Consulting Ethics: McKinsey Pays Additional $230 Million Opioid Settlement, Bringing Total to $870 Million

McKinsey has agreed to a settlement, subject to court approval, which will enable the giant consulting firm to settle the liability resulting from its advice to Purdue Pharma and other opioid pushers. A high-level recap from the Financial Times:

Thousands of lawsuits from municipalities, school districts, tribes, parents and others were consolidated into a class action complaint heard in the federal court for the Northern District of California.

Plaintiffs alleged McKinsey’s advice to clients such as Purdue Pharma, the maker of OxyContin, had directly contributed to the opioid crisis. US drug overdose deaths involving prescription opioids rose fivefold between 1999 and 2017, according to the National Institute on Drug Abuse. 

The plaintiffs drew on documents disclosed in earlier litigation which showed McKinsey consultants urging Purdue directors to consider whether to “turbocharge the sales engine”. The documents said consultants encouraged directors to steer sales representatives towards doctors with records of prescribing large amounts of opioids.

One of the key PowerPoint presentations which made it pretty much impossible for McKinsey to deny its, erm, thought leadership role, is Oxycontin – driving growth through stronger brand loyalty. I strongly encourage readers to have a gander. I would have embedded it but the file size is way too large. You con find the full set of McKinsey documents here.

The pink paper points out the supposed reputational cost to McKinsey, which back in the day was all over what became the then-largest US bankruptcy, Enron, yet barely seemed to get its hair messed. Again from the Financial Times:

The litigation has further tarnished the reputation of the firm, which has also been caught in a South African corruption scandal and faced criticism for its work for clients ranging from Saudi Arabia to fossil fuel companies. The cost of its legal settlements, which cut into the profit pool shared by partners, was cited by some insiders as one reason why former managing partner Kevin Sneader did not win a second three-year term in 2021….

In its statement on Tuesday, McKinsey noted that it had agreed in 2019 to stop advising clients on any opioid-related business. It had also tightened its client selection policy and invested nearly $700mn since 2018 to strengthen its risk management, it said.

I don’t see how it is possible for McKinsey to have spent $700 million on risk management, save having had premiums on various types of insurance go up considerably at it was also buying more cover, and retaining a boatload of litigation firms so as to conflict out the most ferocious potential opponents.

The comments at the Financial Times were uniformly derisive. Some examples:

shug4476
We’ve handed over a billion dollars because we did nothing wrong.

User JP1976
Criminal charges need to be brought again this amoral firm

And shame to the companies that continue to use this firm

Like working with suppliers of poisonous gas to the concentration camps

Michael bezzett
So it pays out $870m and invests $700m to protect its self in future with better risk management. This isn’t about risk management it’s about morals. Shocking.

Think about it
I really do not know how McKinsey passes a KYC Onboarding processes with the clients they work for. Based on the facts AI processes would simple bin the application as an unreliable organisation with a difficult history and a complicated reputation.

Liszt
McKinsey is truly a farce. Amazing that they still get business outside of their incestuous circle.

Yours truly, having worked at both Goldman and McKinsey (so long ago that misconduct was marginal at both firms and then only rose to “badly behaved”) holds the counterintuitive view that management consulting of the sort that McKinsey, Bain, and BCG do is inherently more ethically problematic than finance.

In banking and investment banking, the professionals are facilitating transactions, as brokers, salescritters, and/or traders. In most countries, these activities are at least somewhat regulated at the retail level. Where the big fleecing of clients can take place is with large transactions and over-eager or not-as-sophisticated-as-they-fancy-themselves clients. Clients can also pay big fees for a banker to facilitate misconduct, like engage in money laundering or use derivatives to evade taxes.

However, there are entire swathes of finance where the firm is executing a transaction, for fees the client might resent, and so the fundamental exchange is straightforward: you do something for me I cannot or cannot readily do on my own, and I pay you via a commission, an underwriting discount, a portion of a bid-asked spread, or a professional fee (we’ll leave out private equity, since the development and refinements of that model are way way way outside historic norms for client exploitation. And the worst is most want more!).

A short version of what went wrong is the deregulation of stock market commissions was the start of a destructive trend of moving the entire industry from a relationship-based model to a transactional model. In the hoary old days when investment bankers could make a pretty good living (on a par with very good surgeons), they generally took very good care of their clients/customers and if they fleeced them, it was only a little and once in a while so they could try to make it look like an accident if they were caught. The regulatory prioritization of lowering transaction costs greatly increased transaction volumes and put many in finance in the position of seeing their clients as counterparties (who should be able to fend for themselves) than customers.

Needless to say, things devolved over time. As we wrote in ECONNED:

It is easy to be overwhelmed by the vast panorama of financial instruments and strategies that have grown up (and blown up), in recent years. But the complexity of these transactions and securities is all part of a relentless trend: toward greater and greater leverage, and greater opacity….

The authorities now claim they will find ways to solve the problems of opacity, leverage, and moral hazard.

But opacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the innovations. No one was at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits. They were instead rewarded for making sure no one, the regulators, the press, the community at large, could see and understand what they were doing.

Now that sounds and is bad, no? But recall that this result came out of the regulatory intent to increase liquidity, as opposed to letting participants earn a decent living even on plain vanilla transactions.

Remember, in banking, compensation is tied pretty directly to getting transactions done, so the financier can point to a concrete outcome. By contrast in high-end management consulting, the vague language McKinsey uses (“adding value”) and disclaiming responsibility for their role should raise alarms. Similarly, I was shocked when I arrived that slide shows were the only method for delivering study findings to clients (I was deviant and when I managed a study was the first in the memory of the New York Office to give the client full text documents with charts and tables as needed). How could something so incomplete be an acceptable “deliverable”?

But the big problem is there is no way of determining if the consultant did a good job or a bad job. Even if the reports looked great, the analysis seemed persuasive, and the client went gung ho and implemented, how can you be sure the client wouldn’t have shown similar results if they’d been left to their own devices? Or alternatively, a consultant might actually correctly comfort himself that if a client continued to muddle along, he would have done worse ex the consultant involvement.

Similarly, most big companies need financial transaction services. Some need them all the time, some need them periodically. That means consultants are having to sell work all the time, whether or not clients necessarily need it. Mind you, there are CEOs who keep McKinsey around so they can use the senior McKinsey partner on their account as a personal counselor. McKinsey does not allow for the separate sale of director time; you have to buy a lot of studies to get that.

In other words, the very existence of McKinsey-style consulting suggests management isn’t coping very well. In the very old days, McKinsey did have a bona-fide role in helping propagate new management practices across industries.

The reasons I knew I would not stay at McKinsey were two-fold. First, I didn’t see how partners could feel good about what they were doing. As a manager, you could take pride in your work by getting your analyses done without overtaxing your team, having your presentations be tightly-structured and documented, and having the “progress review” with the client go well. But as a partner, most clients did not get better, yet you were taking fees from them and trying to create dependence.

The second was there were people there I would not want to have as partners. One was in the New York office who was known to fabricate data in client reports. The second, who I had the great misfortune to work with in the London office,¹ would lie to clients…and in front of his team! Confirming my judgement, when the London partner came up for review to join the tenured group (“director”), one of the partners on the shareholder committee quit over his elevation.

And mind you, it wasn’t that the firm had some bad apples among its “partners” (mind you, both these cases were shareholders who were not yet “directors” so forcing them out would not have been all that hard). It was that even I as a pretty new and junior person know about them and the firm had no interest in, and not even any mechanisms, to do anything about it

Or perhaps, to put the issue more crisply, consider two rules of consulting:

The problem with consulting is you are hired by the problem

The most profitable clients are the most diseased

As we see from McKinsey’s increasing walks with addict-creating opioid firms and unsavory third world types, “most diseased” has gone beyond management rot to now include the corrupt.

____

¹ I had been assigned to the London study, for Citibank’s Treasury operation, because I was the only person in the firm who had spent time on a trading floor. The Treasury unit included Citi’s big foreign exchange trading desk.

The partner announced at the first meeting of the team that McKinsey was going to figure out how to beat the foreign exchange market.

I tried, politely as I could, that that was a non-starter. All we had was four months of end of day trading data in four currency crosses. This was not the right data. We would need not only Citi’s intraday trading data, which we did not have, but the intraday data of everyone in the market, which we would never get, since it was an over-the-counter market.

On top of that, even if this had been the right data, there was not enough of it to conclude anything.

I didn’t add a discussion of efficient market hypothesis.

The partner decided I was lazy and didn’t want to use the computer.

And predictably, a study that had been sold as taking four months wound up taking nine.