The Golden Passport

by Duff McDonald

  A veteran front man for AT&T’s efforts to appear a good corporate citizen, Barnard had worked with the Council of National Defense as far back as 1917 in helping set phone rates for optimal national economic efficiency. Later, through the use of a no-layoff policy at New Jersey Bell during the Depression, he had earned a reputation as one of a rare breed of executive: a humanitarian cost-cutter. After running the relief program for eighteen months in the early 1930s, he resigned, but the governor beseeched him to return to the job in 1935 when organized protests were teetering perilously close to riots. Days after he did so, during a meeting between Barnard and the leaders of a group of unemployed citizens in Trenton, they did just that. An accidental shove on the street prompted a violent reaction from the police, arrests, and a speedy trial just two days later. (The charges were dismissed.)

  When negotiations with the strikers resumed, Barnard went pure Mayo on them. After listening to the “trivial” complaints of the relief recipients, Barnard says he employed techniques such as respecting their personal integrity (by shaking their hands) as well as their desire to be recognized, which he knew was “literally more important to these personalities than more or less food for themselves or their families.”2 (If the strikers themselves did not know that, it was only because they didn’t really know themselves.) Recalled Barnard: “In this case, and in countless others, men talk and fight about what they do not want, because they must talk about something, and they even convince themselves that they believe what they say.”3 The making of those enlightened gestures, along with a few other psychological manipulations thrown in for good measure, was pretty much all it took. The strike was over, and everyone went home peacefully.

  In one sense, Chester Barnard was Vilfredo Pareto dressed in a Brooks Brothers suit. Like Pareto, Barnard saw organizations as “systems” analogous to the human bodies seeking equilibrium. To get there, an organization needed both effectiveness (the ability to meet goals) and efficiency (the ability to satisfy the individuals who worked for it). And the task fell to management—the corporate incarnation of Pareto’s elite—to formulate those goals and decide how to meet them.4

  In another sense, he was Mayo all over again: Barnard had eschewed the use of top-down power in favor of moral leadership. But he was Mayo all over again in another way, too: In his later retellings of how the peaceful resolution had been achieved, Barnard minimized both the strikers’ demands for a 35 percent increase in food relief and his promise to ask the relief council for more money.5 To Barnard (and his fans at HBS), the money was beside the point. Rather, it was his moral leadership—his understanding the strikers’ need for social recognition—that had mattered most of all. While Barnard later referred to the interaction as the greatest “purely personal accomplishment” he had ever made, he also insisted that he was “not impressed [with himself] at the time—an indication of how intuitive and responsive my whole behavior was.” (Even the greatest among us need time to realize how great they really are.)

  Barnard’s theories also echoed Mayo in their rejection of the idea of workplace democracy in favor of psychological manipulation. And, it should be noted, in their rejection of reality for fantasy: Considered both a “chilly” and “aristocratic” leader by those who had worked for him, Barnard instead saw himself as the object of their admiration. He even saw sound managerial technique where others might see outright discrimination: “Personal aversions based upon racial, national, color, and class differences often seem distinctly pernicious; but on the whole they are, in the immediate sense, I believe, based upon a sound feeling of organization necessities.”6

  Like many of history’s great moralizers, Barnard simply ignored those facts that didn’t align with the message he wanted to convey. Why were America’s big corporations successful? For Barnard, the answer did not include their marshaling of capital, their political influence, or their scale (in his case, an actual monopoly), but rested almost entirely on management’s ability to communicate and empathize with the rank and file. Authority was a “fiction,” he argued, because workers could choose to follow orders or not, meaning that the real power lay with them, and not those above them.

  To Barnard, an order given by a manager was not an exercise of power, but simply the manager’s acceptance of responsibility for an action that the employee had the power to initiate but not the courage to take. (Read that again. It’s quite the remarkable feat of sociolinguistic gymnastics.) And here’s the crux: That lack of courage was a moral weakness, even moral cowardice, and the situation salvaged only by the manager’s display of moral strength in accepting the responsibility for telling his underling what to do. Fashionable managers took note: Power was out; empowerment was in.

  Barnard’s legacy is a complicated one. His contributions to management theory, including his thoughts on the systems approach to the study of organizations, formal versus informal organizations, and effective communication, are many. According to management historian J.-C. Spender, Barnard is the true intellectual father of HBS’s appreciation of management as art, not science. His emphasis on the importance of purpose in group activity dovetailed particularly well with the thinking behind HBS’s integrative course Business Policy, the point of which was to teach students the methods of choosing and implementing long-term policies.

  In Chester Barnard, the folks at HBS found the exact thing they’d been looking for: a real-life executive who validated their ideas about enlightened management. But in the wrong hands—which included, it would seem, his own—all Barnard’s particular approach to human relations did was replace autocracy with paternalism. And in doing so, he helped lay the foundations of an insidious cult of moral leadership that we are still grappling with today. By making the case that success is a result of moral purity—and that corporate leadership is intrinsically moral—he left us not just with the dangers of false pride but with something worse, which James Hoopes refers to as the paradox of moral leadership. “Only those who recognize that they may be or become morally unfit to lead are morally worthy to do so,” writes Hoopes in Hail to the CEO: The Failure of George W. Bush and the Cult of Moral Leadership. “People confident of their purity are morally unqualified to lead.” HBS only compounds the issue by insisting to new students that they are already America’s future leaders simply by virtue of having enrolled.

  If HBS’s embrace of the likes of Elton Mayo and Chester Barnard has left the impression that the School’s curriculum was all about the soft, or people, side of management, that was definitely not the case then, nor is it now. The School may have draped a silky veil of humanism over itself, but when it came to actual coursework, HBS has always favored a numbers-heavy approach to the teaching of management. Administration was the unifying scheme of the School, but the core of its teachings is best captured with another word: control.

  While the word control wasn’t explicitly used in a course title in the first-year curriculum until after World War II, the evolution of thought that brought it about had been going on for some time. Rice University’s Stephen A. Zeff traces it back to HBS’s very first year of operation, 1908, when William Morse Cole, an assistant professor of accounting, taught first-year students Principles of Accounting, the purpose of which was “not intended primarily to afford practice in book-keeping, but to give students a grasp of principles which will enable them to comprehend the significance of accounts.”7 From the very start HBS was adamant that even those who didn’t intend to become accountants needed a fundamental understanding of accounting methods and their effective use and interpretation by senior executives.8

  In 1912, the School also introduced a half course on Business Statistics, taught by Professor Melvin Copeland, which focused on the collection not of general economic statistics but of “industrial and commercial statistics for individual establishments”—a more fine-grained look at the collection and interpretation of statistics about those markets in which a firm operated. Years of curricular tinkering followed until these origi
nally separate topics were eventually combined into the broader concept of control. The driving force behind that synthesis was Professor Ross G. Walker.

  A member of the faculty starting in 1926, Walker had left the School for five years in the mid-1930s to work as treasurer of a woolen mill, before returning for the 1937–38 school year. That year, he was part of the teaching team for Accounting Principles, which by that point had been refined even further away from accounting for its own sake: “Accounting is treated not as a separate subject, but as an integral part of business administration.”9 That idea—that the gathering of a company’s cost data was less of an end point (as it would be for a bookkeeper) than a starting one (for executive decision making)—had been percolating both at HBS and elsewhere for more than a decade.

  All the way back in 1922, James O. McKinsey, a professor at the University of Chicago, had written a 474-page textbook, Budgetary Control, that had spelled out the case for viewing accounting in a whole new light. To that point, most people, accountants included, considered the accounting function as a means to take stock of the past—a crucial exercise, if a not strategic one, the results of which were of more interest to external players (auditors, bankers, the tax man) than internal ones. In McKinsey’s new conception, the data of traditional record keeping was reoriented toward the future, transformed into a tool to be used internally to solve business problems.

  While he had yet to found his eponymous consulting firm, James McKinsey was already a well-known and influential voice in accounting in 1922, and it is surely no coincidence that HBS’s next course catalog described a course called Industrial Analysis and Control as the use of “accounting and statistics as a means of analysis and budgetary control.”10 That same year, Arch Shaw published HBS assistant professor Thomas Sanders’s Problems in Industrial Accounting, a 600-page compilation of 150 cases, including fifteen from management’s point of view.

  Thanks largely to James McKinsey, by the early 1930s the concept of budgetary control had been enthusiastically adopted by the majority of the country’s corporate elite. “No other mechanism of management of similar scope and complexity has ever been introduced so rapidly,” wrote one commentator ten years after the release of Budgetary Control. “It is estimated that 80 percent of budgets installed in industry have been put in since 1922.”11 So when the official history of HBS includes one colleague suggesting that Walker helped bring accounting “out of the green-eyeshade era to become a tool of general management,”12 that’s just HBS being HBS again, ignoring what others had already done. Whatever his contributions inside HBS, Ross Walker was walking in James McKinsey’s shadow outside of it. (He even worked with McKinsey & Company between 1940 and 1954.)

  In 1938–39, Walker introduced a second-year elective, Aspects in Budgetary Control, which explicitly tied cost analysis to “the determination of policy.”13 If the aim of the required second-year capstone course Business Policy was the creation of “an effective administrative machine,”14 by the late 1930s, HBS had come to view effective budgetary control as one of that machine’s most crucial parts. But that, too, was less a groundbreaking thought than an internal acknowledgment of an already-established external fact. Indeed, the country’s industrial empire had been built using sophisticated control and cost-management techniques that dated all the way back to return-on-investment formulas that DuPont had landed on before the First World War.15

  It’s only natural that HBS occasionally sees itself as a primary source of management wisdom in instances when it’s more a secondary compiler of it. And in most cases, there’s no harm in their doing so. Where things start to get dangerous is when the faculty and their students make the mistake of confusing a tool for understanding one part of reality—that is, the use of management accounting and budgetary control—for reality itself. In its overemphasis of cost control at the expense of such things as new product innovation in its conception of the primary tasks of an executive, HBS helped set American management on a trajectory that would blow up in its face in the 1970s in more ways than one. But that comeuppance—when “management by numbers” was finally revealed as a hollow substitute for the real thing—was still a long way off in the late 1930s.

  While HBS wasn’t the first mover in understanding the potential for using accounting data in managerial decision making, its early 1940s offering in Management Control did take an unquestionably unique approach to the broader topic of control as HBS defined it. Originally designed as part of the School’s Industrial Administrator program, a part of HBS’s mobilization efforts as the nation prepared for World War II, the course could easily have been called Wallace Donham 101, given that it reflected a synthesis of Donham’s favorite avenues of inquiry he’d been pushing as dean.

  “I want this course,” Donham told HBS professor Edmund Learned, “to be a combination of the control concepts represented by [Professor] Meriam in Industrial Management, by Walker in the advanced accounting field, and by you and Bliss in Marketing and Statistics.” And he wanted the Human Relations teachings of Mayo and Roethlisberger to be included as well.16 Professor George Lombard described the course as follows: “Management Controls pulls together the human and technical problems of an administrator and emphasizes the fact that at the point of action they are but different aspects of a single total situation.”17

  When the School completed a curriculum overhaul under new dean Donald David in the mid-1940s, the first-year program was described as a single course, Elements of Administration, divided into six parts: Production, Marketing, Finance, Control, Administrative Practices, and Public Relationships and Responsibilities. Students were taught to consider the administrative process as the unity of all six, with Control being “the use of figures in the choice of courses of action and in the appraisal of actual performance.”18

  Robert Anthony, a former student of Walker who later became his research assistant and eventually a member of the faculty, took the mantle from his mentor and put the prevailing Control philosophy in textbook form with his 1956 book, Management Accounting: Text and Cases. In doing so, he also extended it to include the first HBS endorsement of the concept of discounted cash flow, or DCF, for use in management decision making as a superior approach to internal rate of return, or IRR. It was that addition, according to one commentator, that made the book influential, in that it prompted large multidivisional corporations around the country to adopt DCF in their budgeting and capital allocation decisions.19

  As Rice University’s Stephen Zeff points out, the notion of attuning management to the fact that in accounting information could be found the seeds of future policy naturally led to increased interest by management in the choice of accounting policy itself, particularly when Generally Accepted Accounting Principles “did not give a definitive answer.” In the 1950s and 1960s, when the majority of large American companies enjoyed relatively uncontested positions in their core markets, as well as strong top- and bottom-line growth, the choice of one accounting policy over another was taken more or less objectively, with the aim of providing “better information to outside parties.”20

  It was only in the 1970s, with the rise of international competition, the threat of takeovers, and institutional investors’ pressure on companies to meet their earnings forecasts that the downside of bringing accounting policy under management’s (and not their accountants’) purview began to come into focus. “Company managers,” Zeff writes, “aggressively managed earnings by attuning their accounting policies to strategic and tactical aims.” If the original intent of Control had been to shift the use of accounting and statistical data from a look at the past to a means of charting a course into the future, by the 1970s, scores of HBS graduates had pulled it back into the present, using the concepts they had learned in Control in order to paint a better picture of today.

  13

  The Venture Capitalist: Georges Doriot

  When Peter Thiel, the cofounder of PayPal turned venture capitalist, was publicizing his 2014
book for aspiring entrepreneurs, Zero to One: Notes on Startups, or How to Build the Future, his handlers included stops at a number of the nation’s premier business schools, including Harvard, Stanford, and Wharton. There was, of course, irony in the decision, given Thiel’s well-known opinion of the value of MBAs: “Never hire an MBA; they will ruin your company.” While he might have been selling books, Thiel didn’t hold back, telling each group of MBAs what he thought of them, which wasn’t pretty. The press lapped it up.

  Enjoying the controversy, Thiel wandered into the realm of gross generalization when addressing a conference of gay MBAs in San Francisco. There he made the claim that MBAs only buy into innovations after they’ve peaked. They were late to the junk bond boom, he pointed out, only arriving en masse in 1989, a year before Michael Milken went to jail. None of them went near Silicon Valley until 1999, he added, at which point “[graduates of] HBS perfectly timed the dot-com bubble.”1

  It was all very entertaining, especially for non-MBAs. But it was also wrong. While Thiel was obviously generalizing about the herd behavior of MBAs, the experience of many HBS graduates, in particular, undercut those generalizations at their source. Fred Joseph (’63) was president of junk bond juggernaut Drexel Burnham Lambert during Milken’s heyday at the company. Arthur Rock (’51) is one of Silicon Valley’s most legendary moneymen, a founding investor of Intel in 1968, and also one of Apple’s early backers. Thomas Perkins and Frank Caufield, two cofounders of the legendary venture capital firm that bears their names, were HBS grads. And then there is HBS professor Georges Frederic Doriot, one of the founders of the modern venture capital industry, the latest stampede into which included the likes of Peter Thiel himself. In that, Thiel is like many of those MBAs that he so likes to criticize: the follower who has convinced himself that he is leading instead.