Is Gupta scandal a "mortal threat" to McKinsey?

After the SEC broke the news yesterday that former McKinsey managing director Rajat Gupta was implicated in a massive insider trading scheme, the media had a bona fide field day with all things Raj (and Raj Raj), McKinsey, and Goldman Sachs, the latter of which absolutely refuses to be left out of any Wall Street scandal in sight. I must admit, I was in on the media feeding frenzy; I did indeed discuss the implications of it all, and suggested that some huge ethical questions will have to be addressed industry-wide. What I failed to consider, though, was the notion that McKinsey had been dealt a potentially fatal blow, a notion that CNBC delivered enthusiastically in a piece entitled "Will Rajat Gupta Destroy McKinsey?"

I'll be honest: when I first read the headline, I thought it was another shameless, sensationalistic attempt to shock or scare people into clicking on it. But the writers at CNBC, who also ran a story suggesting that the soon-to-be Gupta scandal is "Bigger Than Madoff", have done their homework.

They've also got a good point: McKinsey stands to lose far more from Gupta's folly than those companies that have dealt with insider trading scandals before it. Banks, like Goldman, for example, seem to be able to shrug off scandal by blaming it on single parties, usually lower-level employees who still have access to privileged information and cash reserves.

McKinsey, though, faces a greater challenge.  With a name that's recognizable the world over, McKinsey thrives upon its reputation as the world's best strategy consulting firm; each year, it tops Vault's most prestigious list, and countless other publications have deemed it among the finest organizations in the world. That reputation is what keeps clients coming back, keeps the best new consultants coming in, and, most importantly, keeps the cash flowing in the right direction.

During his nine-year stint as top dog at McKinsey, Rajat Gupta not only preserved but enhanced that reputation, overseeing unprecedented geographic expansion and headcount growth. Now, because of what some McKinsey-ites are calling an "absolute betrayal", that reputation has been irreversibly tarnished (assuming he's guilty, and it certainly looks like he is).

CNBC also polled current and former McKinsey consultants to see what they think of the scandal and what it means for the future of their beloved firm. "It’s very, very bad for the firm, no matter what happens," said one McKinsey insider. "I think we go the way of Arthur Anderson," guessed another, referencing that firm's downfall after the damaging Enron scandal of a decade ago (which McKinsey was also intimately involved with).

Pessimism abound! But could it really happen? A writer for the Economist offered a more composed perspective. "For the former boss of such a firm to be found double-dealing would deal a more profound reputational blow than the usual insider-trading scandal," the publication writes. "Traders and hedge-fund types are expected to scrap for every bit of momentary advantage to make their money… But elite consultants, and McKinsey foremost among them, consider themselves in a different class."

The author of the CNBC piece finishes with a subtly morbid (but wholly appreciated) bit of humor. From John Carney, CNBC: "Ironically, McKinsey might want to look to its own client advice to weather this storm. In June, 2009, McKinsey published an article in the McKinsey Quarterly entitled 'Rebuilding Corporate Reputations.' It might be time for McKinsey to start rebuilding its reputation now—before any serious damage is done."

For more information:
CNBC: Will Rajat Gupta Destroy McKinsey?
CNBC: Rajat Gupta—Bigger Than Madoff?
The Economist