The Golden Passport

by Duff McDonald

  But the changes ran deeper than that, including a fundamental rethinking of the purpose of the company itself. By the 1930s, authors John Micklethwait and Adrian Wooldridge argue in The Company: A Short History of a Revolutionary Idea, American industrialists had come to see companies “almost [as] an end in themselves . . . they were to be tended and grown.” British industrialists, on the other hand, still saw them as “a means to a higher end: a civilized existence . . . they were there to be harvested.” And while George F. Baker may have bought his way into respectability in Cambridge, Massachusetts, his resume still wasn’t worth a damn in Cambridge, England: “To British intellectuals, particularly between the wars, a career in business was a despicable way of life, pursued only by the stupid and unimaginative.”2

  They obviously weren’t reading Wallace Donham, whose writings during the decade included the highbrow suggestion that the United States not engage in ruthless competition with Europe, lest such battles leave the continent (including Britain!) vulnerable to the spread of communism and its goal of the destruction of capitalism.

  Some at HBS went even further than Donham, calling into question a few of the sacred assumptions upon which the HBS curriculum was based. Professor Clyde Ruggles was alarmed enough by the excesses of the 1920s and their fallout in the 1930s that he voiced an opinion that surely didn’t endear him to too many colleagues at the School: “Much of our laxness with regard to standards of business conduct has grown out of our theory that private initiative should have full sway and that regulation should not be substituted for management. Our zeal for this theory of the relationships between government and business has blinded us to the fact that management should be held responsible for misrepresentation and for mismanagement. Under a theory of laissez-faire and Jeffersonian philosophy that the government is best that governs least, we have given an opportunity for business practices to develop that have militated against the best interests of the public and even of business itself.”3

  Ironically, this was the same Clyde Ruggles, a professor of public utility management and regulation, who in 1929 had been the recipient of pointed inquiry from Massachusetts state legislator James E. Hagan, who became interested in his “scholarly objectivity” (or lack thereof) when evidence of payments from the New England Light Association to Ruggles to the tune of $15,000 a year came to light. Ostensibly provided to help Ruggles in an “overhauling” of textbooks on public utilities, the payments struck others as highly inappropriate, akin to a “propaganda salary.”4 (Even Donham wasn’t immune to the lure of corporate lucre. In 1931, he still sat on the board of his previous employer, Old Colony Trust, as well as those of the Haverhill Gas Company, Cambridge Savings Bank, and travel agency Raymond & Whitcomb Company.)5

  A handful of respected authorities had also begun to question the spread of the tentacles of corporate power into all corners of American life. Justice Louis Brandeis wrote in 1933 that corporations had become “Frankenstein monsters,” built from scraps of case and statutory law in such a way that they enjoyed extraordinary legal protections and few restraints in their “pathological pursuit of profit and power”6 save self-preservation. In The Modern Corporation and Private Property, Berle and Means were only slightly more polite: “The state seeks in some aspects to regulate the corporation, while the corporation, steadily becoming more powerful, makes every effort to avoid such regulation.”7 But most Americans had other concerns in the 1930s, such as feeding their families.

  Even though the CEO class had lowered its profile as Roosevelt and other ideologues went after them, their economic power remained intact, and their demand for capable managerial talent did, too. Rather, it continued to explode: The proportion of managers to production workers in industrial firms rose from 8.1 percent in 1900 to 17.9 percent in 1929.8 This was the era of managerial capitalism, and it was one of the most profound changes in American society to that point. Company Man was ascendant.

  As the 1930s wound to a close, HBS had yet to start cranking out large numbers of alumni who would go on to become truly famous. Marvin Bower (’30), the future head of McKinsey & Company, was an exception, as was Walter Haas Jr. (’39), the future CEO of Levi Strauss & Company. But the School was nevertheless churning out a product that was in high demand. Of HBS’s class of 1932, which numbered 395 men, 80 percent had found work by midyear, with the largest number, 61, finding work in chain and department stores. Commercial and investment banks came a close second, hiring 44. The next year, finance regained the top spot, with 84 graduates out of 394 finding work in the field, followed by manufacturing with 76. (At the time, nearly all of the 4,000 men who had graduated from HBS over its twenty-five-year existence were employed, despite the ravages of the Depression.) In 1934, manufacturing edged finance, 67 to 61, while an unusually high total of 12 found governmental positions, a clear indication of the expansion of government into American life. The same held true in 1935, as manufacturing again took top honors (62/290), banking was second (56), and 7 entered government work. In short, HBS emerged from the national turmoil stronger than it had been going in, with an impressive track record of producing graduates that American business saw reason to hire.

  By 1937, in fact, with first-year class sizes approaching an unmanageable 200, the School decided to enlarge the faculty enough to make the maximum class size just half that, adding $50,000 a year in salary expenses in the process. While large parts of the country were grappling with the challenge of unused capacity, HBS was grappling with the opposite, having already run out of office space in Morgan Hall and stacks in Baker Library.

  In the more than one hundred years since the founding of HBS, the American economy has alternated between periods of performance and underperformance, and its business leadership between times of public acclaim and public scorn. At each juncture, HBS has simply modified its pitch accordingly: We’re either seeing the benefits of the influence of HBS alumni or the need for more of that very thing. In the late 1930s, Wallace Donham realized that it was time for the latter: “Business has suffered a loss of prestige during the past eight years, and business leadership failed at a critical juncture. It is essential that this failure shall not occur again. Business needs young men of high integrity, of broad training, and of keen intellectual ability. The School is aware of its responsibility in this regard.”

  (It was also aware of its “responsibility” to study the things that mattered. If the Mayo studies had concluded that the workingman didn’t really want to be paid more, they hadn’t said anything about the deepest desires of executives themselves. In search of an answer to that question, HBS proudly announced that it was one of the very first to study what it described as “the long-neglected question of executive compensation.” The effects of that “research” are still being felt today.)

  The faculty of HBS will rarely be in favor of more government regulation rather than less. And that is as one might expect. And while it did belatedly come around to the new national reality when it began offering training especially for government work in 1935, the program didn’t last through decade’s end, at which point Donham and the rest of the faculty were advocating for the government’s retreat from things they considered best handled by private industry.

  By then Donham was getting ready to retire. And no one could blame him, given that he’d spent the better part of two decades trying to figure out just what HBS should teach while also constantly pleading with donors for their support. But all that thrashing about did leave at least two enduring results. The first was that HBS was an educator of generalists, not specialists, and one way it achieved that was by insisting that the faculty be generalists as well. The second: After more than twenty-five years of searching for a “unifying conceptual scheme,” HBS finally realized that the crucial word in “Master in Business Administration” was not business but the one that followed it: administration. HBS wasn’t just teaching its students how to run businesses. They were teaching them how to run everything.

&
nbsp; “Consciously or unconsciously, it is the subject matter around which the lives of all our leading men in the world of affairs revolve,” Donham wrote in 1942, the year he stepped down as dean. “The present breakdown of the world is a breakdown of administration or rather a triumph of bad administration. Our civilization stands or falls according to the overall successes or failure of these men who must in the nature of things act responsibly and should act skillfully as prophets in the shifting scene of men and events.” With those words, Donham signaled that HBS had expanded its remit once again—this time to patriotism, and the survival of America itself.

  15

  The West Point of Capitalism

  One of the nicknames bestowed on the Harvard Business School over the years is “the West Point of Capitalism.” Its graduates are officers of the capitalist army, so to speak, and their platoons the workers of private industry. But the military connections run much deeper than that. From its earliest days, the School has educated not just future corporate officers but actual military officers as well. And that’s largely because when it comes down to it, business is a lot like warfare, at least as far as it is taught at HBS. There are things in each that are done over and over again, and both have best practices that can be learned from doing so. Just as there is a learning curve in blowing one’s business competitors out of the water, there’s one in literally blowing people out of the water, too.

  In the early 1920s, the War Department decided to establish its own college dedicated to the business training of military officers, with the goal of ensuring efficient cooperation between the military and American industry in the event of another war. Asked for his advice, Wallace Donham suggested sending officers to HBS for training as teachers in what was eventually named the Army Industrial College (AIC). Between 1920 and 1939, the army and navy sent 135 and 55 men, respectively, to Boston, and by 1939, some 50 percent of the faculty of the AIC had HBS degrees.

  In 1939, the armed forces asked Donham to modify the curriculum to include the teaching of business problems relating to national defense. In the fall of 1940, HBS offered second-year students two courses, Industrial Mobilization, and Economic Problems of National Defense, and preparations were made to train army reserve officers in problems of procurement. And in March 1941, the faculty voted to inaugurate a twelve-month defense course leading to the degree of Industrial Administrator.

  That fall, the HBS student body had tilted dramatically toward those with a military focus. Of 788 students enrolled, 108 were in a special MBA-ROTC course focused on training officers for the Quartermaster Corps, 287 were in the Industrial Administrator program, and 393 in the regular MBA. Asked about the changes by Time, Donham replied, “In modern warfare industrial preparedness and production are of the greatest importance, and . . . any failure behind the lines will seriously affect the chances for military success.”1 He spoke with obvious urgency, but even Donham probably didn’t realize what lay ahead: Whether they knew it or not, America’s manufacturers were about to embark on the greatest industrial effort in history. (Many even resisted it at first. In 1942, then-senator Harry Truman denounced Standard Oil of New Jersey’s reluctance to invest in the development of synthetic rubber, in order to protect a patent agreement with a German petrochemical company; Truman accused the firm of behavior “approach[ing] treason.”2)

  When Roosevelt declared the country at war with Japan after the December 1941 attack at Pearl Harbor, HBS began requiring every student—not just its military ones—to sign a pledge promising to apply for a commission in the armed services if offered the opportunity, and to accept that commission if offered. The move, partly intended to prevent the School from becoming a haven for draft dodgers, had the additional effect of focusing students on their larger responsibilities as Americans.

  The next spring, HBS hosted the first class of the newly formed Army Air Forces Statistical School, dedicated to the training of a new kind of officer in the Army Air Forces’ information-heavy reporting systems regarding personnel, matériel, supply, and operations. Enrollment was 150, with double that number in the Navy Supply School, which had opened the previous year. (The Army Supply Officers Training School followed in April 1943.) Given the significant increase in numbers—in June 1942, the School had those 450 military trainees learning alongside 1,200 MBAs in a physical plant intended for just 1,000—the remarkable conversion from a school of private business into a near-military academy took on physical manifestations as well.

  In 1942, the navy built the two-story, ten-classroom Carpenter Hall on Harvard’s playing fields. Tennis courts behind Morgan Hall were converted into the Cowie Mess Hall. The School’s Fatigue Laboratory shifted its focus away from fatigue on the factory floor and toward the human body’s reaction to extremely hot and cold environments, as well as the physiological effects of high-altitude aviation.

  The conversion became total when the faculty voted in June 1943 to suspend all civilian instruction. At that point, it was literally a military academy, offering eight different programs of instruction, including the Navy Supply School, the Army Air Forces Statistical School, Army Supply Officers Training School, Army Air Forces War Adjustment Course, Midshipmen Officers School, two Navy Industrial Accounting Courses, and a Navy War Adjustment Course. Uniformed soldiers marched in formation past Baker Hall, and marching songs were sung by the men who came to be known as the “Singing Statisticians.”3 In 1942, Wallace Donham wrote that the flexibility of the case method had allowed for the “successful conversion of our curriculum to war conditions.”4 He wasn’t exaggerating: In 1943, the faculty wrote six hundred cases specifically for classroom instruction of military personnel.5

  (Several business schools that hadn’t thrown their lot in as completely with the government as HBS experienced such declines in enrollment during the war that they were forced to admit women for the first time. But because HBS had, in effect, ensured that it would be operating at full capacity during the war, it was able to put off entry into the modern era of gender equality, and wouldn’t admit its first women until 1962.)

  Eighty-six alumni of the School lost their lives in the war, the greatest contribution possible.6 And the broader effort of the Harvard Business School to the conduct—and winning—of the war was the most impressive of any business school in the country. A full breakdown of that contribution is beyond the scope of this book, but two efforts in particular merit mention due to their impact on the postwar curriculum at HBS.

  The first, and most important: the Army Air Forces Statistical School. Led on the faculty side by Professor Edmund Learned, with support from Professors Robert S. McNamara, Myles L. Mace, and George F. F. Lombard, the goal of the School was to facilitate the creation of a worldwide network of statistical officers who would oversee the flow of information from the front lines back to the headquarters of individual air forces. The previously discussed course on Management Controls was a direct result of these efforts, which married accounting, statistics, and behavioral science. Stat School instructor Robert S. McNamara later relied heavily on its methods as president of the Ford Motor Company (with positive results) and then later as secretary of defense in Vietnam (with negative ones). In 1945, the Army Air Forces awarded Learned the Distinguished Service Medal in recognition of his work.7

  The second: the introduction, in February 1943, of a “retraining” course for businessmen too old to enlist but who nevertheless sought ways in which they could help the war effort. Sponsored by the U.S. Office of Education, the fifteen-week course was explicitly intended to retrain executives between the ages of thirty-five and sixty for war-related jobs. The inaugural class of 121 students, who were given the derogatory-if-hopeful moniker “retreads,” didn’t make much of a impact on the war effort itself, graduating as they did in May 1943, but in the experiment lay the seeds of one of the most meaningful developments in the field of business education since its founding: Executive Education.

  With the School’s help, managerial expe
rtise had been turned into a weapon as powerful as any, and the war effort benefited tremendously from HBS teachings in accounting, purchasing, procurement, personnel management, efficiency analysis, and more.8 And there’s an argument to be made that HBS’s contribution to the winding down of the war machine was of equal, if not greater, importance to the country. World War II was the first war in history that saw the near-total transformation of national economies to a war footing, and the subsequent return to peacetime operations was fraught with its own risks, including the potential for economic disruption as newly massive industries shrank as quickly as they had grown. Whereas HBS had contributed mightily to that which won the war—in particular, the nation’s logistical prowess—it now had another role to play that was much closer to its roots: the oversight of massive and rapid adjustment in those industries most affected by the war.

  Consider the manufacture of aircraft. In 1939, the country manufactured a mere 3,611 planes. By the end of the war, the country had made nearly 300,000. Add to that 86,000 tanks, 2.5 million trucks, half a million jeeps, 8,800 naval vessels, 5,600 merchant ships, 2.6 million machine guns, and 41 billion rounds of ammunition, and the scale of the conversion becomes almost too large to contemplate.9 All told, U.S. military spending jumped 24-fold from 1939 to 1945, from $2.5 billion to $62 billion. As William Knudsen, the president of General Motors whom Roosevelt tapped in 1940 as director of production, Office of the Under Secretary of War, later said, “We won because we smothered the enemy in an avalanche of production, the likes of which he had never seen, nor dreamed possible.” But that ramping up of capacity and production now needed to be reversed, and the potential for economic mismanagement loomed large.