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Is McKinsey a partnership? That is how it thinks of itself, how it governs itself and how it projects itself to clients and potential recruits. It is “the world’s leading partnership”, no less, according to Kevin Sneader, who ran the management consultancy from 2018 to 2021.
But the meaning of partnership is about to be put under a microscope, externally, thanks to a lawsuit filed in a New York court and, internally, as a result of a governance review launched after two messy leadership elections.
In a narrow sense, McKinsey isn’t a partnership at all. In fact, it reorganised itself as a corporation registered in New York almost 70 years ago, for the financial flexibility and the tax benefits, according to its official internal history.
It has kept the trappings of partnership, however. It insists on referring to itself as the Firm (typically with the capital F), and its ponderous internal democracy has sometimes frustrated its leaders (to the point that Sneader was indecorously kicked from office). As with actual partnerships, those who make partner are required to put capital at risk by investing in the firm, and the money they make each year reflects their share of the annual profits. In bad years, like 2008, they may be required to stump up money in a capital call.
That is enough to confer on the corporation a partnership’s fiduciary responsibility to and between its partners, according to a lawsuit filed by Arnab Ghatak, a former senior partner in McKinsey’s healthcare practice. Ghatak was fired on the eve of McKinsey’s $574mn legal settlement with US states, which had claimed the firm’s advice to opioids manufacturers contributed to an epidemic of addiction. He was fired after having “communicated about document deletion”, McKinsey said, referring to emails that caused embarrassment when they became public.
Ghatak, a trained physician who says he worked specifically on projects designed to promote addiction-resistant opioids, claims he never deleted any documents and the firm is defaming him by implying he did. He also claims that it breached a partnership’s fiduciary duty by conducting a sham disciplinary process designed to use him as a scapegoat.
McKinsey said when the lawsuit was filed that it stood by its decision to fire Ghatak and stood by its statements about him — but it didn’t initially comment on the partnership question. The firm’s formal legal arguments, filed at the end of last week, will therefore be of interest to partners: as a corporation, it does not have a fiduciary duty to them, McKinsey claimed.
“I’m sure they would prefer to avoid having to address the issue,” said Dan Kaiser, Ghatak’s lawyer. “To take the position in open court that they are not a partnership might irritate their partners, who say they are a partnership and believe they have fiduciary duties to each other. Not to mention the marketing issues it might cause.”
The past two leadership elections have already revealed consternation among McKinsey’s 750 senior partners at how Sneader and his successor Bob Sternfels introduced more corporate-style decision making, responding to opioid settlements and other reputational crises by installing more central oversight and controls. Sternfels won a second term in February with only the narrowest of margins.
His supporters say McKinsey needs to modernise decision making because it has doubled in size in the past decade by revenues. A governance review, just launched, has put longer leadership terms and changes to election rules on the table. In a first step, the firm has made its “shareholders council” of prominent partners more like a traditional corporate board, separate from management and charged with overseeing executives. Other tweaks are under consideration. If it is anything like the last governance review a decade ago, it could be fractious.
What it is not likely to be is radical, at least this time. Most in the current generation of leaders are unlikely to countenance tearing up the partnership system entirely, even if some partners do privately wonder about the future. McKinsey has grown into an organisation of 46,000 people in 65 countries with businesses far beyond its historic core of strategy consulting. If McKinsey needs more traditional corporate decision making as a result, and if it starts to feel more like working for a corporation, why not go the whole way by selling a stake to private equity or floating on the stock market?
Another firm once laid claim to the title of “world’s leading partnership” — Goldman Sachs. It just celebrated its 25th anniversary as a public company. Who would take bets on McKinsey still operating as a partnership in 25 years?