The Golden Passport

by Duff McDonald

  When Roosevelt charged out of the legislative gate in 1933, Donham described the decisions of the man in the Oval Office using words that could be reasonably interpreted as either admiration or thinly veiled contempt. “At the present time western Europe and America turn toward great centralization of power in efforts to exercise control over the complexities of industrial civilization,” he wrote. “Under a man who has the courage of a magnificent conviction that bold departure from tradition is essential this nation now experiments in many such controls.”1 He then went on to warn of the potentially disastrous effects of those very experiments. The official history of HBS interprets the use of “magnificent conviction” as a sign that Donham was “heartened” by Roosevelt’s moves. But it’s easy to see it as condescension, or worse.

  In Donham’s thinking, the nation had simply misused its productive capacity. It was one thing to raise material standards of living to the highest point in history. But it was another thing entirely to elevate the value of material things above the value of the intangible and the spiritual. When it did so, America had exposed itself to the potential for a reversal: If material objectives collapsed, so too could morale. And according to Donham, that’s what had happened. Donham then lectured those who would take the “easy” road in which we “rationalize all our national failures as the result of the selfish short-sightedness of a few money grubbers.” Why punish them, the logic went, if the real source of the problem was in the nation’s soul? That line of thinking—a recurring one out of HBS—is both tiresome and obtuse, as if a nation cannot pursue both things at once, to punish malefactors and to question its priorities. It need not choose between the two.

  To Wallace Donham, the answer was simply to expand the remit of HBS back to where Charles Eliot had wanted it in the first place. “We must become a school of public as well as private business,” he wrote in 1934. If there had to be government intervention, then the people doing the intervening should probably be “competent trained men who have a keen sensitiveness to the constantly changing relationship of their specialized problems to the general problems of society.” In other words, the answer to the Great Depression and its causes was the answer to every problem, everywhere: the Harvard Business School.

  By mid-decade, the curriculum at HBS had been overhauled to recognize the new reality of increased government intervention in business—not to mention the fact that Roosevelt didn’t seem to be going anywhere—and in 1934 plans were in the works to appoint a professor solely dedicated to the topic. The next year, HBS announced the hiring of Howard L. Bevis as the William Ziegler Memorial Professor of Government and Law, to teach Public Administration. Other new courses included a research course in Federal Finance and Taxation, another on the governmental aspects of Agricultural Industries, and a third on governmental administrative problems, Public Regulation. While the public aspect of business problems had already been covered in such courses as Statistics of Economic Planning, and Problems of Economic Balance, the new courses confirmed the status of public business administration at the center of the MBA program. If they couldn’t beat back the government, they sure as hell were going to grab a piece of it.

  Wallace Donham had not seen the Great Depression coming. In his defense, neither had anyone else. But as dean of the School, Donham was responsible for keeping HBS solvent as it grappled with declines in tuition income (from a high of $674,128 in 1931–32 to a low of $436,367 in 1934–35), dormitory income ($219,465 in 1930–31 to $144,503 in 1934–35), endowment income ($141,981 in 1931–32 to $105,256 in 1936–37), as well as a near evaporation of all gifts. (Gifts to the endowment and the library all but disappeared between 1931 and 1935.) The one bright spot on an otherwise imploding income statement was the contribution of a new entity Donham had established just before it all fell apart, and the one Abraham Flexner had singled out as deserving of scorn—the Two Hundred Fifty Associates of the Harvard Business School.

  Donham conceived of the Associates in 1929, and with a specific goal in mind: to provide “regular and assured financing” of the School’s case research. Officially launched in early 1930, members of the group were assessed $1,000 in annual dues. Specifically, those “gifts” were to be made to a Massachusetts-based nonprofit, the trustees of which were selected from the School’s Visiting Committee, which would in turn hand the funds over to the School, as needed. Jesse Straus, a longtime supporter of the School and chairman of its Visiting Committee, took the lead in recruiting. (Straus’s father, Isidor, who founded R. H. Macy & Company with his brother Nathan, died in the sinking of the Titanic along with his wife, Ida. Jesse and his two brothers provided the funds that built HBS’s Straus Hall dormitory in their memory, as well as other significant contributions over the years.)

  With the powerful Visiting Committee fronting the recruiting push—its members included the likes of George F. Baker Jr., George Whitney, and Gerald Swope—two hundred charter members were signed up in short order. “Seldom has such a formidable array of tycoons been represented in a college activity,” gushed a July 21, 1930 article in Time.2 While at least one portion of the inaugural membership had been an easy sell—the Visiting Committee recruited from its own ranks—the magazine was right. It was an impressive group, including George F. Baker, William Ziegler Jr., J. P. Morgan, Adolph S. Ochs, Otto Hermann Kahn, Andrew Mellon, Owen Young, and H. Gordon Selfridge of London.

  While 39 of the 200 members bailed out the next year as economic conditions worsened, the rest stayed, and continued to ante up, with an average total annual contribution of nearly $55,000 over a decade. Those monies kept the School’s case collection efforts above water throughout the Depression, with the group providing two-thirds of research funds between 1930 and 1937.3 But the real impact of the Associates was still to come. Although membership flatlined through much of the 1930s, it started to climb again thereafter, and in 1940 was opened up to include corporate memberships. That same year, it was renamed the Associates of the Harvard Business School in order that it might take on more than 250 members, and by the end of the 1940s, more than 350 companies and individuals were contributing dues.

  The combined contributions of these “friends” of the School topped $250,000 for the first time in 1954–55, at which point the benefits of membership had been expanded to include exclusive weekend conferences. While the School continued to refer to it as a group of “business firms and individuals,” by 1959 the Associates was essentially a corporate affair, with 328 corporate members and just 58 individual ones. Because corporations have bigger wallets than people, dues were raised to $1,500, and at that point, then-dean Donald David recruited Visiting Committee members Sidney J. Weinberg (Goldman Sachs) and Marvin Bower (McKinsey & Company) to crank the dial up even further, to a target of $1 million in annual contributions by 1964.

  By 1980, the Associates’ board of directors included William Agee (’63, Bendix), George Baker III (’64, First Security), Thornton Bradshaw (’42, Atlantic Richfield), Charles Brown (chairman of AT&T), Philip Caldwell (’42, Ford), Robert Campbell (AMP ’55, Newsweek), Thomas Carroll (’47, Lever Brothers), Albert Gordon (’25, Kidder Peabody), Armand Hammer (Occidental Petroleum), Samuel Johnson (’52, SC Johnson), Robert Malott (’50, FMC Corporation), Donald Perkins (’51, Jewel Companies), James Robinson III (’61, American Express), Charles Shaeffer (’35, T. Rowe Price), and John Whitehead (’47, Goldman Sachs).

  Harvard Business School has produced case studies on the majority of the above—as one might expect. And one can hardly fault it for seeking out the advice of corporate leaders for help in identifying promising areas of inquiry. And seek it they did: Board chairman Raymond Gilmartin (’68), later chairman and CEO of Merck & Company, reported on the satisfactions of board membership in 1980: “It’s clear to me, and to all members of the board, that our ideas and challenges are valued and that they do make a difference.”

  And what kind of difference was that? Twenty years after Gilmartin made that remark, Merck fo
und itself in the midst of the largest scandal in the pharmaceutical industry’s history, accused of minimizing, if not burying, evidence that its blockbuster painkiller, Vioxx, significantly increased the risk4 of heart attacks and strokes in long-term users—all while the company spent a mind-boggling $500 million marketing the drug. Merck, which knew about the potential dangers as early as 1999, sold billions of dollars’ worth of Vioxx before it was forced to pull the drug off the market in September 2004 after a clinical trial found that people who had taken the drug for eighteen months were five times as likely to suffer heart attacks and strokes as those who had taken a placebo. Gilmartin resigned the next May, on the same day that congressional investigators released a trove of documents detailing how the company had continued to aggressively promote Vioxx even after it knew of the safety issues. Merck insisted that Gilmartin’s resignation had nothing to do with the Vioxx situation. But what else could they say?

  From the outside, it was clear what had happened: a profound failure of leadership that put marketing ahead of safety, and legality ahead of ethics. One piece of research estimated that 88,000 Americans had heart attacks from taking Vioxx and 38,000 of them had died.5 What did HBS have to say about it all? A two-part 2009 HBS case study on the debacle suggested that “at the end of the case series” students might find lessons in Merck’s belated decision to withdraw the drug, even if it could hardly have done otherwise: “[D]oing the right thing sometimes requires very hard choices.” Just like that, reckless disregard (selling a dangerous drug) was recast into an opportunity for heroic leadership (eventually ceasing to sell that same drug, the lost profit notwithstanding).

  Of course, that might have had something to do with the fact that Gilmartin had joined the HBS faculty in July 2006. In a 2011 post on the website of the Harvard Business Review, Gilmartin went for broke, praising both himself and his management team for the timeliness of a withdrawal that was anything but,6 while also claiming to have never lost sight of company founder George W. Merck’s precept that, “We try never to forget that medicine is for the people. It is not for the profits.” In 2012, the School awarded Gilmartin the HBS Health Industry Alumni Association Ellerin Award for contributions to the field.7

  When Wallace Donham described the reason behind the creation of the Associates in 1930, he lauded the membership for helping HBS “[secure] for the first time intellectual freedom in the planning of its research activities.” So much for that. Abraham Flexner had a point.

  The introduction of the Associates wasn’t Donham’s only late 1920s experiment that echoed loudly through subsequent decades. As the decade came to a close, the faculty of the School set aside some of the time it spent teaching MBAs about the importance of market research to do a little market research of its own. There was clearly strong—and growing—demand among the country’s business-minded youth for the School’s core educational product, the MBA. But what about everybody else? An already-seasoned business executive wasn’t going to go back to business school. Or was he?

  In the summer of 1928, the School held its first-ever “special session” for business executives, offering over a six-week period courses including finance, public utility management, and transportation. A total of 179 men enrolled, the vast majority of whom (170) were working executives. The second session, in 1929, attracted 224 men. Outside events then intervened, and in 1930 just 156 men enrolled in a program that had been shortened to one month. Discontinued entirely in 1931, the program reappeared in 1936 and 1937 before being set aside once more.

  In this short-lived experiment lie the seeds of executive education, arguably the most important part of the MBA Industrial Complex of today, at least in terms of the underlying economics. But that came later. A more immediate outcome of the sessions arrived in the middle of the decade, courtesy of Professor Philip Cabot. Cabot hailed from old New England Puritan stock, and had also nearly died of diabetes, saved only by the discovery of insulin in 1923. And so he joined the faculty of HBS in 1925 with the devil-may-care attitude of a man who had successfully told the Grim Reaper to come back at a later date.

  One of the organizers of the special sessions, Cabot had found the interaction with actual executives a rewarding one. In May 1934, with the Depression wreaking havoc across the country, he proposed a variation on the theme. Specifically, he suggested that HBS convene a series of meetings of business executives between the ages of thirty and fifty to “deliberate on the problems arising from the new relationship between government and business and to provide a background for an understanding and discussion of national affairs.”8

  Donham, of course, was firmly on the side of less government intervention, not more, even if that government was responding to a crisis brought on at least in part by the sort of enlightened businessmen that HBS claimed to be producing. “One of the most important issues before our American democracy,” he wrote in 1934, “is the determination of the dividing line between the spheres of government and of private activities. . . . The government now undertakes things in a variety of areas which put more burden on men than their time, their intelligence, or their ability to obtain facts makes it possible for them to bear.”9 (He did allow for more regulation in the future than in the past, although that was for the express purpose of “controlling anti-social minorities.” Even the most ardent antigovernment businessman can find that government helpful if it arrives in the form of policemen arresting their striking workers.)

  At the same time, however, Donham was showing visible frustration at the reluctance of the nation’s businessmen to assume the responsibilities he saw for them, and he jumped at the possibility of a forum in which they could be harangued into doing so. “In the past,” he wrote at the time, “these leaders have been too much concerned with the affairs of their own business enterprises and too little concerned with the affairs of the nation at large.”10

  In the spring of 1935, four meetings were held over a series of weekends between January and April, with seventy attendees discussing topics ranging from “The Social and Governmental Problems Which Industrialists and Business Men Must Face in Order to Help Stabilize Our Industrial Nation” to “The Problem of Labor Relations and Their Social Significance.” Attendees paid just twelve dollars: seven for room and board and five for tuition.11 With the passage of the Social Security Act of 1935, the next year’s meetings, which averaged fifty attendees, focused on unemployment compensation, old-age pensions, and medical care.

  It wasn’t until 1938, however, that the discussions got to the heart of the matter, or “the conditions which make the persistence of large-scale organizations socially desirable.”12 While the arrival of World War II would provide an excellent example of their desirability, in 1938, those attending the “Cabot Weekends” were so convinced of their value to society that they had moved on to worrying about how it might be sustained after they were gone: “The Leadership of Business Enterprises: How Can It Be Perpetuated? The Problem of Carrying On.”

  While the United States did not officially enter World War II until December 1941, the Cabot discussions got the jump on things, first with a philosophical question in 1940 (“Democracy and the Profession of Business”) and then with a more pragmatic approach in 1941, when officers of the Army Procurement Services and officials of the Office of Production Management offered more than 250 executives tips such as how to land procurement contracts from the government.

  The Reaper was impatient, though, and came back for Cabot in 1941, when he died at the age of sixty-nine. Donham credited him with having widespread influence on behalf of the School. “More than any other man I have known he had the capacity to stir other men out of ruts,” the dean wrote in 1942. “Often he did this by overstatements which shocked men into rethinking the things they thought most thoroughly established.” Including, one assumes, a rethinking of the status of the U.S. government from a problem to be dealt with into a business opportunity of untold proportions.

  12

  The
Marriage of Moral Authority and Managerial Control

  Wallace Donham spent much of his career at HBS speaking out about the moral responsibilities of managers. As with Elton Mayo, the “findings” at Hawthorne only served to confirm what he already knew, that the fate of Western civilization lay in the hands of an enlightened managerial elite. But if HBS was going to close the pragmatic loop, elevating the Hawthorne research to the level of relevance, it still needed an executive who was held in high regard by his peers to cast a vote on management’s behalf. That man arrived in the person of Chester Barnard, a senior executive at one of the country’s most important corporate giants: AT&T.

  Barnard was never a full-time lecturer at HBS, or even a part-time one. But he was a member of Henderson and Mayo’s conservative “Pareto Circle” and gave a series of lectures at A. Lawrence Lowell’s Lowell Institute in 1937 on the topic of the “functions of the executive.” (Henderson was said to have been impressed by the fact that Barnard had read Pareto originally in French.1 Comment savant!) The next year, on the urging of Donham, Cabot, Henderson, and Mayo, he published the material from the talks in The Functions of the Executive, still widely regarded as one of the most influential management books of the twentieth century.

  The product of a broken home—his mother died when he was five, after which he went to live with his grandparents—Barnard made it into Harvard College on a scholarship in 1906 by dint of talent and drive. While he left before completing his degree, that didn’t halt his ascent. He joined AT&T in 1909, rising to president of the New Jersey Bell Telephone Company in 1927. He later took on a number of other influential roles, including president of the United Service Organizations (1942–45), president of the Rockefeller Foundation (1948–52), and chairman of the National Science Foundation (1952–54). But the job that provided him his revelation of the moral superiority of managers such as himself was as director of New Jersey’s Emergency Relief Administration during the Depression.