The Golden Passport

by Duff McDonald

  What’s more, they had come to believe that it didn’t even matter what the actual business was. “Look,” recalled Conrad Jones, a ’49er, in 1986, “when most of us got to the Business School, we had no idea what we wanted to manage, all we knew was that we wanted to manage. And that seemed fine, because the way it was presented to us was that managing was a skill unto itself. . . . That was the premise that we started with, and we worked from it diligently and in some cases brilliantly. We took that premise about as far as it could possibly be taken. Only problem was, the premise turned out to be wrong.”19

  The fact of the matter is that managing costs—and costs alone—probably is a skill unto itself. And that’s largely what they had been taught to do. The problem was that managing a company’s cash flows is not the same as managing its business. But those were the people who had beaten back everyone else on their way up the corporate ladder. And then, thanks to the moral righteousness that permeates the atmosphere at HBS, they could rest assured that they weren’t just doing the right thing, but they were also better people for having done so.

  In 1988, James Stamps, who had attended a two-day seminar for New England businessmen at the School on “Control Problems of the Executive” in the mid-1960s, wrote a letter to the Los Angeles Times recalling the experience: “By the end of the first day, I was wondering what kind of a weird world the Harvard MBA was being raised in,” he wrote. “The professors made no bones of the fact that they regarded the factory floor as the least important part of a business. The business office was the place where the company made or lost money. One of them stated that he could save more money with a calculator in a week than a factory manager could in a year with all his new machines and production ideas. Of course, at that time, the Harvard MBA was everybody’s fair-haired boy and the school’s curriculum was widely imitated. With this kind of nonsense passing for a business education, is it any wonder that American business has gotten completely off the track and become hopelessly uncompetitive?”20

  In their successful effort to convince the American executive—and the MBA, in particular—that he really was the best of the best, HBS and its peers inadvertently kept America on the road to defeat, although not at the hands of the communists but of other armies of capitalism, Germany and Japan. An executive corps that sees itself as America’s true leaders—and delivers on that leadership—is one thing. But when it maintains that high self-regard while abdicating its leadership role? That’s something else entirely. While HBS fostered the high self-regard, they were also blithely unaware that America’s corporate leaders had been leading the country down a dead-end street.

  40

  A Decade in Review: 1970–1979

  The 1970s were, to use the lingo of Wall Street, a volatile time for both the managerial class and HBS itself. At the start of the decade, American managers could do no wrong. By the end of it, they were being blamed for America’s comeuppance, and more than a few of the fingers pointing their way were just across the Charles River. Just a few years after HBS had achieved peak influence, at least as measured by the number of its graduates populating the country’s executive suites, the whole enterprise was suddenly being called into question.

  As the 1970s opened, then newly appointed dean Fouraker had inherited an operation that had grown fat and happy. Between 1962 and 1970, enrollment at HBS grew by 44 percent, to a total of 2,463. The bulk of that had come through growth in its executive education offerings, which had taken place in double-digit increments. When you’re adding students at such a clip, you’ve got to add faculty, too, and during Dean Baker’s tenure, faculty growth had been nearly double that of enrollment, rising from 105 to 192, or an 83 percent increase.1 Baker had managed to defray some of the new cost of faculty salaries by nearly tripling the number of endowed chairs—from 13 to 35—which were going for $1 million apiece by that point.2 Still, by 1970, endowment income still only covered less than 40 percent of total salaries for the faculty, the administration, and some doctoral students.

  Not since Wallace Donham had a dean of HBS found himself in such serious financial straits. While Fouraker grappled with how to contain the size of the faculty while avoiding a drop in morale among those without tenure, he began ratcheting up MBA tuition at an unprecedented rate: from $2,000 in 1969, it jumped to $2,800 in 1972, $3,400 in 1973, and $3,600 in 1974—an 80 percent increase in five years. After a momentary decline in 1972 due at least in part to the sticker shock of the tuition increase, however, the applications just kept coming. In 1974, the School received 3,725 applications and admitted just 25 percent, or 943, of those applying.

  While cultural changes played their part, it’s hard to see how the surge in tuition costs didn’t also contribute to the fact that by the late 1970s, HBS graduates began to swarm around those jobs that paid the most money immediately, namely Wall Street and consulting. Why? Because HBS was putting them deeper and deeper into debt. HBS has a long history of providing student loans to those in need, but in the 1970s, the student body began tapping that resource in earnest, with annual borrowing nearly tripling between 1969 and 1974.

  One crude measure used to determine the “value” of attending HBS (or any business school) is the “return on tuition investment” that can be calculated by dividing the median starting salary of the graduating class by its tuition. Setting aside the narrowness of the equation, the statistic is nevertheless one that can be tracked over time. In 1929, the School’s tuition was $500 a year and the median starting salary $1,820, for a ratio of 3.64. Save for a few fits and starts, the ratio climbed steadily over the next several decades, reaching a peak of 7.0 in 1969. By 1974 it had fallen to 4.89—not because salaries were falling but because tuition was rising so fast.3

  But the real stampede into finance was still a few years off. In the mid-1970s, most HBS graduates were trying to get in the crowded doors of large companies that seemed more likely to survive the turbulent economy—and chaotic national affairs—of the time. President Johnson had been hounded out of office because of Vietnam; Nixon brought America Watergate, and Gerald Ford and Jimmy Carter were such disappointments that Carter couldn’t get elected twice and Ford not even once. No wonder everyone was scurrying for a safe haven.

  The number of women in the MBA program finally became more than a statistical footnote, nearly quadrupling between 1969 and 1974, from 27 to 104. Mind you, the number of minorities admitted dropped from 74 to 51 during that time. True to HBS’s ability to blame its own shortcomings on anything other than itself, while also somehow praising itself for them, Fouraker pinpointed the top reason for that decline as one outside HBS’s control. “Many other graduate business schools are successfully recruiting minority students in 1974 compared to the late sixties,” he wrote, with the downright ridiculous implication that HBS had failed to maintain a diverse student body because it had been at the forefront of minority admissions.

  In 1975, he found someone else to blame. “Most of the students enrolled in the MBA program have good undergraduate records, high test scores and were employed in promising jobs at the time of admission,” he wrote. “It is difficult to persuade the employer of a minority manager with the same characteristics that the interests of the company will be best served by encouraging the employee to leave and enroll at Harvard.”4 One might be tempted to call such a remark racist, if one could actually understand what he meant. In any case, it was the minority manager’s employer’s fault.

  To his credit, as the decade neared its end, Fouraker had returned the School to a strong financial position. Total capital, including endowment, building, and operating capital, rose from $56 million in 1969 to nearly $100 million by 1977. He had done so in part by holding the line on faculty size—in 1972, it totaled 180, and in 1978, just 175. But he did so at the cost of morale: Whereas the odds of being promoted from assistant professor to full professor were 32 percent between 1950 and 1972, they were a paltry 14 percent between 1972 and 1978.5

  By that point,
the School had established three major research traditions. The first, comparative descriptive work of managerial practices, was the heart of the case method, and had been pioneered by Edwin Gay, Melvin Copeland, Malcolm McNair, Edmund Learned, C. Roland Christensen, and Kenneth Andrews. The second, human relations, was essentially the building of a bridge between behavioral sciences and the first tradition, and its representatives Elton Mayo, Lawrence Henderson, Fritz Roethlisberger, George Lombard, Paul Lawrence, and Jay Lorsch. The third, and newest of the three, was the decision theory of Robert Schlaifer and Howard Raiffa. On the margins were smaller groups, usually centered around a senior professor, such as Business History (Alfred Chandler), Retailing (Walter Salmon), and Transportation (John Meyer).

  Its weaknesses were what they had always been. The faculty’s strength in industrial relations—including work satisfaction, labor relations, and collective bargaining—was paltry to nonexistent. In human resources, it had a gaping hole when it came to personnel administration.6 Fewer than two hundred HBS graduates worked in the two fields combined. But was it such a surprise? Industrial relations was for people who could—or even wanted to—talk to the little people. And human resources was—and remains—the province of female executives, of which HBS could claim precious few.

  Where the School claimed to excel was in corporate planning, in particular via its Business Policy course but supplemented with all manner of others. By 1979, HBS had seven general management courses “dedicated to issues facing general managers as they plan their corporations’ future.”7 At the time, too, of the nearly two hundred faculty research projects at the School, approximately one in four covered some aspect of strategy. So the School was essentially claiming to teach the ability to see into the future.

  The problem was, by the mid-1970s, public opinion of the clarity of that vision was dropping fast. In a 1966 Harris poll, 55 percent of Americans voiced “a great deal of confidence” in the leaders of large companies. By 1975, only 15 percent did. “After two decades without serious recession, the oil shocks of the 1970s and an accompanying economic malaise put paid to the notion of managerialism triumphant,”8 writes Walter Kiechel.

  What makes it all the more amazing is that having bought into the notion that MBAs were the answer, American corporations kept on hiring them once it was clear that they weren’t. An American Airlines’ manager of college relations told BusinessWeek at the time that an HBS graduate “is always among the very best.” While other schools were good, too, he added, “I guess the big difference is that you can depend on the Harvard MBA.”9

  In their 1973 book, The American University, Talcott Parsons and Gerald Platt made the observation that the field of business administration was less focused on broad social problems than the other academic disciplines were and wasn’t particularly interested in changing the normative order of society.10 Such an attitude is plain as day in The Success of a Strategy, the report produced by the Associates in 1979: “The long buildup of government regulation of the private sector seems to have reached a crescendo in the Johnson and Nixon administrations with the passage of legislation establishing the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Environmental Protection Agency, and the Consumer Product Safety Commission. With each enactment came a great number of rules and regulations.”11

  As the pressure increased on American companies and, by extension, American managers, something broke. It wasn’t so obvious at the time, but HBS professor and psychoanalyst Abraham Zaleznik put it in terms of the psyche. “[You] can infer a lot about the students here, or anywhere, just from the changes that have occurred in the vocabulary of psychology,” he observed in the mid-1980s. “Back in the forties, nobody talked about an ‘identity crisis.’ People weren’t that self-involved. You didn’t worry about identity; you worried about how you functioned in the world—with the world. The key word was adjustment.” In the 1970s, however, the narcissist made his appearance. “This was really a new wrinkle,” Zaleznik said, “a generation of people who were less interested in adjusting than in seeing their own image reflected. Put in MBA terms, they were careerists. They appeared purposeful and hard-driving—as students here have always appeared—but they were calculators, maneuverers. Some sense of belongingness, of shared purpose, had disappeared along the line.”12

  And then the shift began. By 1978, nearly a quarter of the graduating class took jobs as consultants. “The value of building something . . . was an idea increasingly moving out of fashion,”13 writes David Callahan in Kindred Spirits. Peter Cohen, a student at HBS in the mid-1970s, described those around him. One of them displayed “the hollow self-confidence of a man who has never been seriously challenged.”14 Another was “given to the kind of harsh judgments that are the mark of one whose punishing drive toward self-perfection has made [him] intolerant of failure and defect, except for his own self-righteous arrogance.”15

  After reigning for decades as the unelected monarch of America, the corporate manager saw his reputation destroyed in the recession of the 1970s. The postwar success of American business, it turned out, was less about managers having truly solved the puzzle of how to best run a business, and more about the easy profits engendered by the uneven playing field resulting from America’s unique position as the only developed nation whose industrial capacity hadn’t been devastated by World War II.

  It was no coincidence that the seeds of the manager’s decline were planted around the same time as those of the American conglomerate, a wholly different animal from the megacorporation of decades past. Flush with profits earned from a lack of competition while the rest of the world was busy rebuilding itself, but constrained by regulation aimed at halting the creation of monopolies, corporate giants had instead expanded into amalgamations of completely unrelated companies.

  The academy had helped create the intellectual underpinning for the argument that a conglomerate’s CEO could just as easily run an airplane manufacturer as an entertainment empire. Lawrence Fouraker himself had described the general manager as “the sovereign” of America’s economic system. But the sovereign had been fiddling while his competitive advantage burned. Enter Japan, Germany, and Vietnam.

  In his first annual report to the president of the university, Fouraker waxed rhapsodic about the quality of the School’s educational programs and its commitment to maintaining it. And then he let slip something that few deans have ever done: He claimed that there was an “implied warranty to our services,” the gist of which was that it was “graduat[ing] managers of considerable competence, measured against both technical and social standards.”16

  A decade later, those managers had been revealed for what they were: “oversized gadget[s], the sad result of an educational process that mistakes efficiency for the end toward which it should have been a means. A piece of equipment produced on that assembly line leading from Sunday school to high school, from high school to college, from college to graduate school, from graduate school to the corporation.”17 HBS, the “machine” that made the managers, had been pumping out a faulty product, and the nation was demanding a recall. But HBS wasn’t offering refunds. Instead, it rolled out a whole new product line: the shiny, new Wall Street MBA.

  41

  The Subversive Nature of a Social Conscience

  In 1970, the economist Milton Friedman wrote an essay in the New York Times Magazine titled “The Social Responsibility of Business Is to Increase its Profits.” His argument was the opening salvo in what would come to be known as shareholder capitalism. Flouting the midcentury view (and that of the most influential faculty at HBS) that the best type of CEO was one with an enlightened social conscience, Friedman claimed that such executives were “highly subversive to the capitalist system.”

  His tone was snide. “[Businessmen] believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends,” he wro
te, “that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are—or would be if they or anyone else took them seriously—preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”1

  He then described the concept of the executive as “agent” of the company’s shareholders: “In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom . . . the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation . . . and his primary responsibility is to them.”

  At which point, he allowed for the possibility of the executive as “principal”—that is, as a person in his own right: “As a person, he may have many other responsibilities that he recognizes or assumes voluntarily—to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country. . . . If we wish, we may refer to some of these responsibilities as ‘social responsibilities.’ But in these respects, he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are ‘social responsibilities,’ they are the social responsibilities of individuals, not of businesses.”