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Mass Layoffs & Growing Income Gap Are Part of McKinsey Legacy: Duff McDonald

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Mass Layoffs & Growing Income Gap Are Part of McKinsey Legacy: Duff McDonald

It’s one of the most revered consulting firms but “almost nothing is known about it,” writes Duff McDonald, author of “The Firm: The Story of McKinsey and Its Secret Influence on American Business.”

McDonald spoke with The Daily Ticker about his new book and the mixed history of the renowned global consulting firm. Among his findings:

1. “McKinsey may be the greatest legitimizer of mass layoffs in history.” McDonald says, “McKinsey is on the vanguard of rationalizing and making companies more efficient [and] one way of doing that is layoffs,” but ultimately corporate executives, not McKinsey consultants, make the decision to cut jobs.

Related: Jobs Market Bumping Along Bottom of a Very Deep Hole: Economist

2. McKinsey is a key contributor to the growing gap between CEO pay and average worker pay. It started in the early 1950s when McKinsey consultant Arch Patton studied executive compensation at 37 major companies and found, surprisingly, that worker pay was rising faster than executive pay.

“That study obviously caught the attention of every CEO in the country, who suddenly wanted it,” says McDonald. And so began the widening gap between executive pay and worker pay which has swelled to over 350 to one.

Related: CEOs Make More Than 350 Times the Average Worker: AFL-CIO

3. The consulting firm is largely responsible for the rise of the MBA. “McKinsey was one of the first firms to start hiring MBAs, and put them on real work as opposed to hiring experienced people to consult with clients,” says McDonald. The company especially favored Harvard MBAs and at one point 75% of its consultants had one.

But not every McKinsey consultant—including its Harvard MBA consultants—turn out to be good corporate citizens. Take Jeff Skilling, a Harvard MBA and star consultant at McKinsey in the 1980s who worked on the firm’s Enron account, eventually joining its board, then becoming president of the company.

He helped transform Enron from a gas pipeline operator into a financial powerhouse, but it eventually collapsed from excessive debt and fraudulent accounting. It was the largest corporate bankruptcy in U.S. history at the time and Skilling was convicted of securities fraud and insider trading and sentenced to 24 years in jail (recently reduced to 14).

And McKinsey was in “all the major financial institutions” before the financial crisis hit using its traditional risk models looking at the past to forecast the future, says McDonald. And we all know how that turned out.

As for the firm’s future, McDonald says McKinsey has the ability to evolve and has -- moving from the corner office to operations, risk management and now, the supply chain. Their biggest challenge, says McDonald, “is maintaining quality and keeping the company from spinning apart…Eighty-five percent of their business is repeat clients. If they keep doing what they’re doing they should stick around for a long time.”

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