Sensemaker Daily
McKinsey is at risk of being banned from US government contracts because of claims it advised Beijing. Along with BCG, Teneo and dealmaker Michael Klein, it’s also been hauled in front of Congress for its work with Saudi Arabia’s Public Investment Fund (PIF).
So what? Consultancies work for governments of every stripe. That’s no surprise, especially when countries increasingly take an a la carte approach to foreign relations. But recent run-ins expose a widening gap in expectations: between what business thinks is an acceptable level of engagement with autocracies – and what the public and their political representatives will stand for.
One FTSE chair recently described the gulf in attitudes regarding Saudi as a “Cold War”.
Red lines. The claims against McKinsey, first reported by the FT, are that it
- Led a think-tank called the Urban China Initiative (UCI) that helped develop the CCP’s 13th five-year plan, and
- boasted on a now-defunct website, mckinseychina.com, that 10 per cent of its clients in China were government agencies or non-profits.
McKinsey says its business and UCI are not the same. Less than a month ago Bob Sternfels, the recently re-elected global managing partner, told Congress he was unaware the firm ever worked for the Chinese central government.
Republicans are furious even so. Marco Rubio, vice-chair of the Senate intelligence committee, accused McKinsey of lying and concluded that its “true mission is to make money, even if that money comes from genocidal communists”.
McKinsey isn’t the first firm to sustain chinese burns and it won’t be the last: a survey last week found that while two thirds of European CEOs are planning to adjust their supply chains in the next two to five years, less than two per cent plan to exit China.
Startup Saudi. “The more I think about it, the more Saudi almost feels like a startup,” Adam Neumann, the WeWork founder, told a conference in Miami last year. He’s not the only one repositioning Saudi and its $700 billion sovereign wealth fund as responsible investors in everything from golf to critical minerals: the consulting market in the Gulf is booming, with $4 billion in revenues last year.
But can they weather the politics? Last month, executives from McKinsey, BCG, Teneo and Klein were questioned by a Senate committee investigating Saudi “soft power”, after they failed to comply with a subpoena seeking information about their work with the PIF. The firms argue they are “caught between two sovereigns” and their employees face jail time in Saudi if they hand over details of the PGA golf merger. All four are being sued by the PIF to keep the documents classified.
What’s at stake? Last year McKinsey was paid over $100 million by the US federal government. But consultancies have more than contracts to worry about.
Richard Blumenthal, the Senate committee’s chair, suggested that three of the four consultancies could be violating the Foreign Agents Registration Act (FARA) by failing to formally declare to US authorities they are acting as agents of the Saudi government. This is considered a federal crime and can lead to millions in fines. Names to have fallen foul include:
- The rapper “Pras” Michel of the Fugees, convicted last year for lobbying on behalf of the fugitive Malaysian financier Jho Low.
- Senator Robert Menendez, charged last year with conspiring to act as a foreign agent for Egypt.
- Hunter Biden, who could face fines for not registering under FARA while working with companies in Ukraine.
Stay or go? Inflation and high rates mean many more companies are willing to dip a toe in Saudi’s deep pools of capital. Others are reluctant to jettison low-cost operations in China.
But the public remains fundamentally opposed. An Axios Harris 100 poll of Americans found
- 79 per cent think companies should set red lines before engaging in joint ventures or investments with authoritarian governments.
- 45 per cent would have a worse opinion of a company if they knew it was sourcing supplies and materials from authoritarian countries (dropping unexpectedly to 35 and 28 per cent respectively for Gen Z and Millennial respondents).
- 43 per cent say companies should speak out when a government’s actions violate its values.
Bridging the gap in perceptions won’t be easy. McKinsey argues it is a “force for good” in Saudi Arabia, transforming its oil-dependent economy from within. It shouldn’t be surprised if critics say that prioritises client discretion over public interest.
