Why McKinsey alumni don't always make good bankers

Valeant has gone spectacularly awry under the leadership of Mike Pearson. Photo / AP

COMMENT:

When US drugmaker Valeant collapsed nearly four years ago, there was no shortage of name-calling and blame-gaming. But one narrative cut through the noise: Valeant had gone spectacularly awry under unusual leadership. A few years earlier, the group had hired as its boss a McKinsey executive named Mike Pearson, who had spent 23 years at the consultancy before being parachuted into the real world of running a pharmaceuticals company — with no operational experience.

For a while, business thrived. But the consultant's business model — egged on by activist investors at ValueAct and Pershing Square — unravelled. Ditching research, boosting revenue at all costs and hiking drug prices wherever possible turned out to be disastrously short-termist.

In some ways it was a replay — without the criminality — of the 2001 Enron scandal, when a more infamous McKinsey alumnus, Jeffrey Skilling, moved from a 10-year career as a consultant into a string of divisional CEO roles at the energy group before rising a decade later to become CEO of the group. He was convicted on charges of fraud and insider trading and spent more than 12 years in prison.

The question of how good McKinsey consultants are at running companies is a live debate in the financial sector, where growing numbers of banks and insurers are helmed by McKinseyites. It recently emerged that Jane Fraser, another alumna, was a favourite to succeed Mike Corbat at the top of Citigroup. Fraser has enjoyed glowing praise from colleagues. But will she deliver if she wins the big job?

Of course, it is hardly surprising to find a few rogues or incompetents among the 34,000 McKinsey alumni working at 15,000 different institutions around the world. Far more will be raging successes or at least perfectly proficient — and for a host of reasons beyond the McKinsey stint on the CV.

Even so, there may be a key lesson to learn from the examples of Messrs Pearson and Skilling: in both cases, these were men who had worked for a long time at McKinsey, including as consultants to the companies they ended up heading. And in both cases they had done little else.

"There's an important correlation. How long is it since you left the firm before you become a chief executive?" says one ex-McKinsey corporate CEO. "The longer it is, the more successful you are likely to be."

A prime example of the theory is the tenure of Morgan Stanley's James Gorman. Under his near decade in charge, the bank has reshaped itself away from being a carbon copy of Goldman Sachs before the financial crisis into a wholly different group. He has been rewarded with a 90 per cent rise in the share price, compared with an uplift of 50 per cent at Goldman. After his early career at McKinsey, he spent years in senior but not top-ranking jobs at Merrill Lynch and then Morgan Stanley, before becoming CEO.

Similarly, consider Nigel Wilson's leadership of Legal & General, where he became CEO in 2012, after working first at McKinsey and then in big corporate roles across several sectors. L&G stock is up 140 per cent since Wilson took over. Germany's Allianz, under fellow McKinseyite Oliver Bäte, is one of only two big European rivals (together with France's Axa) that have outperformed it over that period.

Credit Suisse boss Tidjane Thiam did big jobs at Aviva and Prudential successfully before tackling a major restructuring at CS. Critics acknowledge the scale of the task was a factor as well as operational banking inexperience but there is no escaping the halved share price.

Peter Sands, who moved from being a consultant to Standard Chartered at McKinsey to become the bank's finance director and then CEO, was the closest banking has come to a Mike Pearson moment. Sands disengaged from day-to-day running of the company, leaving gung-ho underlings to expand too aggressively. And the stock plunged 43 per cent during his last two years in charge.

If Jane Fraser does make it to chief executive of Citigroup, she may have the strategic nous to deal with some of the persistently underperforming parts of the business — from equities to the core US consumer business. Her long lead-up to the top job — after a 15-year career at Citi — puts her in the category of operationally experienced McKinsey alumni, not latecomer parachutists. But one omen may be a concern: high up the Citigroup shareholder register, as at Valeant, is the activist investor ValueAct.

Written by: Patrick Jenkins

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