The View | Maximum transparency the only way to prevent conflicts of interest
Recent articles in the Financial Times highlight the moral dilemmas created when a company’s proprietary trading becomes more lucrative than servicing clients
Conflict of interest arises when you place yourself in a situation where you might realise illegal gains. If you do realise illegal gains from a conflicted situation it is already criminal conduct. So in the case of McKinsey, one of the world’s most important consulting firms, a conflict of interest clearly exists between it and its in-house investment arm.
Last week the Financial Times ran a series of articles about the McKinsey Investment Office. It revealed how McKinsey runs an investment operation while providing consulting advice to clients.
The McKinsey Investment Office, known as MIO Partners, has actually existed for about 30 years, but its operations are not transparent. MIO runs a US$9.5 billion internal investment fund created in 1985 for current and former partners. Around half of it represents partner investments while the rest is invested on behalf of the McKinsey group pension plan.
McKinsey is a global strategy consultant for the world’s largest firms and for governments, employing over 9,000 consultants. Its vast experience and global reach give it unique insights into influential companies and entire industries. Its alumni often assume prominent positions in government and corporations.
Management consultants themselves are not necessarily subject to regulation. MIO is not secret as it has a website and its EU arm is regulated by the Financial Conduct Authority. According to the FT, McKinsey says, “MIO is managed independently, and all its activities are separate from McKinsey’s consulting operations.”
Running an internal fund is one way of rewarding and retaining top people and utilising all of the firm’s knowledge and experience. However, the entire setup is riddled with conduct risk. It is especially surprising after Raj Gupta, McKinsey’s one-time managing director, was sentenced to two years in prison in 2012 for insider trading and fined $5 million.
In today’s competitive hiring environment, recruiting and retaining top consultants will often boil down to money – lots of money. There is no way that even senior consultants can be paid more than investment bankers or hedge fund, private equity or venture capital managers.