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A big fish's big wake: What Rajat Gupta's insider trading charges mean for McKinsey

Of all the fish the SEC has caught in the vast insider trading probe it has been pursuing for many months now--or perhaps, some are saying, that have been hooked by accusations of securities law violations ever--none may be bigger than Rajat Gupta. The SEC alleged Tuesday that the former head of the elite consulting firm McKinsey provided non-public information to a hedge fund manager about two of the major companies--Goldman Sachs and Procter & Gamble--where he worked as a director after his time at McKinsey. The hedge fund founder, Raj Rajaratnam, allegedly traded on the news soon after speaking with Gupta.

Gupta also sits on the boards of American Airlines parent AMR Corp., Genpact and Harman International. He is the chairman of the International Chamber of Commerce, and even played adviser to Kofi Annan on implementing management reforms at the United Nations. (Gupta's lawyer, Gary Naftalis, calls the charges "totally baseless" and vigorously maintains that the 62-year-old adviser has done nothing wrong.)

But it is Gupta's 34-year career and 9-year run atop McKinsey that cemented his reputation as one of the business world's most powerful people and most quintessential insiders. It has been 9 years since Gupta ran McKinsey and 4 since he left it, but he remains closely tied in many people's minds to the influential firm. Under his leadership, McKinsey more than doubled in size, expanding from 3,300 to 7,700 consultants, Fortune Magazine reported in October.

Which raises an interesting question: How might the accusations against Gupta hit his former employer? The Indian-born management consultant has been gone from McKinsey for a long time, and the allegations are tied to his post-McKinsey work as a director, not as a consigliere working for McKinsey's top-tier executive clients. When news first surfaced nearly a year ago that Gupta was under investigation, the firm offered little in the way of comment other than it had "no knowledge of this alleged matter, which is unrelated to our firm."

Perhaps other companies without the same reputation for confidentiality, discretion and secrecy could distance themselves, without much argument, from former leaders' actions after they left the firm. But McKinsey's very business is keeping company secrets, and questions about whether or not Gupta might have shared information about McKinsey clients could very well come up. In fact, they're already being raised.

What's more, Gupta was the firm's leader for nine years. This is not a low-ranking consultant who had no influence over the company's culture and values. Rather, Gupta presided over the firm during its biggest growth surge, shaping the firm and the way it works during a time when thousands of new employees were brought on board. While successors have surely made their mark on the company's culture since then, it wouldn't be surprising if clients or potential customers paused to wonder what indelible marks Gupta, if the charges are found to be true, may have left behind.

McKinsey is hugely successful, and I have little doubt the firm will continue to serve the world's most powerful executives and draw clients attracted by the vast accumulated knowledge of the firm. And with Gupta refuting the accusations, he could still be vindicated. But the episode also serves as a reminder not to underestimate the out-sized impact a leader--even a former one--can have on the stature of a firm. Big fish, after all, tend to leave a big wake.

By Jena McGregor

 |  March 1, 2011; 11:09 PM ET |  Category:  Bad leadership , Corporate leadership Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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Has any body noticed that both Gupta and Raja Ratnam are from India ? Lots of big shot management gurus and hedge fund operators on Wall street are Indians who have no moral compunction in fraud and cheating.

Posted by: syedahaq2000 | March 3, 2011 3:40 PM

Has any body noticed that both Gupta and Raja Ratnam are from India ? Lots of big shot management gurus and hedge fund operators on Wall street are Indians who have no moral compunction in fraud and cheating.

Posted by: syedahaq2000 | March 3, 2011 3:39 PM

The biggest catch, or the fall guy?

Posted by: Joallen8 | March 3, 2011 3:13 PM

Is this a joke....NO BIG GUYS HAVE BEEN INDICTED....the whole firm of goldman sachs should be on trail as well as UBS.....not to mention paulsen, greenspan, gramm, et al.....

Posted by: ticked | March 3, 2011 12:45 PM

I have never worked for McKinsey, but as a former investment banker know many people who have. Rajat Gupta created a culture at McKinsey which, on good authority, I can assure you has been largely rejected, abandoned and overhauled by subsequent management. I have heard stories of his sweeping into senior management meetings with a sycophantic entourage in tow, to the wonderment and bewilderment of other senior partners. Those days are gone. I hear they're not even allowed to use PowerPoint anymore. Consultants now have to be able to put all the relevant points of McKinsey's analysis on two sheets of paper, which they leave with the client after presenting it on their feet. It's basically the old McKinsey--top flight, thoughtful, and client oriented.
I cannot imagine that whatever Gupta did after he left McKinsey would or should have any impact on the firm whatever.

Posted by: cwpnewpaltz | March 3, 2011 12:10 AM

I have never worked for McKinsey, but as a former investment banker know many people who have. Rajat Gupta created a culture at McKinsey which, on good authority, I can assure you has been largely rejected, abandoned and overhauled by subsequent management. I have heard stories of his sweeping into senior management meetings with a sycophantic entourage in tow, to the wonderment and bewilderment of other senior partners. Those days are gone. I hear they're not even allowed to use PowerPoint anymore. Consultants now have to be able to put all the relevant points of McKinsey's analysis on two sheets of paper, which they leave with the client after presenting it on their feet. It's basically the old McKinsey--top flight, thoughtful, and client oriented.
I cannot imagine that whatever Gupta did after he left McKinsey would or should have any impact on the firm whatever.

Posted by: cwpnewpaltz | March 3, 2011 12:09 AM

These jerks get paid big bucks to do their jobs. Why do they have to cheat? Greed? Stupidity?

Posted by: adrienne_najjar | March 2, 2011 11:29 AM

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