’ worth of OxyContin revenue.20

Federal prosecutors in Virginia had initially hoped to charge three executives on numerous felonies for fraudulently marketing OxyContin as less dangerous and prone to abuse than other narcotics, including the company president and its top legal adviser, but Purdue successfully lobbied the Bush administration to pressure prosecutors to allow the executives to plead to misdemeanour charges and collectively pay a $34.5 million fine. Thanks to a legal team led by former New York mayor Rudy Giuliani, at the height of his influence, Purdue also avoided being barred from doing business with the federal government, which would have dramatically reduced profits by preventing OxyContin from participating in public health programs like Medicaid.21 Despite its control of the company, the Sackler family (and its growing fortune) was left untouched.22 After insisting that its transgressions stemmed from the actions of a few bad apples, Purdue continued its aggressive and unethical marketing of OxyContin following its conviction for misbranding, avoiding sales restrictions by releasing a new formulation of the drug that supposedly reduced the risk of abuse. By 2011, company objectives included approval of OxyContin for children.23

In 2019, when lawsuits seeking billions of dollars in opioid-related damages from Purdue were mounting, OxyContin sales were directly linked to the opioid crisis by a study that found markedly higher rates of overdose in US states without prescription monitoring programs, where the company focused its marketing efforts.24 After making an estimated $30 billion fuelling a deadly health crisis, the company protected itself from accountability by declaring bankruptcy. While under court protection from creditors, Purdue cut another controversial deal, this time with Trump administration prosecutors. While pleading guilty to a second round of criminal charges for—among other things—paying kickbacks to doctors and continuing to mislead the market over the safety of OxyContin, it agreed to an $8.3 billion settlement, which critics noted was probably worth “pennies on the dollar,” as the company was bankrupt.25 In a related deal, the Sacklers agreed to pay $225 million in civil penalties, with no admission of wrongdoing.26 After taking about $13 billion out of Purdue, the Sacklers also negotiated a separate deal that protected most of their wealth lawsuits in return for contributing approximately $4 billion to Purdue’s restructuring and giving up control of the company.27 This deal was thrown out on appeal in late 2021.

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PUSHING PAINKILLERS WITH PURDUE

In September 2018, citing research that noted “many, if not most, patients who use opioids for more than a brief period develop some degree of dependency,” McKinsey researchers released a study on the epidemic calling for bolder action to combat the escalating crisis, noting that the social costs “include not only overdoses and deaths, but also unemployment, lost productivity, and exacerbations of behavioural health conditions. In addition, a growing number of children are being displaced and/or emotionally affected because of their parents’ opioid dependency.”28 The study did not note how the firm’s consultants had worked to help turbocharge OxyContin sales.29

According to the Massachusetts attorney general’s office, McKinsey worked with Purdue executives and members of the Sackler family to limit the regulatory response to the company’s 2007 criminal conviction for misbranding OxyContin as low risk. In 2009, McKinsey reportedly advised its client that new sales tactics could increase annual sales of OxyContin by as much as $400 million. Options presented to management included pushing the idea that opioids reduced stress and increased patient optimism, focusing marketing efforts on prolific prescribers of OxyContin and using pain sufferers to lobby reluctant doctors to prescribe the drug. In an email exchange that included a McKinsey consultant, a potential plan was discussed to counter bad publicity generated by grieving mothers of teenagers who had overdosed. In 2013, after Walgreen Company (Walgreens), under pressure from regulators, started cracking down on illegal prescriptions, McKinsey recommended that Purdue “lobby Walgreens’ leaders to loosen up,” noting that a “deep examination of Purdue’s available pharmacy purchasing data shows that Walgreens has reduced its units by 18%.”30 In 2017, after OxyContin prescriptions between 2010 and 2016 had dipped about 40 per cent,31 McKinsey suggested that Purdue could boost revenue by offering rebates of $14,810 to OxyContin distributors for every sale linked to an overdose or death. This option was presented with an analysis that estimated that 2,484 customers of the pharmacy chain CVS Pharmacy Inc. alone would overdose or become addicted to opioids in 2019.32 In addition to focusing “on higher, more lucrative dosages and increased sales rep [representative] visits to high-volume opioid prescribers,” McKinsey reportedly advised Purdue to maximize its OxyContin profits by working with other opioid manufacturers to counter calls for “strict” regulations. The firm also recommended that Purdue consider delivering OxyContin directly through mail- order pharmacies that could circumvent restrictions on suspicious high-dose prescriptions.33

In July 2018, after learning that Purdue board members faced legal actions for allegedly helping fuel the opioid epidemic, at least two senior McKinsey consultants discussed “having a quick conversation with the risk committee to see if we should be doing anything other that [sic] eliminating all our documents and emails.”34 Nevertheless, the firm insisted that its work for Purdue was being mischaracterized, and it admitted no wrongdoing in February 2021 when it reached its controversial settlement with a coalition of attorneys general representing 47 states, the District of Columbia, and five US territories. In addition to the payment—which was meant to help state efforts to abate the opioid crisis—McKinsey agreed to stop advising companies on potentially dangerous Schedule II and III narcotics. It further agreed to release all available documentation related to its opioid work and to implement strict standards for document retention and conflict disclosures on government contracts.35 As ProPublica Inc. (ProPublica) later reported, while some McKinsey consultants were working for Purdue, helping push opioids and limit regulations, other McKinsey consultants were working for the FDA, helping it revamp drug-approval processes and monitor the pharmaceutical industry—without disclosing the conflict.36

McKinsey’s opioid settlement was made under the leadership of global managing partner Kevin Sneader, who, according to New York Magazine writer Andrew Rice, embarked on “what, by McKinsey’s standards, amounted to a policy of perestroika,” after inheriting numerous scandals from his predecessor, Dominic Barton.37 Prior to cutting a deal to limit the risk of potential lawsuits, Sneader authorized the release of a statement to address the firm’s work for Purdue:

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As we look back at our client service during the opioid crisis, we recognize that we did not adequately acknowledge the epidemic unfolding in our communities or the terrible impact of opioid misuse and addiction on millions of families across the country. That is why last year we stopped doing any work on opioid-specific business, anywhere in the world.

Our work with Purdue was designed to support the legal prescription and use of opioids for patients with legitimate medical needs, and any suggestion that our work sought to increase overdoses or misuse and worsen a public health crisis is wrong. That said, we recognize that we have a responsibility to take into account the broader context and implications of the work that we do. Our work for Purdue fell short of that standard.

We have been undertaking a full review of the work in question, including into the 2018 email exchange which referenced potential deletion of documents. We continue to cooperate fully with the authorities investigating these matters.38

Criticism of McKinsey’s questionable accountability was significant outside of the firm, where Peters was not the only outraged former employee. “This is the banality of evil, M.B.A. edition,” Anand Giridharadas, a former McKinsey consultant told the New York Times. “They knew what was going on. And they found a way to look past it, through it, around it, so as to answer the only questions they cared about: how to make the client money and, when the walls closed in, how to protect themselves.”39

Inside McKinsey, reaction was mixed. Some anonymous posts on an internal chat site called the work for Purdue a betrayal of the firm’s stated commitment to serving society, but others accepted the party line, considering the scandal more a result of McKinsey consultants simply being too focused on doing what they were trained to do—that is, serving their client’s interests to the best of their abilities.40 According to media reports, the latter camp included senior partners who thought Sneader had paid too much to end investigations into the firm’s work for Purdue and gone too far in his acknowledgement of failures. This disapproval, according to Forbes columnist Michael Posner, led McKinsey to decisively deny its would-be reformer a second term before the ink on the opioid settlement was dry. The rejection of Sneader’s leadership was not just unexpected; it was the first time in 40 years that a McKinsey leadership vote denied a second mandate to a global managing director.41 According to media reports, Sneader’s ousting was a rejection of “efforts to reform the private firm by tightening scrutiny of which clients its partners took on,” and that said a lot to critical outsiders.42 An Economist column concluded that, “as the smuggest guys in the room,” McKinsey’s partners suffered from a “collective self-delusion” that had put them in “a clueless mess that they do not understand and therefore cannot fix.”43

MCKINSEY & COMPANY

When facing conflicts involving hijackers, kidnappers, pirates, or other armed foes, governments and organizations across the planet turned to elite military units like the US Navy SEALs to save the day. When facing major non-military challenges, they turned to McKinsey—the special forces of capitalism. As noted in Duff McDonald’s The Firm: The Story of McKinsey and Its Secret Influence on American Business, McKinsey’s clients knew there was “no better army of analysts in the world.”44 They also knew that the firm’s reputation as a powerful and influential adviser to the world’s ruling class provided serious cover for anyone charged with meeting goals.45

McKinsey was founded in 1926 when, after concluding that the powerful business class of the day lacked people willing or able to tell businesses what they were doing wrong, James O. McKinsey set out to sell

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businesses advice based on fact-based analysis. However, the father of McKinsey’s culture was Marvin Bower, who expanded the advice offered clients beyond accounting and into the realm of strategy.46 When Bower, who went on to serve as managing director from 1950 to 1967, joined the firm in 1933, management consulting was widely seen as questionable. In order to give consulting more credibility, Bower introduced a set of principles based on the obligations of the legal profession, which included an obligation to not do unnecessary work. Although this opened the door to value judgements, the rules also put meeting client- defined objectives above all else.47

As a Fortune profile noted in 1993, a McKinsey consultant had to “put the interests of his client ahead of increasing The Firm’s revenues; he should keep his mouth shut about his client’s affairs; he should tell the truth and not be afraid to challenge a client’s opinion; and he should only agree to perform work that he feels is both necessary and something McKinsey can do well.”48

McKinsey’s influence increased as operational control of American capitalism migrated from the robber baron class1 to the emerging management profession. As regulators clamped down on market collusion, consultants also saw their perceived value increase as conduits of information and best practices between industry competitors.49 McKinsey opened its first overseas office in London in 1959. By the end of the 1960s, the firm was active in eight countries across three continents. In 1970, it gained a reputation for industry-wide innovation after helping develop the bar code system for the retail sector. Shortly after, the firm divided itself into separate practice groups targeting specific industries. These practice groups spanned geographic boundaries, boosting McKinsey’s reputation for global expertise.

By the 1980s, the firm’s global focus was further enhanced after the number of McKinsey consultants and partners hailing from outside the United States surpassed that of the firm’s American employees. Over the years, McKinsey developed a reputation for strategic expertise in a range of areas including organizational restructurings and disruption, analytics, digitalization, and design thinking. In 1964, the company launched the McKinsey Quarterly, spreading its influence via the publication of internal and external thought leadership. In 1990, the McKinsey Global Institute was established as a think tank, with a research agenda covering “competitiveness, financial markets, growth, innovation, labor markets, natural resources, productivity, technology, and urbanization.”50

As its influence spread, McKinsey launched numerous programs and initiatives that reflected its stated “firm- wide commitment to civil society.” In 1954, the firm started working pro bono for non-profits, which led to a practice dedicated to serving the sector with a focus on economic development, education, global public health, and social innovation. In 1964, it hired three of the first female graduates from Harvard Business School’s master of business administration (MBA) program. In the early 1990s, McKinsey established a global initiative to help more women succeed at business. In 2007, the firm published the first global greenhouse gas cost curve, which became part of a broader effort to help clients address sustainability. In 2014, McKinsey founded an internal non-profit focused on tackling youth unemployment.51

By 2021, the firm had 30,000 employees generating more than $10 billion in annual revenue across 65 countries. With clients including major corporations and governments of all stripes, trillion-dollar sovereign wealth funds, intelligence agencies, defence and justice ministries, military units, and police forces, McKinsey’s influence was unquestionable; however, what was not clear, to critics at least, was whether McKinsey had any real checks and balances in place to support accountability or contain its institutional hubris.

1 The term robber baron class refers to powerful industrialists of the late 19th century—such as Henry Ford, Andrew Carnegie, Cornelius Vanderbilt, and John D. Rockefeller.

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EARLIER SCANDALS

Shortly after McKinsey announced its opioid settlement, McDonald released a new book in which he admitted pulling his punches when writing The Firm, noting that his research into McKinsey’s history and culture led him to conclude that the firm’s overall value to society was clearly “negative.”52 A few months later, the US Committee on Oversight and Reform launched an investigation into McKinsey’s ethics, stating, “Over the last decade, McKinsey & Company—one of the largest consulting companies in the world and a major U.S. government contractor—has engaged in a pattern of conduct that raises serious concerns about its business practices, conflicts of interest, and management standards.”53 Indeed, despite McKinsey’s self-proclaimed commitment to civil society, the firm’s opioid work controversy followed a string of earlier scandals that also raised concerns about McKinsey’s enormous influence as a chief executive officer (CEO) factory and adviser to governments and business leaders around the world.

In February 2019, McKinsey agreed to pay $15 million, with no admission of wrongdoing, to end a US Department of Justice inquiry into whether it violated disclosure rules related to conflicts of interest in bankruptcy cases. McKinsey argued that it settled an investigation based on unfounded accusations simply to make the issue go away without exposing confidential client information.54 However, according to federal officials, the firm’s work lacked “candor” and did not “satisfy its obligations under bankruptcy law.”55

In October 2018, the media reported that McKinsey appeared to have supported Saudi Arabian efforts to silence opponents of the Saudi crown prince Mohammed bin Salman. After being hired to measure public response to Saudi austerity measures in 2014, McKinsey crafted a report that found negative public sentiment was being driven by the Twitter accounts of three people: local writer Khalid al-Alkami; Omar Abdulaziz, a Saudi dissident living in Canada; and an anonymous user. According to the New York Times, shortly after the report was published, the anonymous account was shut down, al-Alkami was arrested, and Abdulaziz family members were imprisoned. When the story broke four years later, dissident journalist Jamal Khashoggi had just been killed by Saudi operatives while working with Abdulaziz to counter government trolls on Twitter.56 In response, McKinsey issued a statement that insisted the firm “has not and never would engage in any work that seeks to target individuals based upon their views,” adding that the document in question was meant for an internal audience and that the firm was “horrified by the possibility, however remote, that it could have been misused in any way.”57

In June 2018, McKinsey’s values were called into question by media reports that highlighted the firm’s assistance with managing the US Immigration and Customs Enforcement (ICE) agency’s detention facilities during the Trump administration. McKinsey cost-cutting recommendations reportedly included cuts in spending on food and medical care provided to migrant detainees as well as legally questionable ways to increase deportations. According to a joint investigation by ProPublica and the New York Times, ICE insiders said that McKinsey “seemed focused solely on cutting costs and speeding up deportations— actions whose success could be measured in numbers—with little acknowledgment that these policies affected thousands of human beings.”58 After announcing that McKinsey was no longer working for ICE, Sneader assured employees that the firm “‘will not, under any circumstances, engage in any work, anywhere in the world, that advances or assists policies that are at odds with our values.’”59

McKinsey’s reputation also took a hit after the firm was linked by South African prosecutors to a corruption scandal that ensnared numerous multinational consulting firms. In 2016, aiming to secure a contract worth $120 million with state power company Eskom, McKinsey partnered with associates of former South African president Jacob Zuma who were accused of using their influence to fraudulently win government business. After being linked to rampant corruption in a struggling nation with the worst income inequality in the world, the firm acknowledged that two partners had made misjudgments, but denied any legal

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wrongdoing and declined to voluntarily pay back tens of millions of dollars in related fees until facing a client revolt in November 2017.60 “This isn’t who we are,” Barton insisted shortly before his term as managing director ended, admitting that the firm had a “bit of a tin ear” when first responding to the crisis.61

In 2012, Rajat Kumar Gupta, McKinsey’s first foreign-born managing director (1994–2003), was sent to prison after being found guilty of three counts of securities fraud and one count of conspiracy for participating in an insider trading ring. While Gupta’s crimes were committed after leaving McKinsey, the insider trading ring in question included an active McKinsey partner, who also ended up in jail.62

As an aggressive promoter of mortgage asset securitization in the first decade of the twenty-first century, McKinsey’s work in the banking sector helped drive the irresponsible practices that led to the 2008 financial crisis.63 The firm was also heavily tied to the fraud that led to the 2001 collapse of the energy firm Enron Corporation (Enron). As an Enron adviser, McKinsey promoted off-balance-sheet accounting—a grey-area practice used to mislead markets—as a strategic way to lower the cost of capital. In addition to setting the stage for an expensive regulatory backlash, this contributed to Enron’s fraud, which occurred under the unethical leadership of Jeff Skilling, a Harvard MBA who worked with Enron as a McKinsey consultant before joining the company in 1990, eventually becoming CEO. Enron’s fraud cost approximately 20,000 employees their jobs, wiped out billions of dollars in savings, and led to the breakup of auditor Arthur Andersen LLP. When Skilling was sentenced to 24 years in prison in 2006, the trial judge noted that Skilling’s crimes “imposed on hundreds, if not thousands of victims a life sentence of poverty.”64

As Ben Chu, a writer for the Independent, noted in 2014, McKinsey’s fingerprints “can be found at the scene of some of the most spectacular corporate and financial debacles of recent decades”—and that was before the firm’s work on OxyContin or its link to corruption in South Africa became public.65 While the size of any firm could inevitably lead to mistakes, McKinsey’s critics insisted that the firm’s repeated scandals pointed to dangerous systemic or cultural issues.66

JUST ANOTHER FIRM?

McKinsey consultants typically dressed alike, spoke alike, shared certain traits—such as a willingness to conform and let clients take credit for their work—and worshipped the firm as more than just a business institution. This was by design; the firm itself had compared its organizational character to a religious order.67 Critics, on the other hand, described the firm using terms such as “corporate cult” and “bastion of privilege.”68 The word “mercenary” was also attached to McKinsey, thanks to its controversial list of clients, which gave the impression that the firm would work for anyone willing to pay its fees.69 However, according to McDonald, the firm’s consultants did not necessarily need to be seen as brainwashed or inherently bad in order for one to understand McKinsey’s scandals; rather, the issue was a combination of the firm’s structure, culture, hiring practices, and business model.

The rise of McKinsey’s influence coincided with the rise of management education, and with its academic foundation, the firm’s traditional hiring practices naturally focused on recruiting MBAs from top-tier business schools. In the years leading up to the firm’s opioid scandal, the firm talked about being more open to non-traditional candidates, but it remained dominated by individuals selected for their brain power.70 According to a preparatory guide for aspiring McKinsey’s employees, the firm’s inner world “can be described as one that values intellect over experience; influence over compulsion; logic over emotion; and facts over gut feel. It’s left-brained, with a hyper-rational, almost Cartesian view of how business and the world works.” New hires, the guide added, should expect to be moulded to fit into “a tightly-knit, highly- cohesive culture—one of the strongest you will come across for a company its size.”71

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According to McDonald’s research, McKinsey’s recruitment efforts focused on “overachievers” who were willing to submit to a collective that expected rules to be followed in return for being a part of what insiders called the “greatest collection of analytical minds on the planet.” As a result, the culture weeded out “tall poppies”—meaning people like Peters who stood out from the crowd by pushing for change or doing things differently. Amid fallout from McKinsey’s opioid scandal, for example, a small group of junior consultants sent an open letter to senior partners demanding the firm stop serving client-defined goals that appeared to conflict with international efforts to control global warming. According to media reports, McKinsey had advised at least 43 of the world’s top 100 corporate polluters in recent years, often helping them meet objectives that increased their carbon footprint. The group of junior consultants who wrote the letter wanted McKinsey to use its influence to make emissions-heavy clients more socially responsible or to stop working for them; they insisted that not doing so “poses serious risk to our reputation, our client relationships, and our ability to ‘build a great firm that attracts, develops, excites, and retains exceptional people.’” In response, Sneader and his successor, Bob Sternfels, insisted that McKinsey had to continue serving the interests of the energy sector to stay relevant. This reportedly led several of the letter writers to resign, with one sending an email to colleagues that read as follows: “Having looked at the actual hours billed to the world’s largest polluters, it is very hard to argue today that McKinsey is the ‘greatest private sector catalyst for decarbonization.’ It may well be the exact opposite.”72

Furthermore, thanks to the firm’s obsession with secrecy, McKinsey projects tended to lack transparency, even within the firm, where client interests were put ahead of everything else. And since McKinsey consultants worked in the shadows, typically separated from implementation decisions, the work they did was detached from outcomes, making it easier to recommend drastic measures. As McDonald noted, it is easier to recommend mass layoffs as an option when you don’t know the people whose lives will be impacted, and on the client side, it is easier to implement drastic measures when you can tell yourself, or the board, it was a McKinsey recommendation.”73

Critics argued that McKinsey’s weakened accountability stemmed from its consultants not accepting responsibility for what clients did with the ideas that were presented to them. McKinsey consultants effectively became comfortable with crunching numbers and formulating strategies to meet goals that were handed to them, all without considering the impact of their work beyond the interest of their clients. As McDonald put it, “They are detached geeks.” As a result, while business consultants had no justifiable obligation to help everyone who could benefit from their strategic advice, the firm’s army of MBAs could end up acting like lawyers who had a legitimate responsibility to represent clients, including unethical and dangerous ones, to the best of their abilities.74

PETERS’S PREDICAMENT

McKinsey’s opioid settlement was enough to prevent a mass exodus of clients, despite paling in comparison to other penalties for socially irresponsible corporate behaviours, such as the billions of dollars in fines and settlements that Volkswagen paid following its emissions scandal. But McKinsey’s public response to its work for Purdue destroyed Peters’s faith in the firm that launched his career. Over the years, the world- renowned management guru had garnered many nicknames, including “the Red Bull of management thinkers” and “the Gandalf of business”;75 nevertheless, as Peters’s career progressed, his reputation remained tied to McKinsey—which he had joined “in a flash” after receiving a coveted job offer as a young Stanford MBA graduate in 1974.76

Ironically, McKinsey’s most famous alumnus was forced out of the firm by senior partners who noticed that he preached more about the importance of culture than about the firm’s gospel of scientific management

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by spreadsheets. Before being sent packing in 1981, Peters significantly increased McKinsey’s public profile by publishing his first article on organization effectiveness, highlighting the importance of “the people stuff.” This eventually led to the publication of the 1982 management bestseller In Search of Excellence that Peters co-authored with Robert Waterman, which made Peters a boardroom name.77 But despite his forced departure, Peters still considered McKinsey an honourable institution up until when he reflected on the firm’s string of major scandals. As he noted in 2021, he was no longer certain that “the good old days were in fact the good old days,” partly because the only convicted white-collar criminals that he personally knew (i.e., Gupta and Skilling) had worked for McKinsey. Whatever the case, Peters saw the firm’s work for Purdue as a new low for capitalism—something he blamed on the lasting influence that Milton Friedman’s definition of corporate purpose had on McKinsey’s culture.78

In 1970, Friedman published an essay that argued corporate executives had a responsibility to conduct business in accordance with the desires of their owners, “which generally will be to make as much money as possible while conforming to the basic rules of the society.”79 For decades, this position was widely considered corporate orthodoxy, heavily influencing the education of McKinsey’s employees. As far as Peters was concerned, this is what made McKinsey’s influence as the world’s pre-eminent consulting firm particularly dangerous, as traditional business education had stocked the firm with exceptionally motivated individuals who were highly skilled at figuring out ways to cut costs and increase profits but were not educated to do so while considering the “higher societal purposes” of business.80

While there had never been a universally accepted definition of corporate purpose, Peters knew where he stood. In a blog post on the topic, he wrote:

Most of us spend the best parts of our waking hours in a business with 1 to 100,001 fellow employees. Business, therefore, is not “part of the community.” Business is the community. Hence, the “first order of business” for any enterprise is its ongoing moral responsibility to all of those who make its success possible: employees, in terms of their personal growth, and social equity as regards gender and race. This also includes the communities in which its employees lives as well as the larger communities where the enterprise does business: city, state, country, planet.

And as to output—what business delivers to its employees, its communities, and its customers—it holds a sacred obligation to create products and services that, as Jony Ive (Apple’s former design leader), says, “serve humanity first.”

Regarding traditional business goals, such as unwavering commitment to excellence and to people and community are the only repeatedly proven long-term drivers of exceptional growth and profitability. Looking down the road, developing the full potential of its people and providing products and services that inspire offer the best chance we have to continue to provide enlightened and humane contributions that the looming artificial intelligence tsunami cannot take away from us.81

This view fit with the stated evolution of thinking on corporate purpose of the Business Roundtable (BRT)—a prestigious association of American CEOs, including many who ran companies that employed McKinsey. In 2019, the BRT updated its views on the purpose of a corporation, rocking the corporate world by mentioning the obligation to serve shareholder interests only after listing responsibilities to other business stakeholders, such as serving customers, supporting employee career growth, working fairly and ethically with suppliers, and supporting “the communities in which we work.”82

Reaction to this statement—a statement that, notably, was not signed by directors responsible for the governance of companies managed by the BRT’s membership—was mixed. While some believers in

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stakeholder capitalism saw it as an honest statement from executives who accepted that corporate purpose needed to evolve beyond the shareholder primacy model, others saw it as nothing more than a cynical public relations ploy. Meanwhile, a sizable proportion of the business community simply disagreed with calls for capitalism to change, and not just in the United States; according to a 2020 survey of Canadian board members, only 54 per cent of respondents strongly felt “responsible for the social impact of their own organization’s activities.”83

Nevertheless, as far as Peters was concerned, McKinsey’s work for Purdue conflicted with his values because it was “directly aimed at extreme sales improvement” without considering the potential “to increase addictive, destructive behaviour.”84 And since he saw this as an appalling and dangerous cultural issue that his former employer did not appear prepared to address, he felt the need to distance himself from McKinsey by using his influence as the firm’s most famous alumnus to highlight the social costs of the firm’s opioid work while provocatively asking, “Why is McKinsey still open for business?”85

Other believers in stakeholder capitalism faced a more difficult challenge when navigating the ongoing debate over corporate purpose, especially supporters of stakeholder capitalism who lacked Peters’s independence and influence. As the world struggled with its socio-economic and environmental challenges, they needed to decide whether they could be true to themselves and work with people that put profits first.

Meanwhile, young career-minded business professionals who shared Peters’s principles faced a potentially serious moral dilemma. After receiving his MBA, Peters accepted a McKinsey job offer in a flash because it was akin to a winning lottery ticket. But amid the opioid crisis, when working for McKinsey was still widely seen as a golden ticket despite the firm’s various scandals, Peters posed this previously unimaginable question: “At this moment in time, why the hell would anyone want to go to work for McKinsey?”86

The Ivey Business School and the Ian O. Ihnatowycz Institute for Leadership gratefully acknowledge the generous support of Bill and Kathleen Troost in the development of this case.

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ENDNOTES

1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Tom Peters, McKinsey & Company, or any of its employees. 2 All dollar amounts are in US dollars. 3 Michael Forsythe and Walt Bogdanich, “McKinsey Settles for Nearly $600 Million over Role in Opioid Crisis,” New York Times, February 3, 2021, https://www.nytimes.com/2021/02/03/business/mckinsey-opioids-settlement.html. 4 Government of Canada, Federal Actions on Opioids to Date, updated March 2021, https://www.canada.ca/content/dam/hc- sc/documents/services/substance-use/problematic-prescription-drug-use/opioids/responding-canada-opioid-crisis/federal- actions/federal-action-opioids-to-date-march-eng.pdf. 5 Tom Peters, “McKinsey’s Work on Opioid Sales Represents a New Low,” Financial Times, February 15, 2021, https://www.ft.com/content/82e98478-f099-44ac-b014-3f9b15fe6bc6. 6 Peters, “McKinsey’s Work on Opioid Sales.” 7 bsteve865, February 4, 2021, comment on butcher_of_the_world, “Consulting elite, McKinsey and Company, pay $573 million for their marketing campaign to hook people on Opioids,” https://www.reddit.com/r/iamatotalpieceofshit/comments/lcxy9x/consulting_elite_mckinsey_and_company_pay_573/. 8 Tom Peters, “McKinsey’s Work on Opioid Sales Represents a New Low,” Financial Times, February 15, 2021, https://www.ft.com/content/82e98478-f099-44ac-b014-3f9b15fe6bc6. 9 Tom Peters (@Tom Peters), Twitter, April 2, 2021, 12:47 p.m., https://mobile.twitter.com/tom_peters/status/1378026406467239938. 10 Crime of the Century, directed, produced, and written by Alex Gibney, aired in two parts on May 10, 2021, and May 11, 2021, on HBO. 11 Nick Allen, “The Crime of the Century,” Roger-Ebert.com, May 10, 2021, https://www.rogerebert.com/reviews/the-crime-of- the-century-tv-review-2021. 12 Crime of the Century. 13 Barry Meier, “In Guilty Plea, OxyContin Maker to Pay $600 Million,” New York Times, May 10, 2007, https://www.nytimes.com/2007/05/10/business/11drug-web.html. 14 Harriet Ryan, Lisa Girion, and Scott Glover, “‘You Want a Description of Hell?’ Oxycontin’s 12-hour Problem,” LA Times, May 5, 2016, accessed September 1, 2021, https://www.latimes.com/projects/oxycontin-part1/. 15 Art Van Zee, “The Promotion and Marketing of OxyContin: Commercial Triumph, Public Health Tragedy,” American Journal of Public Health 99 no. 2 (February 2009): 221–227, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2622774/pdf/221.pdf. 16 Crime of the Century. 17 Meier, “In Guilty Plea.” 18 Van Zee, “The Promotion and Marketing of OxyContin.” 19 Harriet Ryan, Lisa Girion, and Scott Glover, “OxyContin Goes Global—‘We’re Only Just Getting Started,’” Los Angeles Times, December 18, 2016, https://www.latimes.com/projects/la-me-oxycontin-part3/. 20 Patrick Radden Keefe, “The Sackler Family’s Plan to Keep Its Billions,” New Yorker, October 4, 2020, https://www.newyorker.com/news/news-desk/the-sackler-familys-plan-to-keep-its-billions. 21 Chris McGreal, “Rudy Giuliani Won Deal for OxyContin Maker to Continue Sales of Drug behind Opioid Deaths,” Guardian, May 22, 2018, https://www.theguardian.com/us-news/2018/may/22/rudy-giuliani-opioid-epidemic-oxycontin-purdue-pharma. 22 Keefe, “The Sackler Family’s Plan.” 23 Commonwealth of Massachusetts v. Purdue Pharma, No. 1884-cv-01808 (Mass. Super. Ct. filed January 31, 2019), https://www.mass.gov/doc/massachusetts-mckinsey-complaint/download. 24 Abby E. Alpert et al., “Origins of the Opioid Crisis and Its Enduring Impacts” (working paper 26500, National Bureau of Economic Research, Cambridge, MA, November 2019), https://www.nber.org/papers/w26500. 25 Kate Brenner, “Purdue Pharma Pleads Guilty to Role in Opioid Crisis as Part of Deal with Justice Dept.,” New York Times, Nov. 24, 2020, https://www.nytimes.com/2020/11/24/us/politics/purdue-pharma-opioids-guilty-settlement.html. 26 Kate Brenner, “Purdue Pharma Pleads Guilty to Role in Opioid Crisis as Part of Deal with Justice Dept.,” New York Times, Nov. 24, 2020, https://www.nytimes.com/2020/11/24/us/politics/purdue-pharma-opioids-guilty-settlement.html. 27 Brian Mann, “The Sacklers, Who Made Billions from OxyContin, Win Immunity from Opioid Lawsuits,” NPR, September 1, 2021, https://www.npr.org/2021/09/01/1031053251/sackler-family-immunity-purdue-pharma-oxcyontin-opioid-epidemic. 28 Sarun Charumilind et al., “Why We Need Bolder Action to Combat the Opioid Epidemic,” McKinsey & Company, September 6, 2018, https://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/why-we-need-bolder-action-to- combat-the-opioid-epidemic. 29 Walt Bogdanich, “McKinsey Advised Johnson & Johnson on Increasing Opioid Sales,” New York Times, July 25, 2019, https://www.nytimes.com/2019/07/25/business/mckinsey-johnson-and-johnson-opioids.html?searchResultPosition=16. 30 Michael Forsythe and Walt Bogdanich, “McKinsey Advised Purdue Pharma How to ‘Turbocharge’ Opioid Sales, Lawsuit Says,” New York Times, February 1, 2019, https://www.nytimes.com/2019/02/01/business/purdue-pharma-mckinsey- oxycontin-opiods.html. 31 Ryan, Girion, and Glover, “OxyContin Goes Global.” 32 Walt Bogdanich and Michael Forsyth, “McKinsey Proposed Paying Pharmacy Companies Rebates for OxyContin Overdoses,” New York Times, November 27, 2020, https://www.nytimes.com/2020/11/27/business/mckinsey-purdue- oxycontin-opioids.html.

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33 Office of Attorney General Maura Healey, “AG’s Office Secures $573 Million Settlement with McKinsey for ‘Turbocharging’ Opioid Sales and Profiting from the Epidemic,” press release, February 4, 2021, https://www.mass.gov/news/ags-office- secures-573-million-settlement-with-mckinsey-for-turbocharging-opioid-sales-and. 34 Forsythe and Bogdanich, “McKinsey Settles.”

Forsythe and Bogdanich, “McKinsey Settles.” 36 Ian MacDougall, “McKinsey Never Told the FDA It Was Working for Opioid Makers While Also Working for the Agency,” ProPublica, October 4, 2021, https://www.propublica.org/article/mckinsey-never-told-the-fda-it-was-working-for-opioid- makers-while-also-working-for-the-agency. 37 Andrew Rice, “Scandal-Plagued McKinsey Ousts Leader,” New York Magazine, February 24, 2021, https://nymag.com/intelligencer/2021/02/scandal-plagued-mckinsey-ousts-leader.html. 38 McKinsey & Co., “McKinsey Statement on Its Past Work with Purdue Pharma,” press release, December 5, 2020, https://www.mckinsey.com/about-us/media/mckinsey-statement-on-its-past-work-with-purdue-pharma. 39 Bogdanich and Forsyth, “McKinsey Proposed.”

Duff McDonald, in conversation with Thomas Watson on August 26, 2021. 41 Michael Posner, “McKinsey Rejected Its Leader; Now, Will It Really Change?,” Forbes, March 2, 2021, 2021, https://www.forbes.com/sites/michaelposner/2021/03/02/mckinsey-rejects-its-leader-now-will-it-really- change/?sh=499af6b15dff. 42 Rice, “Scandal-Plagued McKinsey Ousts Leader.” 43 “McKinsey’s Partners Suffer from Collective Self-Delusion,” Economist, March 3, 2021, https://www.economist.com/business/2021/03/03/mckinseys-partners-suffer-from-collective-self-delusion. 44 Duff McDonald, The Firm: The Story of McKinsey and Its Secret Influence on American Business (New York, NY: Simon & Schuster, September 10, 2013).

McDonald, in conversation with Watson. 46 McDonald, in conversation with Watson. 47 McDonald, in conversation with Watson. 48 John Huey, “How McKinsey Does It the World’s Most Powerful Consulting Firm Commands Unrivaled Respect – and Prices – but Is Being Buffeted by a Host of New Challenges. Here’s the Inside Story,” Fortune, November 1, 1993, https://money.cnn.com/magazines/fortune/fortune_archive/1993/11/01/78550/index.htm. 49 McDonald, in conversation with Watson.

“History of Our Firm,” McKinsey & Company, accessed June 1, 2021, https://www.mckinsey.com/about-us/overview/history- of-our-firm. 51 “History of Our Firm.” 52 McDonald, in conversation with Watson. 53 Press release, “Oversight Committee Launches Investigation into McKinsey & Company’s Consulting Practices, Conflicts of Interest,” US House Committee on Oversight and Reform, November 5, 2021, https://oversight.house.gov/news/press- releases/oversight-committee-launches-investigation-into-mckinsey-company-s-consulting. 54 Mary Childs, “A Former McKinsey Chief on Its Racketeering Charges, the Problems of Privacy, and a New Era of Scrutiny,” Barron’s, April 10, 2019, https://www.barrons.com/articles/consulting-firm-mckinsey-talks-about-its-legal-battles-51554901896.

Mary Williams Walsh, “McKinsey Will Return $15 Million in Fees over Disclosure Failures,” New York Times, February 19, 2019, https://www.nytimes.com/2019/02/19/business/mckinsey-bankruptcy-settlement.html. 56 Katie Benner et al., “Saudis’ Image Makers: A Troll Army and a Twitter Insider,” New York Times, October 20, 2018, https://www.nytimes.com/2018/10/20/us/politics/saudi-image-campaign-twitter.html. 57 McKinsey & Company (@McKinsey), “Statement in response to today's New York Times article,” Twitter, October 20, 2018, 10:40 p.m., https://twitter.com/McKinsey/status/1053838356826808320. 58 Ian MacDougall, “How McKinsey Helped the Trump Administration Carry Out Its Immigration Policies,” New York Times, December 3, 2019, https://www.nytimes.com/2019/12/03/us/mckinsey-ICE-immigration.html. 59 Michael Forsythe and Walt Bogdanich, “McKinsey Ends Work with ICE amid Furor over Immigration Policy,” New York Times, July 8, 2018, https://www.nytimes.com/2018/07/09/business/mckinsey-ends-ice-contract.html.

“McKinsey Says It Will Pay Back the R1 Billion Eskom Contract,” BusinessTech, November 15, 2017, https://businesstech.co.za/news/business/211103/mckinsey-says-it-will-pay-back-the-r1-billion-eskom-contract/. 61 Walt Bogdanich and Michael Forsythe, “How McKinsey Lost Its Way in South Africa,” New York Times, June 26, 2018, https://www.nytimes.com/2018/06/26/world/africa/mckinsey-south-africa-eskom.html. 62 Peter Lattman and Azam Ahmed, “Rajat Gupta Convicted of Insider Trading,” New York Times, June 15, 2012, https://dealbook.nytimes.com/2012/06/15/rajat-gupta-convicted-of-insider-trading/. 63 McDonald, in conversation with Watson. 64 Alexei Barrionuevo, “Ex-Enron Chief Is Sentenced to 24 Years,” New York Times, October 23, 2006, https://www.nytimes.com/2006/10/23/business/24enroncnd.html.

Ben Chu, “McKinsey: How Does It Always Get Away with It?,” Independent, February 7, 2014, https://www.independent.co.uk/news/business/analysis-and-features/mckinsey-how-does-it-always-get-away-with-it- 9113484.html?amp. 66 McDonald, in conversation with Watson. 67 McDonald, in conversation with Watson. 68 McDonald, in conversation with Watson.

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69 McDonald, in conversation with Watson. 70 McDonald, in conversation with Watson. 71 “What Working at McKinsey Is Really Like,” CaseCoach, accessed June 1, 2021, https://casecoach.com/b/what-working- at-mckinsey-is-really-like/. 72 Michael Forsythe and Walt Bogdanich, “At McKinsey, Widespread Furor over Work with Planet’s Biggest Polluters, New York Times, October 27, 2021, https://www.nytimes.com/2021/10/27/business/mckinsey-climate-change.html.

73 McDonald, in conversation with Watson. 74 McDonald, in conversation with Watson. 75 “Tom’s Bio,” Tom Peters, accessed June 1, 2021, https://tompeters.com/wp- content/uploads/2018/02/2017_1126_Peters_bio.pdf 76 Tom Peters, “McKinsey’s Work on Opioid Sales Represents a New Low,” Financial Times, February 15, 2021, https://www.ft.com/content/82e98478-f099-44ac-b014-3f9b15fe6bc6. 77 “Tom’s Bio.” 78 Tom Peters, “McKinsey’s Work on Opioid Sales Represents a New Low,” Financial Times, February 15, 2021, https://www.ft.com/content/82e98478-f099-44ac-b014-3f9b15fe6bc6. 79 Milton Friedman, “A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits,” New York Times, September 13, 1970, https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of- business-is-to.html. 80 Tom Peters, “McKinsey’s Work on Opioid Sales Represents a New Low,” Financial Times, February 15, 2021, https://www.ft.com/content/82e98478-f099-44ac-b014-3f9b15fe6bc6. 81 Tom Peters, “The Moral Responsibility of Enterprise: Credo 2021,” Tom Peters (blog), May 28, 2021, https://tompeters.com/2021/05/. 82 Business Roundtable, “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans,’” press release, August 19, 2019, https://www.businessroundtable.org/business-roundtable-redefines-the- purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans. 83 Rahul Bhardwaj, in conversation with William Thomas Watson on December 7, 2020. 84 Peters, “McKinsey’s Work on Opioid Sales.” 85 Tom Peters (@Tom Peters), Twitter, November 7, 2021, 2:10 p.m., https://twitter.com/tom_peters/status/1457432798499938307?s=21. 86 Tom Peters (@Tom Peters), Twitter, April 10, 2021, 11:28 a.m., https://twitter.com/tom_peters/status/1380905501916028938.

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