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DEFINING CAPITALISM’S CHARACTER: TOM PETERS VERSUS MCKINSEY1

Gerard Seijts and Thomas Watson wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

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Copyright © 2022, Ivey Business School Foundation Version: 2022-03-25

In early 2021, McKinsey & Company (McKinsey), the world’s pre-eminent consulting firm, agreed to pay US$573 million2 to end US state-level investigations into claims that it had helped exacerbate a global opioid crisis.3 Tom Peters, an influential and highly respected management guru, knew that organizations made mistakes and that individual employee actions did not always reflect a company’s values. Nevertheless, he felt “personally soiled” by how far his former employer had been willing to go in helping US drug maker Purdue Pharma LP (Purdue) increase sales of OxyContin, a narcotic-based painkiller that helped drive an opioid epidemic responsible for hundreds of thousands of tragic deaths, including 19,355 in Canada.4 Peters was particularly disgusted by McKinsey’s recommendation that Purdue consider reducing distributor reluctance to sell the drug by paying rebates based upon fatality and addiction statistics.5 In a commentary published by the Financial Times, McKinsey’s highest-profile former consultant publicly wondered what he should do, noting: “As a McKinsey alumnus, my reaction [to the scandal] was simply: ‘Dear God!’ My decades of pride in the firm evaporated as I read of the settlement. In fact, I asked a colleague, in earnest: ‘Should I remove McKinsey from my CV?’”6

Condemnation of McKinsey’s opioid work was far from universal because its advice to Purdue came with a statement noting that McKinsey’s recommendations were subject to appropriate legal and regulatory review by Purdue prior to implementation. As one Reddit user put it: “Can someone explain just exactly what McKinsey [has] supposedly done wrong? I mean, OxyContin was approved by the FDA [Food and Drug Administration], and the manufacturer had the right to sell it. McKinsey was supposedly just helping to market and to boost sales. That sounds like that they are doing their jobs.”7 But as far as Peters was concerned, there was no question as to what McKinsey did wrong: it had hit a “new low” for capitalism by ignoring the moral responsibility of business while helping an unethical client aggressively promote the wide-scale use of a highly addictive drug to maximize profit.8

Determined to distance himself from this behaviour, Peters spent 2021 attacking the values of the firm that had launched his career. As he told his 171,000 followers on Twitter, “I will continue to publicly beat on McKinsey until I see a genuine expression of remorse the magnitude of which approaches the magnitude of the catastrophic behavior.”9

In addition to promoting the Hulu drama series Dopesick, which chronicles the pain and suffering brought on by the criminal misbranding of OxyContin, Peters blasted McKinsey’s culture for being what he called

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dangerously tied to a narrow definition of corporate purpose that dominated capitalism for decades before becoming widely seen as the antithesis of acceptable corporate behaviour in recent years.

This heated dispute between the world’s most prestigious consulting firm and its highest-profile alumnus raised a timely question for business professionals: in today’s evolving marketplace, at what point, if any, should organizations and individuals who shared Peters’s point of view cut ties with anyone (e.g., employees, partners, or suppliers) who had the skills and commitment required to excel at generating profits but lacked what it took to willingly forgo opportunities to increase revenue when such opportunities (even legal ones) threatened the well-being of individuals, society, or the environment?

CAPITALIST DRUG DEALERS

Crime of the Century, Alex Gibney’s 2021 documentary on the opioid crisis, was a searing indictment of big pharma’s drive to maximize profits by downplaying the addictiveness of synthetic opiates, which set the stage for the wide-scale abuse of prescription drugs while creating additional demand for big pharma products in the illicit street drug market.10 As movie reviewer Nick Allen put it:

This is a saga comprised of enormous greed, hundreds of thousands of Americans addicted to prescription pills with heroin-like dosages, sales reps entering Faustian bargains, [and] parasites with medical degrees who run ‘pill mills.’ . . . The drug lords here aren’t like Tony Montana or Walter White, but are corporations like Purdue Pharma.11

Based in Connecticut, the Purdue Frederick Company was founded in 1892 by doctors John Purdue Gray and George Frederick Bingham. In 1952, when the company was still a relatively small concern, offering products ranging from tonics to earwax remover, it was acquired by Arthur, Raymond, and Mortimer Sackler, a trio of sibling doctors who, while working in a psychiatric hospital treating thousands of patients with shock therapy, decided to go into business after becoming convinced that drugs were the future of medicine. Leaving his brothers in charge of manufacturing, Arthur acquired a medical advertising business and revolutionized how drugs were sold, using ethically challenged marketing practices. In addition to using misinformation to sell drugs, he pioneered the idea of enticing doctors to promote medications to other doctors. After making a fortune promoting addictive tranquilizers like Valium, Arthur died before OxyContin was launched, but the tactics he developed influenced marketing strategies deployed by Purdue under Sackler family control.12

Prior to launching OxyContin, Purdue generated significant revenue from MS Contin, which, like other early opioid-based prescription painkillers, was targeted at cancer patients—a limited market. With MS Contin facing competition from generic drug makers, Purdue, under the direction of a new generation of Sacklers, moved to increase profitability by introducing OxyContin in 1996, billing the much stronger opioid-based product as a revolutionary medical breakthrough by insisting it was safe for wide-scale use and could relieve pain for 12 hours (much longer than competitor medications), eliminating the need for pain sufferers to take medication in the middle of the night.13 Doctors were told that one pill in the morning and one at bedtime provided patients with “smooth and sustained pain control all day and all night.”14 At the time, the medical profession widely considered it irresponsible to treat non-cancer patients with opioids due to their addictive nature. But Purdue assured the market that a slow-release coating significantly reduced the risk of abuse and addiction. Despite having no legitimate evidence to back up these claims, Purdue sales representatives told doctors that the risk of addiction for patients with chronic pain seeking long-term relief was “less than one per cent.”15

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When OxyContin was approved, industry influence on the US FDA already had critics concerned with the oversight of drug approvals. In Purdue’s case, the process was called into question by the company’s relationship with the FDA, since the official responsible for reviewing OxyContin’s safety ended up working at Purdue for a significantly higher salary.16 For whatever reasons, the FDA approved misleading labelling that suggested clinical studies had found the risk of addiction for prescribed use “very rare” and OxyContin’s delayed absorption reduced the drug’s “abuse liability.” Using its FDA approval to support its unfounded claims, Purdue then targeted general practitioners lacking expertise in drug abuse with what the New York Times called “the most aggressive marketing campaign ever undertaken by a pharmaceutical company for a narcotic painkiller.”17

From 1996 to 2001, more than 5,000 physicians, pharmacists, and nurses attended all-expenses-paid events at vacation resorts, where they were recruited to promote OxyContin as safe. As the drug became a blockbuster money-maker, with sales increasing from $48 million in 1996 to more than $1 billion in 2000, rates of addiction also began to skyrocket, with OxyContin not living up to its branding.18 With the painkiller often wearing off earlier than the 12-hour mark, legitimate users started popping more pills to counter feelings of withdrawal. Meanwhile, illicit street demand took off as people realized that a heroin- like high could be achieved by simply chewing OxyContin tablets or crushing them into powder. By 2003, the US Drug Enforcement Administration concluded that the company’s “aggressive, excessive and inappropriate” marketing “very much exacerbated” the abuse and criminal trafficking of OxyContin.19

In May 2007, after years of misleading doctors, patients, and regulators, Purdue pleaded guilty to federal criminal charges of misbranding and agreed to pay approximately $600 million in fines and other payments, which, as the New Yorker noted, was then the equivalent of about six months’ worth of OxyContin revenue.20

Federal prosecutors in Virginia had initially hoped to charge three executives on numerous felonies for fraudulently marketing OxyContin as less dangerous and prone to abuse than other narcotics, including the company president and its top legal adviser, but Purdue successfully lobbied the Bush administration to pressure prosecutors to allow the executives to plead to misdemeanour charges and collectively pay a $34.5 million fine. Thanks to a legal team led by former New York mayor Rudy Giuliani, at the height of his influence, Purdue also avoided being barred from doing business with the federal government, which would have dramatically reduced profits by preventing OxyContin from participating in public health programs like Medicaid.21 Despite its control of the company, the Sackler family (and its growing fortune) was left untouched.22 After insisting that its transgressions stemmed from the actions of a few bad apples, Purdue continued its aggressive and unethical marketing of OxyContin following its conviction for misbranding, avoiding sales restrictions by releasing a new formulation of the drug that supposedly reduced the risk of abuse. By 2011, company objectives included approval of OxyContin for children.23

In 2019, when lawsuits seeking billions of dollars in opioid-related damages from Purdue were mounting, OxyContin sales were directly linked to the opioid crisis by a study that found markedly higher rates of overdose in US states without prescription monitoring programs, where the company focused its marketing efforts.24 After making an estimated $30 billion fuelling a deadly health crisis, the company protected itself from accountability by declaring bankruptcy. While under court protection from creditors, Purdue cut another controversial deal, this time with Trump administration prosecutors. While pleading guilty to a second round of criminal charges for—among other things—paying kickbacks to doctors and continuing to mislead the market over the safety of OxyContin, it agreed to an $8.3 billion settlement, which critics noted was probably worth “pennies on the dollar,” as the company was bankrupt.25 In a related deal, the Sacklers agreed to pay $225 million in civil penalties, with no admission of wrongdoing.26 After taking about $13 billion out of Purdue, the Sacklers also negotiated a separate deal that protected most of their wealth lawsuits in return for contributing approximately $4 billion to Purdue’s restructuring and giving up control of the company.27 This deal was thrown out on appeal in late 2021.

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PUSHING PAINKILLERS WITH PURDUE

In September 2018, citing research that noted “many, if not most, patients who use opioids for more than a brief period develop some degree of dependency,” McKinsey researchers released a study on the epidemic calling for bolder action to combat the escalating crisis, noting that the social costs “include not only overdoses and deaths, but also unemployment, lost productivity, and exacerbations of behavioural health conditions. In addition, a growing number of children are being displaced and/or emotionally affected because of their parents’ opioid dependency.”28 The study did not note how the firm’s consultants had worked to help turbocharge OxyContin sales.29

According to the Massachusetts attorney general’s office, McKinsey worked with Purdue executives and members of the Sackler family to limit the regulatory response to the company’s 2007 criminal conviction for misbranding OxyContin as low risk. In 2009, McKinsey reportedly advised its client that new sales tactics could increase annual sales of OxyContin by as much as $400 million. Options presented to management included pushing the idea that opioids reduced stress and increased patient optimism, focusing marketing efforts on prolific prescribers of OxyContin and using pain sufferers to lobby reluctant doctors to prescribe the drug. In an email exchange that included a McKinsey consultant, a potential plan was discussed to counter bad publicity generated by grieving mothers of teenagers who had overdosed. In 2013, after Walgreen Company (Walgreens), under pressure from regulators, started cracking down on illegal prescriptions, McKinsey recommended that Purdue “lobby Walgreens’ leaders to loosen up,” noting that a “deep examination of Purdue’s available pharmacy purchasing data shows that Walgreens has reduced its units by 18%.”30 In 2017, after OxyContin prescriptions between 2010 and 2016 had dipped about 40 per cent,31 McKinsey suggested that Purdue could boost revenue by offering rebates of $14,810 to OxyContin distributors for every sale linked to an overdose or death. This option was presented with an analysis that estimated that 2,484 customers of the pharmacy chain CVS Pharmacy Inc. alone would overdose or become addicted to opioids in 2019.32 In addition to focusing “on higher, more lucrative dosages and increased sales rep [representative] visits to high-volume opioid prescribers,” McKinsey reportedly advised Purdue to maximize its OxyContin profits by working with other opioid manufacturers to counter calls for “strict” regulations. The firm also recommended that Purdue consider delivering OxyContin directly through mail- order pharmacies that could circumvent restrictions on suspicious high-dose prescriptions.33

In July 2018, after learning that Purdue board members faced legal actions for allegedly helping fuel the opioid epidemic, at least two senior McKinsey consultants discussed “having a quick conversation with the risk committee to see if we should be doing anything other that [sic] eliminating all our documents and emails.”34 Nevertheless, the firm insisted that its work for Purdue was being mischaracterized, and it admitted no wrongdoing in February 2021 when it reached its controversial settlement with a coalition of attorneys general representing 47 states, the District of Columbia, and five US territories. In addition to the payment—which was meant to help state efforts to abate the opioid crisis—McKinsey agreed to stop advising companies on potentially dangerous Schedule II and III narcotics. It further agreed to release all available documentation related to its opioid work and to implement strict standards for document retention and conflict disclosures on government contracts.35 As ProPublica Inc. (ProPublica) later reported, while some McKinsey consultants were working for Purdue, helping push opioids and limit regulations, other McKinsey consultants were working for the FDA, helping it revamp drug-approval processes and monitor the pharmaceutical industry—without disclosing the conflict.36

McKinsey’s opioid settlement was made under the leadership of global managing partner Kevin Sneader, who, according to New York Magazine writer Andrew Rice, embarked on “what, by McKinsey’s standards, amounted to a policy of perestroika,” after inheriting numerous scandals from his predecessor, Dominic Barton.37 Prior to cutting a deal to limit the risk of potential lawsuits, Sneader authorized the release of a statement to address the firm’s work for Purdue:

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As we look back at our client service during the opioid crisis, we recognize that we did not adequately acknowledge the epidemic unfolding in our communities or the terrible impact of opioid misuse and addiction on millions of families across the country. That is why last year we stopped doing any work on opioid-specific business, anywhere in the world.

Our work with Purdue was designed to support the legal prescription and use of opioids for patients with legitimate medical needs, and any suggestion that our work sought to increase overdoses or misuse and worsen a public health crisis is wrong. That said, we recognize that we have a responsibility to take into account the broader context and implications of the work that we do. Our work for Purdue fell short of that standard.

We have been undertaking a full review of the work in question, including into the 2018 email exchange which referenced potential deletion of documents. We continue to cooperate fully with the authorities investigating these matters.38

Criticism of McKinsey’s questionable accountability was significant outside of the firm, where Peters was not the only outraged former employee. “This is the banality of evil, M.B.A. edition,” Anand Giridharadas, a former McKinsey consultant told the New York Times. “They knew what was going on. And they found a way to look past it, through it, around it, so as to answer the only questions they cared about: how to make the client money and, when the walls closed in, how to protect themselves.”39

Inside McKinsey, reaction was mixed. Some anonymous posts on an internal chat site called the work for Purdue a betrayal of the firm’s stated commitment to serving society, but others accepted the party line, considering the scandal more a result of McKinsey consultants simply being too focused on doing what they were trained to do—that is, serving their client’s interests to the best of their abilities.40 According to media reports, the latter camp included senior partners who thought Sneader had paid too much to end investigations into the firm’s work for Purdue and gone too far in his acknowledgement of failures. This disapproval, according to Forbes columnist Michael Posner, led McKinsey to decisively deny its would-be reformer a second term before the ink on the opioid settlement was dry. The rejection of Sneader’s leadership was not just unexpected; it was the first time in 40 years that a McKinsey leadership vote denied a second mandate to a global managing director.41 According to media reports, Sneader’s ousting was a rejection of “efforts to reform the private firm by tightening scrutiny of which clients its partners took on,” and that said a lot to critical outsiders.42 An Economist column concluded that, “as the smuggest guys in the room,” McKinsey’s partners suffered from a “collective self-delusion” that had put them in “a clueless mess that they do not understand and therefore cannot fix.”43

MCKINSEY & COMPANY

When facing conflicts involving hijackers, kidnappers, pirates, or other armed foes, governments and organizations across the planet turned to elite military units like the US Navy SEALs to save the day. When facing major non-military challenges, they turned to McKinsey—the special forces of capitalism. As noted in Duff McDonald’s The Firm: The Story of McKinsey and Its Secret Influence on American Business, McKinsey’s clients knew there was “no better army of analysts in the world.”44 They also knew that the firm’s reputation as a powerful and influential adviser to the world’s ruling class provided serious cover for anyone charged with meeting goals.45

McKinsey was founded in 1926 when, after concluding that the powerful business class of the day lacked people willing or able to tell businesses what they were doing wrong, James O. McKinsey set out to sell

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businesses advice based on fact-based analysis. However, the father of McKinsey’s culture was Marvin Bower, who expanded the advice offered clients beyond accounting and into the realm of strategy.46 When Bower, who went on to serve as managing director from 1950 to 1967, joined the firm in 1933, management consulting was widely seen as questionable. In order to give consulting more credibility, Bower introduced a set of principles based on the obligations of the legal profession, which included an obligation to not do unnecessary work. Although this opened the door to value judgements, the rules also put meeting client- defined objectives above all else.47

As a Fortune profile noted in 1993, a McKinsey consultant had to “put the interests of his client ahead of increasing The Firm’s revenues; he should keep his mouth shut about his client’s affairs; he should tell the truth and not be afraid to challenge a client’s opinion; and he should only agree to perform work that he feels is both necessary and something McKinsey can do well.”48

McKinsey’s influence increased as operational control of American capitalism migrated from the robber baron class1 to the emerging management profession. As regulators clamped down on market collusion, consultants also saw their perceived value increase as conduits of information and best practices between industry competitors.49 McKinsey opened its first overseas office in London in 1959. By the end of the 1960s, the firm was active in eight countries across three continents. In 1970, it gained a reputation for industry-wide innovation after helping develop the bar code system for the retail sector. Shortly after, the firm divided itself into separate practice groups targeting specific industries. These practice groups spanned geographic boundaries, boosting McKinsey’s reputation for global expertise.

By the 1980s, the firm’s gl

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