Another insider trading scandal reached its conclusion as Rajat Gupta came up for sentencing.
Another insider trading scandal reached its conclusion as Rajat Gupta came up for sentencing. This is much more than the story of a deal-hungry businessman sailing too close to the wind.
Gupta, as well as serving most recently on the Boards of Goldman Sachs, Procter & Gamble and other leading corporations, had been the global head of McKinsey & Company. McKinsey is the world’s most highly respected and admired professional service organisation, held up to generations of students at top business schools not only as a shining example of commercial success but also a standard bearer for the values of integrity and client confidentiality. Unsurprisingly McKinsey is top of the list for many recent MBAs looking for a job. Gupta spent three decades steeped in McKinsey’s values, under the constant scrutiny of its partners – first as seniors and then as colleagues – seeking to ensure that he made the professional code of the firm his own. How, just a few years after leaving the world of McKinsey, could its former leader fall so low?
The answer is simple: we are social animals. The company we keep inevitably affects the way in which we see the world and how we act in it. Gupta left the highly ordered, values-laden environment of McKinsey for the jungle of the financial world. Gupta’s prosecutor, Preet Bahara, described insider trading as a “performance enhancing drug” in a sector where the boundary between killer deals and illegality is wafer thin, and where personal capital can unfortunately be built up through the veiled disclosure of secrets and exchange of favours. Judge Rakoff, summing up the case, drew the jury’s attention to the fact that Gupta had received no direct financial benefit through revealing confidential information to his friend Rajaratnam, Galleon’s CEO. What Gupta had received in turn were “intangible benefits”. As a relative newcomer to this much less transparent world, Gupta had fallen prey to bad company.
What makes professional service environments like McKinsey – by contrast – such good company?
It arises from necessity. In most professional services it is difficult for clients to judge quality until it’s too late and they face a potential catastrophe. It’s hard to know if your auditor or lawyer has done a good job until you face a full-blown crisis or a lawsuit hits; the competence of your structural engineer may only come to light twenty years later when your building is condemned as unsound or a bridge collapses. As a result, clients must impute quality based on reputation and trust. So it’s not surprising that trust and reputation in professional services are more important than in other sectors.
What makes trust a reality rather than a slogan is the culture of partnership. Yes, those who have traditionally thrived in a professional service firm have needed to be good at ‘bringing in business’, but they have also been motivated by acquiring knowledge, providing advice and exercising judgement. They have sought personal development and self-actualisation in their chosen profession, have respected and challenged the professional judgement of their colleagues, and have had a concern for the future of their firm and for the quality of new generations joining. Success for the individual has brought respect within the community of fellow professionals. Individuals have only become partners – the owners and managers of the firm – once their colleagues have seen that they too shared that motivation, on the basis of many years of close observation.
The culture, however, has depended on a crucial organisational reality: the structure of partnership itself. Partnerships are flat, flexible structures in which practitioners are also owners and managers. Partnerships do not just depend on hierarchies or on rule-books to define and reinforce quality; a well-structured partnership – in which partner selection is not just a matter of longevity, and partner remuneration not just a matter of commission for sales – provides its own self-regulating mechanism in which partners both respect and challenge each other’s judgement. Partners are their firm: the reputation of the latter is dependent on the judgement and behaviour of the former.
In the classic traditional unlimited liability professional partnership, poor judgement or rogue behaviour by a single individual could bankrupt all of its members. So professional values had a real underpinning of economic value and lay therefore at the heart of the business model – rather than being a nice-to-have abstract initiative left to a human resources department detached from the real professional activity of the firm. As more and more professional service firms have limited the liability of their partners by converting to limited liability partnerships (LLPs) or limited companies there should be a real concern about the future strength of their partnerial cultures. Firms need to work much harder at their values if they are not automatically reinforced by unlimited liability. Firms that are companies rather than partnerships need to make sure that newly imposed management hierarchies do not compromise the personal challenge that a partnership automatically makes room for. McKinsey is a limited company, not a partnership – but its management policies and practices by choice continue to be those of a partnership, not a company.
Firms in law and accountancy sectors have faced up to these challenges relatively recently. But those sectors which have long since moved far away from the partnership model and the concept of unlimited individual liability – such as investment banking, which was once described as a profession – have only too often manifestly failed to provide the kind of tough, transparent, ethical environments that even the best of leaders need in order to tread a fully ethical path. The consequence for investment banking has been a death threat not just for the occasional firm but for a whole sector.
Rajat Gupta’s story also reminds us that there are consequences not just for the sector and the firm but for the individual. Without the appropriately engaged scrutiny of colleagues sadly what is left for Rajat Gupta and those who will follow him is the scrutiny of the courts.