The Golden Passport

by Duff McDonald

  Rajat Gupta (’73), McKinsey’s managing partner at the time, came close to sacrilege with his admission that, “[f]rankly, business is in some ways not that difficult to learn. . . . We can pick up people who have not studied business and can teach them, if they have the intellectual firepower.” If consulting firms are increasingly hiring non-MBAs, that still hasn’t dimmed the ardor that MBAs feel for the industry. No matter what the competing alternatives, the draw of deferring one’s choice of eventual career while utilizing one’s well-honed case method skills remains strong among HBS MBAs. In 2015, 24 percent of HBS graduates took jobs in consulting. Today, McKinsey still makes offers to between 15 and 20 percent of each HBS class, and acceptance rates hover around 80 percent.25 The firm’s popularity as an employer waxes and wanes, superseded by private equity in one year, social networking startups the next. But it’s always there, holding steady throughout.

  Except, that is, when criminal behavior by none other than Rajat Gupta nearly destroyed the firm—after he had already left. Truth be told, of all the HBS grads to engage in criminal behavior, Rajat Gupta is surely the most surprising. The India-born naturalized American graduated a Baker Scholar in 1973, took a job at McKinsey, and spent his entire career at the firm, eventually leading it for three consecutive terms as managing director. He steered McKinsey through the stock market boom of the 1990s and the dot-com boom and bust, more than tripling its revenue before stepping down in 2003. At that point, he devoted himself to philanthropic works, including serving as chairman of the Global Fund to Fight AIDS, Tuberculosis, and Malaria and a board position on the Bill & Melinda Gates Foundation. He was also a trustee to the Rockefeller Foundation and a board member of Goldman Sachs, Procter & Gamble, and American Airlines.

  Apparently not content to simply rub shoulders with billionaires, however, Gupta also spent his post-McKinsey years in a determined effort to elevate his financial status from very rich—he was already worth tens of millions—to extremely rich. To do that, he threw his lot in with now-convicted insider trader Raj Rajaratnam, sharing nonpublic information with Rajaratnam that he learned while serving on the boards of Goldman Sachs and Procter & Gamble. He wasn’t careful about it, either.

  In March 2007, Gupta shared Goldman’s first-quarter profits with Rajaratnam almost immediately after a Goldman audit committee meeting. Rajaratnam’s Galleon fund immediately bought $91 million of Goldman stock, and made $2 million on the trade. In June 2008, Gupta divulged Goldman’s second-quarter earnings ahead of their announcement. In September 2008, Gupta tipped Rajaratnam off to the Goldman board’s deliberations about taking a $5 billion investment from Warren Buffett’s Berkshire Hathaway. Within minutes, Galleon had bought $33 million worth of Goldman shares. In October 2008, Gupta phoned Rajaratnam just twenty-three seconds after a Goldman board teleconference to inform him that Goldman would report a loss of $2 a share for the fourth quarter. And so on.

  Arrested in 2011 and charged with insider trading, Gupta maintained his innocence in the face of overwhelming evidence in support of the charges. He also tried to use a legal wrinkle to avoid being punished for his crimes—the fact that he didn’t seem to benefit financially from his insider dealings. Alas, his failure to profit doesn’t make him innocent—it just makes him stupid in addition to being unscrupulous. But stupidity is no defense for wrongdoing. Indeed, it is its constant companion. In June 2012, he was convicted on one count of conspiracy and three counts of securities fraud. He was sentenced to two years of prison and ordered to pay a $5 million fine.

  Once the Gupta imbroglio hit the rearview mirror, McKinsey went back to business. But to what end? To the streamlining of business? To making things more efficient? To providing cover for downsizing? In a searing article in the New Yorker in 1999, writer Nicholas Lemann argued that by directing its brightest students into consulting, the United States had decided, “in effect, to devote its top academic talents to the project of streamlining the operations of big business.” And Lemann nailed it when he outlined just why students like HBS grads were so drawn to the industry: because it offered “that odd upper-meritocratic combination of love of competition, herd mentality, and aversion to risk.”

  In their 1999 book, Gravy Training: Inside the Business of Business Schools, authors Stuart Crainer and Des Dearlove quote one consultant as suggesting “the intriguing scenario of Harvard Business School teaming up with consulting firm McKinsey for a combined program of study and work.” Said the consultant: “It would be a powerful coupling of brands.”26 It was an interesting idea, although also about sixty years out of date; that program has been going on since the 1950s.

  24

  The Specialists: Robert Schlaifer and Howard Raiffa

  If the early faculty of HBS failed in its attempts to discover Edwin Gay’s “science of business,” it wasn’t for lack of trying. They embraced both the faux-science of Taylorism and the pseudo–social science of Elton Mayo and Chester Barnard in their attempt to find it. But you’re never going to get very far toward true scientific discovery if your trailblazers are fake scientists. They may have made meaningful and enduring contributions to the study of management, but none made any discoveries that qualify as science.

  Another factor holding HBS back from its early scientific ambitions was the logic that led to its embrace of the case method. You can generalize all you want about managerial decision making, but the vast majority of important corporate decisions are context-specific and therefore utterly unique. Having arrived at this conclusion, by midcentury the faculty had abandoned its attempt to reframe managerial decision making as a scientific endeavor even if it had never said so out loud.

  And here’s one more: The prewar mathematical skills of business school professors were actually of a demonstrably rudimentary sort.1 Setting aside the advances in applied statistics it had made during the war, the majority of quantitative work at the School—in any MBA program—was Applied Math 101; put most business school professors in an advanced calculus class and they’d have been lost. They were not the right cohort, in other words, to elevate a still-fledgling scholarship of business into the realm of actual science. While they did finally up their math game in the wake of the Ford and Carnegie foundation reports in the late 1950s, they have yet to up it far enough, a fact demonstrated by their continued inability to see the limitations of mathematics in the modeling of financial markets, particularly when it comes to risk.

  World War II changed all that. Suddenly the brightest minds in the nation were focused on those challenges that hadn’t yielded to business schools’ relatively meager collective intellect. With actual scientists and mathematicians focused on tasks like planning, logistics, and operations research, the boundary between management and science suddenly seemed not just surmountable, but utterly porous. It wasn’t just business that was yielding to science, of course. Everything was. The 1950s saw the introduction of the jet plane for civilian travel, the laying of the first transatlantic telephone cable, and the computer making its first halting steps out of the lab and into the corporate office.2

  This wasn’t Gay’s “science of business,” though; it was “management science”—a “new formation that deliberately broke away from the existing disciplinary system and sought to legitimate itself through hard-core technical capabilities.”3 And it didn’t come from the old guard of business schools, but from a brand-new one—the Carnegie Institute of Technology’s Graduate School of Industrial Administration. Founded in 1949 with a $6 million gift from the Mellon banking family, the GSIA’s mandate was to produce executives trained in both management and engineering. The prerequisites: advanced training in quantitative analysis and a background in engineering.4 In other words, GSIA saw more value in expertise than HBS did. If HBS took men of character and taught them judgment, GSIA took men of hard-core technical capabilities and taught them rational decision making via quantitative methods.

  Lee Bach, GSIA’s first dean, broke away from business school tradition wh
en he stocked his faculty with actual brainiacs, including mathematicians and computer scientists, as well as disciplinary experts from the behavioral sciences and operations research. Almost immediately, the upstart business school was a major player in the field. By treating management as a quasi-mathematical science detached from any direct association with business itself, Bach was able to package and sell (that is, teach) “management education” in a way that no longer required the tradition and history upon which HBS was built; in Bach’s (and many others’) conception, all you needed was the appropriate methodological training. Management historian J.-C. Spender goes so far as to call it “the most stunning institutional achievement of our century.”5 In 1953, when the Ford Foundation assembled an advisory group to help guide what was soon to become a gusher of philanthropic money, Bach—along with HBS dean Donald David—was asked to be part of it.

  The sudden rise of GSIA scared the old guard at HBS out of their minds. To wit: In 1956, Dean Stanley Teele mused that “[i]n the next five years we must decide how much skill the executive of the future will have to command in a number of newly emerging fields and techniques. . . . For instance, we shall have to determine the extent to which we shall incorporate in our curriculum additional mathematical and statistical techniques needed in quantitative approaches to decision making.”6

  In fact, they were already doing so. Since late 1955, a handful of HBS professors had been informally studying advanced mathematics with John Bishop, who was on the faculty of nearby Tufts University. In 1956, Teele offered him a job, and Bishop became a member of Professor Robert Schlaifer’s research group, which helped pioneer the development of decision theory.7 (In fairness, and in direct contradiction to the above point about HBS lacking true brainiacs, Robert Schlaifer, who joined the faculty in 1947, was one. The man first taught himself statistics and then revolutionized decision making through the use of a dormant school of statistical thought. Enough said.)

  Another member of Schlaifer’s group: Howard Raiffa, a statistics professor at Columbia who had made a name for himself in game theory, a branch of statistical decision making. Raiffa, an operations researcher, had been frustrated by the rigidity of his colleagues in statistics when it came to adding “squishy judgmental probabilities”8 to their analytical models. But then Robert Schlaifer and the case method came calling. “The case method . . . blew my mind,” Raiffa later recalled. “[Most of the cases] were real decision problems—each replete with competing objectives, with loads of uncertainties, and all embedded in a game-like environment. A veritable treasure trove of real-world examples that cried out for theoretical attention.” Along with others hired to serve as “transmission lines with the behavioral sciences,” Raiffa in particular “proved to be an inspired choice who bridged the HBS gap between excellence in mathematical statistics and excellence in the practice of management.”9

  Raffia accepted joint posts in Harvard’s new statistics department and the Business School in 1957. Working alongside Schlaifer, he used subjective Bayesian probability (don’t ask) to arrive at a method of quantifying subjective knowledge, which led to their “decision theory.” Anyone who has come across a decision tree when contemplating the choices and uncertainties in business owes them a debt. In short, their work opened up just about any business problem to mathematical analysis, without necessarily sacrificing expert opinion in the process.

  In 1959, Schlaifer published Probability and Statistics for Business Decisions, and in 1961, Raiffa and Schlaifer coauthored Applied Statistical Decision Theory, which “set the direction of Bayesian statistics for the next two decades.”10 But this was geeky stuff, especially for the more “broad-gauged” crowd at HBS. So even if the School was trying as hard as it could to keep up with the GSIAs of the world, it still felt a need to apologize for getting too geeky with Applied Statistical Decision Theory. Calling it “a new type of publication,” Dean Teele explained that “[whereas] most reports . . . published by the Division of Research have as their intended audience informed and forward-looking business executives in general, the new series has been written primarily for specialists. . . .”11 Translation: You may not understand it, but that doesn’t mean you’re not “informed and forward-looking.”

  Four years later, Schlaifer, Raiffa, and John Pratt published a more user-friendly version of Applied Statistical Decision Theory for classroom use, Introduction to Statistical Decision Theory. And by that time, they no longer thought of themselves as applied statisticians but as “managerial economists.” The case method had convinced them of that, too. Because business decision problems involve several uncertainties, some of them requiring the judgments of production or marketing or finance managers who had no possibility of statistical sampling, they had no help but to conclude that pure statistical decision making was too confining.

  Alas, as Raiffa explained, everyone (including him) got caught up in the “power and elegance of this emerging field [of decision making]” to the detriment of nonmathematical underpinnings, such as how to identify the problem to be analyzed in the first place. They used the case method to do that at HBS, but the underlying notion of decision theory—that business was in some sense a mathematical machine, and all a manager needed to know was which lever to pull, which button to push—only reinforced the idea that managing was a skill unto itself, divorced from the actual business being managed, that all one needed to be successful was to master a universally applicable machinery of decision making.

  That new managerial orientation, writes former HBS professor Rakesh Khurana in his book From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession, was “quite distinct from the human relations tradition . . . not clouded by experience of sentiment, but driven by hard facts and cold logic.”12 In Gravy Training: Inside the Business of Business Schools, Stuart Crainer and Des Dearlove wonder whether scholars will eventually “come to regard the twentieth century as a period when mechanistic solutions were misapplied to what are essentially human issues.”13 If they do, they will point to the 1950s as the moment of peak misapplication.

  But it was all in keeping with the time. In the behavioral sciences, Elton Mayo’s concern for worker psychology had given way to the much more analytical approach of “systems dynamics.” Essayist William Deresiewicz points out that even society itself was viewed as a system, in which the “notion of sorting everybody on the basis of a single test and training them to occupy a slot in the social machine made a terrifying kind of sense.”14

  And then there were the business schools. Managers might be the operators of the machine called business, but who said managers couldn’t be made by a machine themselves? The country was just about to embark on manufacturing them at scale: The number of MBAs awarded grew from a mere 5,205 in 1958 to more than 55,000 in 1981, a tenfold increase. But at what cost to quality? At least one answer to that question can be seen in another thing the country had begun assembling at scale: conglomerates—which needed even more managers than before. The whole thing fed on itself until it pretty much blew apart at the seams at the end of the 1970s. (The conglomerates, that is. They kept on making MBAs in even greater numbers, prompting Harper’s editor Lewis Lapham to observe in his 1988 book, Money and Class in America, that at least as far as business schools were concerned, “[e]ducation has become a commodity, like Pepsi-Cola or alligator shoes.”15)

  But let us return to the two professors. His work in statistics aside, Raffia’s career accomplishments stack up quite high: He was one of the four organizers of the Kennedy School of Government. He was the founder and director of a joint East-West think tank that aimed to reduce Cold War tensions before perestroika. He was a founder of the Harvard Law School’s role-playing course in negotiation. And he was a scientific advisor to McGeorge Bundy, the national security assistant to Presidents Kennedy and Johnson.16

  Schlaifer stayed closer to Soldiers Field, where, among other things, he des
igned a new course for first-year students, based on Bayesian methods, titled “Managerial Economics Reporting and Control,” or MERC for short. In 1970, students were outraged at the $17.50 price of the accompanying textbook, Analysis of Decisions Under Uncertainty, and held a book burning on the steps of Baker Library. (Again, it was 1970.) “This is the most unclearly written book in the English language on the subject,”17 said one student, somewhat unclearly himself. Asked by a reporter from the Harvard Crimson to comment, Schlaifer replied, “Well for Heaven’s sake! I guess they burned it because they find the book difficult. But I really don’t give a good goddamn one way or the other.”18

  25

  The Philanthropist: Henry Ford II

  Donald David spent thirteen years as dean of HBS, a term that has been exceeded by just two others, Wallace Donham (1919–42) and John McArthur (1980–95). But David’s influence extended well beyond his resignation, and there’s an argument to be made that he made as much of an impact on the School after he left in 1955 as he had before. In the late 1950s and early 1960s, David played a pivotal role in shaping not just the future of HBS but the entirety of business education. He and Henry Ford II, that is.

  One need look no further than David’s relationship with Ford to realize that C. Wright Mills knew what he was talking about in The Power Elite. David first joined the Ford Foundation’s board of trustees in 1948. In 1950, he joined the board of the Ford Motor Company, the first nonstockholding outside director in the company’s history.1 And Henry Ford II personally offered David his first post-HBS gig, as chairman of the executive committee of the Ford Foundation and a “trustee-in-residence” at its offices in New York in 1955.