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Is McKinsey a “partnership”? That’s how the firm sees itself, governs itself, and presents itself to clients and potential hires. It’s “the best partnership in the world,” nothing less, according to Kevin Sneader, who led the management consultancy from 2018 to 2021.
But the significance of the partnership is about to come under scrutiny, externally, through a lawsuit filed in a New York court, and internally, through a governance review launched after two fraught leadership elections.
Strictly speaking, McKinsey is not a partnership at all. In fact, the firm reorganized as a New York corporation nearly 70 years ago for financial flexibility and tax advantages, according to its official internal history.
It has, however, retained the trappings of a partnership. It insists on calling itself “the Firm” (usually with a capital “F”), and its cumbersome internal democracy has sometimes frustrated its leaders (to the point that Sneader was indecently fired from his position). As in real partnerships, those who become partners are required to put up capital by investing in the firm, and the money they earn each year reflects their share of the annual profits. In bad years, such as 2008, they may be forced to fork over cash in a capital call.
According to a lawsuit filed by Arnab Ghatak, a former senior partner in McKinsey’s healthcare practice, that amount is enough to give the firm a fiduciary responsibility to and among its partners. Mr. Ghatak was fired on the eve of McKinsey’s $574 million settlement with U.S. states, which had alleged that the firm’s advice to opioid makers contributed to an addiction epidemic. He was fired after “communicating about the deletion of documents,” McKinsey said, referring to emails that caused embarrassment when they were made public.
Ghatak, a physician by training who says he worked specifically on projects promoting addiction-resistant opioids, says he never deleted any documents and that the firm is defaming him by implying that he did. He also claims it breached a partnership’s fiduciary duty by conducting a sham disciplinary proceeding designed to use him as a scapegoat.
McKinsey said when it filed the complaint that it stood by its decision to fire Ghatak and its statements about him, but it did not comment on the partners’ issue. The firm’s formal legal arguments, filed late last week, will therefore be of interest to the partners: As a firm, it has no fiduciary duty to them, McKinsey said.
“I’m sure they would prefer to avoid having to address this issue,” said Dan Kaiser, Ghatak’s lawyer. “To argue in court that they are not a partnership could irritate their partners, who say they are a partnership and believe they have fiduciary duties to each other. Not to mention the marketing problems it could create.”
The firm’s last two leadership elections have already revealed dismay among McKinsey’s 750 senior partners at how Sneader and his successor Bob Sternfels have introduced more business-centric decision-making in response to opioid settlements and other reputational crises by instituting more centralized oversight and controls. Sternfels won a second term in February by a razor-thin margin.
McKinsey’s supporters say it needs to modernize its decision-making system, as revenue has doubled in a decade. A governance overhaul that has just been launched has included longer director terms and changes to election rules. As a first step, the firm has transformed its “shareholder council,” made up of prominent partners, into a traditional corporate board, separate from management and tasked with overseeing executives. More changes are under consideration. If it’s anything like the last governance overhaul a decade ago, it could be divisive.
Which is hardly radical, at least this time around. Most current-generation executives are not ready to consider ending the partnership system, though some partners privately wonder about the future. McKinsey has grown into an organization of 46,000 people in 65 countries, with activities well beyond its historical core business of strategy consulting. If McKinsey needs a more traditional decision-making process and is starting to feel like it’s working for a corporation, why not go all the way by selling a stake to a private equity fund or going public?
Another company has already claimed the title of “world’s number one partnership”: Goldman Sachs. It just celebrated 25 years as a publicly traded company. Who would bet that McKinsey will still be operating as a partnership in 25 years?
stephen.foley@ft.com
