The Golden Passport

by Duff McDonald

  Business ethics was a different story. The question of how to incorporate ethics into the curriculum is one that dogs HBS to this day. For a variety of reasons—lack of faculty interest, lack of student interest, ongoing disagreement over how to teach it—ethics has never found true purchase at the School, amounting to nothing more than a sideshow on its best days and being utterly ignored on its worst. But they have always claimed to be thinking about how to do so. Donham was the first to say so explicitly, when in 1922 he wrote, “Graduates of a professional school should . . . be prepared to meet the ethical dilemmas of active practice. . . . Business men have not developed the professional attitude toward their work and general accepted ethical standards to anything like the extent that these have been developed in other professions.” But it still took five years from that writing for Donham to hire HBS’s first professor of ethics, Carl Taeusch, who came on board as an assistant professor in 1928. The next year, Donham heralded the creation of a Department of Business Ethics, but it was a department of one—Taeusch—and his ethics course was a second-year elective. He stopped teaching it in 1935 due to lack of interest.

  Even as the School narrowed down its disciplines to just five and career/study groups to eight, the range of content in specific courses was moving in the other direction, seemingly infinite in variety if not in actual number. Over the decade, HBS students could choose between courses that ranged from the very specific (Industrial Education in Ford Motor Company, A Problem in the Advertising of Safety Razors, Method of Approach in Distributing an International Loan), to the conceptually broad (The Employer’s Viewpoint, Profit Sharing), to the high-stakes (Control of Railroads by the War Department in the Event of a National Emergency) and even the enigmatic (The Mind).

  There was so much variety, in fact, that in 1922 Donham mused about the possibility that HBS could add a third year to its MBA program. While they didn’t do that, they did begin hiring significant numbers of freshly minted MBAs to start their careers not in industry but as case researchers for the School’s own Bureau of Business Research. The School went so far as to claim that working for the School after graduation offered the same advantage over working for someone else as going to the School did in the first place—an accelerated climb up the learning curve. In other words, anything HBS-related was superior to any alternative.

  There were dissenting opinions, of course. In The Higher Learning in America, Thorstein Veblen ventured the opinion that the speed of one’s climb was irrelevant, because the learning curve was actually a road to nowhere: “No gain comes to the community at large from increasing the business proficiency of any number of its young men. There are already much too many of these businessmen, much too astute and proficient in their calling, for the common good. A higher average business efficiency simply raises activity and avidity in business to a higher average pitch of skill and fervor, with very little other material result than a redistribution of ownership; since business is occupied with the competitive acquisition of wealth, not with its production.”4

  Be that as it may, over the course of the 1920s, the School enjoyed robust and growing demand for its graduates. While the onset of the Depression dampened demand for new hires everywhere, HBS could rightly claim that employer interest was headed in exactly the same direction as enrollment, which was skyward. And no wonder: The country’s largest corporations grew at an average annual rate of 6.1 percent between 1921 an 1928, compared to 4.4 percent for all other corporations.5

  Donham also claimed that the School had solved a problem that had plagued its early years: the excessively high expectations of its graduates in terms of their initial entry point into corporate hierarchies as well as their subsequent impatience for promotion. (It even went so far as to recommend to employers a limitation on starting salaries, just to keep the boys humble.) “Judging from the comments of business men a satisfactory improvement in their attitude along these lines has been accomplished,” he wrote in 1921. Even if that were true—it seems doubtful—the solution was not a permanent one. HBS students, to this very day, are regularly accused of both of those things. They are also accused of quitting their first job more quickly than almost any other group of new hires. In 1922, Donham was able to say that the School knew of only one man out of the previous year’s graduating class of 120 who had changed his employer during the year; no dean has made a similar claim since.

  By the end of the 1920s, Wallace Donham had transformed HBS into a force to be reckoned with. Its graduates were his graduates—by 1930, more than half of the 2,546 alumni had graduated in the last four years alone. And they were proud. In 1926, 56 percent of the School’s alumni belonged to its alumni association, the highest percentage of any graduate school at Harvard. One notable name: Stanley Marcus, the son of Neiman Marcus founder Herbert Marcus. Stanley graduated in 1926 and took a job at the family firm as a stockboy, later ascending to the CEO spot when his father died in 1950. Nineteen years later, he sold the company for $40 million to a company run by another HBS grad, Edward Carter’s Carter Hawley Hale. Another: Albert Gordon (’25), the future head of Kidder Peabody. And another: George H. Love, who went on to head not one but two industrial giants, the Consolidation Coal Company and the Chrysler Corporation, of which he was chairman of the board between 1961 and 1966.

  Where did most of HBS’s alumni find work? In 1925, nearly two-thirds of them took positions in either banking, sales, production, or teaching (usually at the School itself). Lured by the siren song of fast money, however, by decade’s end many of its newly minted MBAs only had eyes for Wall Street, and investment banking in particular. But the Crash of 1929 put an end to that, a development that Donham described in 1930 with remarkable understatement: “Some difficulty was experienced in placing those of the graduating class who sought positions in the investment banking field.” It wouldn’t be long before Donham was experiencing crash-related difficulties himself.

  10

  The First Broadside: Abraham Flexner

  If the pioneers at Harvard Business School thought themselves battle tested, having survived not just early intra-university skirmishes but lingering condescension and criticism from both the business and academic communities, they had yet to endure the kind of attack that came in 1930, courtesy of one Abraham Flexner. A writer, social critic, and member of the Rockefellers’ General Education Board (GEB), Flexner chose that year to unleash a critical study of the state of higher education in America, titled Universities, and within which he took direct aim at HBS itself.

  Born in Louisville, Kentucky, in 1866, Flexner had staked out permanent territory as an educational authority with the publication two decades earlier of the Flexner Report, which is credited with sparking the reform of medical education in the United States and Canada. He also cofounded (with Louis Bamberger) the Institute for Advanced Study at Princeton, with the immodest ambition of “[advancing] the frontiers of knowledge.”1 The institute, which later counted Albert Einstein and John Von Neumann among its faculty, has more than met that goal.

  Flexner was both a critic and an innovator—a man to be listened to, even if HBS didn’t like what he had to say. And they most certainly did not, starting with his conclusion that the rapid proliferation of professional schools within the university system—with the exception of medicine and law—was a threat to the university’s sacred purpose of the advancement of knowledge.2

  And what society most certainly did not need, Flexner argued, was a graduate school of business at Harvard, which, ironically, the Rockefellers’ own GEB had helped bring into being. HBS, he stated plainly, was pretentious enough to be dangerous, a threat that arose in no small part from the school’s ambitions toward professionalism. While not explicitly denying the potential for a professional administrator at some point in the future, Flexner was resolute that such a time had not yet come to pass—evidenced, in his mind, by the economic crisis that was currently overtaking the country. Mocking a 1927 presentation given by Edwin Gay at a
conference—Social Progress and Business Education—Flexner suggested that “Professor Gay, the first Dean of the Harvard School, takes a hopeful—perhaps one should rather say a prayerful—view of both business and schools of business; but he avoids details.”3

  He then offered up a few details of his own. “Modern business does not satisfy the criteria of a profession; it is shrewd, energetic, and clever, rather than intellectual in character; it aims—and under our present social organization must aim—at its own advantage, rather than at noble purpose within itself.”4 Flexner did allow for the study of business as an academic pursuit, but he tore into HBS for its lack of emphasis on studying the phenomena of business in favor of its “unworthy” focus on kick-starting its graduates’ careers: “[It] is quite another thing—and, in my judgment, an irrelevant and unworthy thing—for a modern university to undertake to ‘short-circuit’ experience and to furnish advertisers, salesmen, or handy men for banks, department stores, or transportation companies.”5

  He pointed out one of the great disconnects in the HBS model: a faculty that may have been focused on advancing that frontier of knowledge working for an administration and on behalf of a student body that had no interest in exploring that frontier whatsoever. “While then the scholars on the staff of the Harvard Business School are really and critically interested in phenomena, the main emphasis of the School from the standpoint of its administration is concentrated on ‘getting on’—the canker of American life. A pamphlet of 145 pages describes the School; from beginning to end there is not a sentence or a word indicative of professional or scientific conception. . . . What university school of medicine would dare to define its ideals and result in such terms?”6

  Flexner also charged the School with failing to adequately analyze (or even acknowledge) the foundational values of its curriculum: “From the standpoint of business itself, the HBS takes a narrow view. Is modern business to be accepted at its own claim, or has a civilized society some critical responsibility in respect to it? The HBS raises neither ethical nor social questions; it does not put business on the defensive as the Harvard faculty of Medicine puts empirical medicine on the defensive; it does not even take a broad view of business itself.”7 A less combative critic might have pointed to the pressures of creating a new discipline out of whole cloth—not to mention high faculty turnover in the School’s early years—as reason to label that particular neglect a forgivable sin. Less so: the fact of that omission having been perpetuated to this very day.

  Flexner then ripped into the school’s fledgling research efforts, particularly its initial forays in publishing casebooks. “In less than ten years, fifteen large volumes on ‘Problems’ in Advertising, Sales Management, etc., have been produced by the School. . . . Can this be matched in productivity? They range in size from 386 to 1,050 pages. Their purpose is baldly stated: ‘to prepare the student for actual business.’ There is not the faintest glimmer of social, ethical, philosophical, historic, or cultural interest in the entire document. It is ‘advertising,’ in neither letter nor spirit differing from the type of advertising employed to sell Paris garters, patent medicines, or rayon stockings.”8

  And then on to the question of fundraising, and the potential for corporate contributors to pollute the academic well, most notably through “The 250 Associates of the Harvard Business School,” a group of tycoons recruited to fund an endowment supporting case research at the School with annual contributions of $1,000 apiece. “The management of the Fund is vested in a Board of Trustees, elected by the subscribers, who characterize themselves as ‘selected business leaders,’” he wrote. “Their intentions are undoubtedly innocent and honorable—but what becomes of academic freedom and scientific spirit, when the research funds of a School operating in the social and economic realm and working ‘in finance, government, labor relations, . . . and public utilities’ are not only year by year derived from but managed by ‘select business leaders’ and by them alone? Could anything more naïve be imagined?”9

  Those who would seek to minimize Flexner’s criticisms point to some obvious misfires in his 1930 report. For one, he suggested that the Golden Age of the American University was already behind it in 1930. He also suggested that to cleanse itself of its obvious mistake, Harvard cleave off HBS as the “Boston School of Business,” an event that obviously did not come to pass. At the time, though, such critiques were impossible to ignore. Among Wallace Donham’s correspondence files at Harvard are notes of a 1931 speech Flexner made on HBS’s doorstep, in Boston. While Donham didn’t let his concerns show publicly, he did write to a School supporter that Flexner’s view was “so far away from my own conception of our philosophical job that I was not even annoyed by it.” Donham’s HBS would stick to its higher calling, regardless of whether critics such as Flexner saw nothing but low motives: “[The] Business School plans to go at least as far in the direction of a philosophical conception of its position in civilization as does the thinking of many of the older departments in our universities.”

  In the end, Donham strained to turn one of Flexner’s primary criticisms—that in the School’s attempts to curry favor with the business community it had deliberately avoided criticizing it—into an asset. “There is a firmly held point of view in this School, which in part starts with me, and for which I would be willing to assume the whole responsibility, were it not for the fact that as far as I know there is no dissent among any of my associates,” he wrote. “We have felt for the twelve years that I have been here at the School that to start criticizing policies before we know enough about business to give a foundation for such criticism would result in two things. In the first place, it would result in half-baked unconstructive attitudes on our part. In the second place, it would wholly destroy any chance we might have of making constructive comments on business, as we come to know enough about business to do so with some assurance. We stay here only because we feel we have this chance.”10

  And stay they would. But the school had been put on notice. Everything it engaged in—its pedagogy, its curriculum, its research, its fundraising, and most of all, its foundational values (or lack thereof)—were suitable targets for outside attack.

  11

  Friends in High Places

  In the mid-1920s, the failure of a bank in the United States was no big deal to anyone other than its depositors. While an average of more than 600 banks collapsed each year between 1921 and 1929, losses as a percentage of overall bank deposits didn’t exceed 0.25 percent—one quarter of 1 percent—in any particular year. The Crash of 1929 had caught the entire world off guard, but stock market panics were nothing new, either. The only question was whether the markets would take the economy down with them. In 1930, the answer to that question was unclear. President Herbert Hoover didn’t think they would. Even Wallace Donham, a man who rarely passed up an opportunity for a call to arms, was unmoved. In his 1930 letter to the president of Harvard, he didn’t refer to the state of the economy whatsoever.

  And then the bottom fell out: Thousands of banks went under in the first three months of 1933, wiping out more than $500 million in deposits, prompting President Franklin Roosevelt to declare a nationwide bank holiday and inspiring one of his most notable utterances in his first inaugural address on March 4, 1933: “The only thing we have to fear is fear itself.” But that wasn’t exactly the view out of the Harvard Business School. As far as they were concerned, there was another thing to fear, and its name was Franklin Delano Roosevelt.

  And why was that? Because the president followed that remark with an attack on bankers: “The rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. . . .”

  The first three months of Roosevelt’s first term later came to be referred to as the “Hundred Days,” a nod to the unprecedented a
mount of important legislation passed by Congress during that time. A number of moves were aimed at stabilizing the financial system, including the Emergency Banking Relief Act on March 9, the Homeowners Loan Act on June 13, and the Banking Act (later referred to as Glass-Steagall) on June 13. No one at HBS could argue with the need for such moves. But what surely caused them consternation were Roosevelt’s incursions into the hallowed territory of the private sphere, moves that included the June passage of the National Industrial Recovery Act—the first-ever attempt to plan and regulate the U.S. economy—and the creation of the Tennessee Valley Authority in May, which put the government in direct competition with private industry in the realm of energy production.

  By mid-1931, the state of the economy was naturally on Donham’s mind, but only as an opportunity to roll out the old trope that the industrial system had reached such a state of development that “the social ills caused by it can no longer be ignored by business itself.” The next year, he’d moved on to theorizing that the cause of the Depression was overspecialization. And the solution to that? “We need a new type of business executive,” he wrote, “administrators with understanding of the complex organism which we refer to as civilization.” He expressed his philosophy in two books released one after the other, Business Adrift in 1931 and Business Looks at the Unforeseen in 1932. By all indications, though, he was having foresight problems of his own, having failed to realize that the American public was just about done with letting business clean up its own messes.