Has McKinsey Lost Its Luster?

What went wrong at McKinsey

Partners at McKinsey yesterday voted out their leader, Kevin Sneader, as the company deals with blowback over its role in the U.S. opioid crisis. It was the latest tough headline for the consulting firm, which may face growing threats to its status as a trusted adviser to companies and governments — and as a magnet for top talent.

Mr. Sneader was denied a second three-year term as global managing partner, weeks after McKinsey agreed to pay nearly $600 million to settle investigations by 49 states into sales advice it gave drug makers about opioid sales. It was the first time since 1976 that a McKinsey leader had failed to win a follow-on term. The candidates to replace Mr. Sneader are Bob Sternfels, based in San Francisco, and Sven Smit, based in Amsterdam.

McKinsey’s reputation has taken a hit in recent years. Beyond the opioid crisis, the firm has been criticized for some high-profile missteps:

Days after taking on the top role in July 2018, Mr. Sneader had to apologize for the consulting firm’s work with a state-owned power provider in South Africa, which was enmeshed in a corruption scandal that brought down the country’s president.

That same month, he had to defend McKinsey over its work with U.S. Immigration and Customs Enforcement amid the Trump administration’s harsh deportation policies. (The firm ended its work soon after.)

In 2019, McKinsey paid $15 million to settle a Justice Department investigation into its failure to disclose potential conflicts of interest in its corporate bankruptcy practice.

One big question: Will graduates think twice about McKinsey? A huge challenge facing Mr. Sneader, and soon his successor, was rebuilding trust in the white-shoe firm. Concerns about the firm’s culture could hurt its status as a premier destination for elite M.B.A. graduates, just as more budding business tycoons are favoring tech companies — whether for money, prestige or more progressive social cultures — over consulting and banking. Mr. Sneader told The Financial Times, which first reported his election loss, that McKinsey was coming off its “best recruiting year ever.” It plans to to hire more new employees this year than ever before.

There’s reason to think that McKinsey can recover. “Franchises such as McKinsey are incredibly robust,” the FT’s Lex column noted, while adding that the firm needed to make sure it was not seen as “representing an old elite order.” At Harvard Business School last year, 24 percent of graduates went into consulting, down from … 25 percent in 2016.

HERE’S WHAT’S HAPPENING

Corporate leaders urge Congress to pass President Biden’s stimulus proposal. More than 150 executives, including David Solomon of Goldman Sachs and Steve Schwarzman of Blackstone, urged lawmakers to approve the $1.9 trillion bill, saying “more must be done” to help the economy.

Promising new data on Johnson & Johnson’s coronavirus vaccine. The shots provide strong protection against severe disease and death from Covid-19 and may reduce the spread of infection. The F.D.A. is set to vote on whether to approve the vaccine within days.

Biden’s pick for U.S. trade representative faces scrutiny. Katherine Tai, a former House aide, is scheduled to testify before the Senate today. She’ll likely be questioned about how trade policy will shift from former President Donald Trump’s “America First” stance — and how it won’t.

An analysis shows Texans paid more for their deregulated power market. Consumers who bought electricity from the state’s deregulated market, which suffered widespread outages during recent winter storms, paid $28 billion more than residents who relied on traditional utilities, according to The Wall Street Journal.

Uber’s Chinese rival may roll out in Europe. Didi Chuxing plans to introduce ride-hailing service in European markets like Britain and France, Bloomberg reports. That could bring a tough new competitor in some of Uber’s big markets.

The strategy at MicroStrategy

Michael Saylor, the C.E.O. of the business intelligence software firm MicroStrategy, is a big believer in Bitcoin and urges companies to diversify their assets by shifting corporate cash into the cryptocurrency. That’s what MicroStrategy has been doing, in a big way: yesterday, it announced a billion-dollar Bitcoin purchase.

The company has spent more than $2 billion on Bitcoin since the summer. MicroStrategy “remains focused on two corporate strategies,” Mr. Saylor said in a statement: growing its software business and “acquiring and holding Bitcoin.” Explaining the relationship between those two priorities, the company’s finance chief, Phong Le, said the “Bitcoin strategy” was “complementary to the software business, by enhancing awareness of our brand and providing opportunities to secure new customers.”

The company’s purchases have been well timed: Bitcoin’s price is currently double the company’s cost basis, implying a gain of nearly $2.5 billion. Before it started buying Bitcoin in August, MicroStrategy’s market cap was just over $1 billion. It is now nearly $8 billion.

“It’s amazing that a board of directors allowed this,” the financial adviser Marc Lichtenfeld said, citing Bitcoin’s extreme volatility and its tenuous link to the software business. Buying crypto in enormous amounts as a marketing tool will not impact the fundamental prospects of MicroStrategy’s business by adding to its earnings and cash flow, Mr. Lichtenfeld noted.

“Regulators could have concerns,” Richard Levin, a fintech lawyer at Nelson Mullins, said. “Any publicly traded company bringing a digital asset onto its balance sheet needs to proceed with caution.” It’s fine to buy an asset because it is appreciating, Mr. Levin said, but companies need to tread carefully to avoid the appearance that they are acquiring it to generate hype.

Companies that reoriented their businesses around cryptocurrency — beyond just buying a lot of it, like MicroStrategy — have run into trouble with the S.E.C. in the past, like Overstock, the retailer and token purveyor, and Long Blockchain, the rebranded iced-tea maker that was delisted this week.

GameStop’s stock is doing that thing again. The video game retailer’s share price more than doubled yesterday, an echo of the meme-stock mania of last month. (After-hours trading implies that shares could rise again today.) Other stocks popular among online traders, like the theater chain AMC, also jumped for no discernible reason other than the unbowed enthusiasm of traders who gather on Reddit, which briefly crashed yesterday.

Activists take old-school approach at Kohl’s

A group of activist investors has taken a 9.5 percent stake in the department store retailer Kohl’s and are pushing for changes. The activists have lobbed a number of criticisms, like stagnant sales and declining gross margins, and offered suggestions: add executives with retail experience to the board and do a sale-and-leaseback of property. Shares of the retailer popped when the stake was disclosed this week, but can these activists succeed where Bill Ackman at J.C. Penney and Starboard at Macy’s struggled?

This isn’t Bed Bath & Beyond, where the activist group taking on Kohl’s last had success. Bed Bath & Beyond didn’t own much real estate, but it had a number of underperforming divisions and low board turnover. Kohl’s has tried to navigate the department store downturn by partnering with grocers to fill space in its larger boxes, with Amazon to offer returns from its stores and with Sephora to attract new customers. And while the activist group wants Kohl’s to add more board members with retail experience, retailers have in recent years focused on hiring from outside the industry to bring in new skills, especially in technology. Kohl’s said it has added six new directors since 2016.

Activists have pushed sale-and-leaseback deals on retailers before. The investors love them because they quickly generate cash that they hope will be returned to shareholders. Retailers hate them because they are left with less flexibility after those activists have gone. For years, Macy’s rejected Starboard’s push to monetize its real estate; when the pandemic hit last year, that property backed billions in much-needed loans. Even after the pandemic passes, the continued rise of e-commerce will force retailers to reassess their property portfolios. A sale-and-leaseback deal, which often entails long-term leases, could lock in retailers like Kohl’s at a time when they need to be nimble.

Charlie Munger lets loose

The 97-year-old vice chairman of Berkshire Hathaway is known for being Warren Buffett’s more brusque right-hand man. He lived up to his reputation yesterday at the annual meeting of the Daily Journal, the Los Angeles-based newspaper publisher that he chairs, during which he traditionally fields questions on a range of topics.

Some of the highlights:

“I think we’re crazy to allow it.” Mr. Munger said that the recent meme-stock mania was “fed by people getting commissions and other revenues out of this new bunch of gamblers,” apparently referring to online brokerages like Robinhood. He added, “It’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mind-set of racetrack bettors.”

“The world would be better off without them.” SPACs have been the hottest trend on Wall Street, but Mr. Munger finds the phenomenon another instance of irresponsible gambling. “This kind of crazy speculation in enterprises not even found or picked out yet is a sign of an irritating bubble,” he said, adding some profane words for the banks bringing these companies to market.

“I don’t think Bitcoin is going to end up the medium of exchange for the world.” Mr. Munger said that digital tokens were too volatile to replace traditional currencies, and compared crypto to gold. “Since I never buy gold, I never buy any Bitcoin,” he said.

Speaking of Berkshire, the conglomerate is set to report earnings on Saturday — and publish the latest annual investor letter from Mr. Buffett, required reading for the billionaire’s thoughts on the markets, the economy, politics and more.

THE SPEED READ

Deals

The carmakers Volvo and Geely canceled plans to merge, and instead will collaborate on electric vehicle technology. (FT)

ReNew Power, the biggest clean-energy provider in India, will go public by merging with a U.S.-based SPAC in a deal valued at $8 billion. (Reuters)

The former House speaker Paul Ryan will join Solamere Capital, the investment firm co-founded by a son of Senator Mitt Romney. Solamere recently sponsored a SPAC Mr. Ryan founded. (WSJ)

Politics and policy

The Fed chair Jay Powell told House lawmakers that improving child care policies could help bring more women into the labor market. (NYT)

The Manhattan district attorney’s office has reportedly begun taking a close look at Donald Trump Jr. as part of their investigation into the Trump family’s business. (Daily Beast)

Tech

ViacomCBS announced the rebranding of its streaming service as Paramount+, including a new “Godfather” series and a reboot of “Frasier.” (NYT)

Relatedly: Why do so many streaming services have a + in their name? (NYT)

Facebook pledged to pay news publishers at least $1 billion over the next three years. (FT)

Best of the rest

Workhorse is a small electric vehicle maker that was beloved by Wall Street until it lost out on a lucrative U.S. Postal Service contract. (NYT)

The New York Times released an internal report calling for changes to make its workplace more diverse and inclusive. (NYT)

“Podcasting Is Booming. Will Hollywood Help or Hurt Its Future?” (NYT)

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