The Golden Passport

by Duff McDonald

  Professors occasionally run into trouble when the School’s overly loose conflict-of-interest policies come into contact with those more rigid. In 2010, for example, Associate Professor Mary Tripsas lost a gig writing for the New York Times’ monthly “Prototype” column when it came to light that she had accepted travel and lodging fees from manufacturing conglomerate 3M before writing about the company for the paper. While Tripsas accepted responsibility for violating the Times’ policy, she was barely able to hide her contempt for it when she said, “If I had carefully read the freelancer contract, the 54-page ethics booklet, and the conflict of interest questionnaire, the specific rule I violated would have been clear.” The implication—Who actually reads ethics policies?—spoke volumes about the HBS view of ethics.

  How much does such work influence what professors say about their clients, whether as teachers, authors, or paid speakers? It’s hard to say, especially given the fact that the School sees no need for public disclosure of such arrangements. But they’re not alone: A devastating scene in Charles Ferguson’s documentary of the financial meltdown, Inside Job, has Glenn Hubbard, dean of Columbia’s Graduate School of Business, churlishly refusing to acknowledge the extent of his consulting for the financial services industry. As one commenter wrote, “Nothing is funnier than watching people who study economics declare that money can’t possibly have any influence on their work.”

  When Harvard’s university-wide Faculty Committee on Outside Activity ruled in 2000 that a professor can spend no more than 20 percent of his or her efforts on outside activity, HBS took the most liberal interpretation of the blanket ruling as possible, choosing to count faculty members’ days away from the School based on the entire calendar year, not just the nine months of the school year. The result: While the University’s Arts & Sciences Faculty can spend 36 days engaged in outside activity during the year, HBS professors get 50.

  The stated reason for the difference? Because of all the insight HBS professors gain from their consulting work. “By maintaining contact with the real world and the problems faced by corporate executives, professors develop their research with intuition about leadership that comes alive in the classroom,” said Dean Kim Clark at the time.12 Clark also claimed that the School evaluated each and every opportunity for its appropriateness.

  Which makes it all the more remarkable that in 2006, star professor Michael Porter took on Muammar al-Qaddafi as a client of his outside consulting business, Monitor Group. Porter personally prepared a report for the Libyan government that characterized the country as being at “the dawn of a new era” and a “popular democracy system.” In 2011, Harvard computer science professor Harry Lewis called on Harvard’s president, Drew Faust, to acknowledge the ethical lapse. “To put it simply,” said Lewis, “a tyrant wanted a crimson-tinged report that he was running a democracy, and for a price, a Harvard expert obliged in spite of abundant evidence to the contrary.” Jerry Davis of the University of Michigan agrees. “There’s a thin line between consulting and advocacy,” he says. “Monitor were total shills for Qaddafi.”13

  Lewis wasn’t even calling for Porter to be censured, rather that “Harvard itself, in [Faust’s] persona, could say that selling the term ‘democracy’ to Qaddafi was inconsistent with Harvard’s values. . . . Harvard spends so much time congratulating its members for their good works off campus that it seems perfectly logical to note when somebody’s off-campus activities do not represent Harvard at its best.”14 But the most Faust could manage was a mealy-mouthed statement: “We are finding ourselves increasingly involved as individuals and as an institution with the worlds around us. . . . This is a good thing. But it also presents us with challenging choices about how that engagement can best be shared to advance our mission of producing knowledge and contributing to a better world.”15

  What’s even more remarkable is that Michael Porter hadn’t fully grasped the import of his actions. Jim Manzi, the former CEO of Lotus, held a dinner party at his house in Vermont one evening that was attended by Bill Bradley and McKinsey’s Roger Klein and James Henry. Henry, then the consulting firm’s chief economist, recalls the evening with bafflement. “Porter showed up, freshly back from Libya,” he says. “He was talking about how great it was, how exciting it was, and how he thought the kind of liberal values that we are taught to respect were beside the point for a place like that, they needed good sound economic management. He could have been the National Socialist Finance Minister of 1935. Roger Klein stopped him in the middle of a sentence, and said, ‘Michael, let me ask you one question. Doesn’t it make you uncomfortable to be working for a terrorist?’ It’s hard to believe, but Porter was shaken by the question, as if he’d never considered it at all.16

  “It was gross,” Henry continues. “I mean, is the business school even prodemocracy? Or is it simply a breeding ground for elite networks of people who run economies of any kind? It’s obviously the latter, because they’ve got Saudis, Russian oligarchs, and the Chinese plutocracy. It’s hard to believe, but I don’t think they have anything to offer when it comes to democratic values and the promotion of a more egalitarian form of capitalism than the one we’ve got.” Porter later claimed to have quit his work for Qaddafi after realizing that the dictator was not serious about reform.

  It wasn’t an isolated instance of consulting for a repressive regime, either. Monitor also worked with the Assads of Syria, and Porter’s own website trumpets his work with the Saudis and the Russians. Another Monitor contract promised to help the Hashemite Kingdom of Jordan increase its influence with John Kerry, who became secretary of state in early 2013.17 If HBS is in the credentialing business when it comes to its students, Porter has taken it up a notch, to the country level. If the man makes any sort of political value judgments when choosing his clientele, it’s not obvious what they might be.

  Harry Lewis is no enemy of HBS. Both of his daughters attended the School. He even admires the School’s distinctive ability to actually get things done when compared to the rest of Harvard. When HBS dean Kim Clark took office in 1995, Lewis recalls, he inherited a technology infrastructure where various departments within HBS were unable to “talk” to each other and decided that getting the entire School on a common technology standard would be one of his first priorities. Clark proceeded to poll the various constituencies, made a decision about the common platform, and gave the go-ahead to his technology people. “They did it over a weekend,” says Lewis. “Dictatorships can be quite wonderful that way.”

  Like many of his colleagues, however, he wonders just how tenuous the ties that bind HBS to the rest of Harvard have become. The computer scientist in Lewis, for example, chafes at the fact that HBS’s online domain is hbs.edu, not hbs.harvard.edu—which separates it from the rest of the university, including the Faculty of Arts & Sciences (www.fas.harvard.edu), the medical school (hms.harvard.edu), and the law school (hls.harvard.edu). When the clerical and technical staffs of Harvard voted to unionize in 1988, Lewis adds, the staff at the business school voted 80–20 against unionization. “It’s that much of a separate world that even the secretaries and floor washers felt that they belonged to a different Harvard than the rest of us.”

  How different? Consider the fact that in January 2012, Faust named HBS professor Krishna Palepu as her “senior advisor for global strategy.” In an interview with the Harvard Gazette regarding the appointment, HBS dean Nitin Nohria poured a level of praise on Palepu that seemed disproportionate when compared to Palepu’s actual reputation, which didn’t extend much beyond the doors of HBS itself: “He has substantively reshaped how we think about leadership in a global century, with tremendous benefit for how we do research, how we teach, and how we learn.”18

  At least Faust wasn’t asking him to work on governance issues. Palepu, supposedly an expert on how corporate boards are supposed to work, had, according to the School’s website at the time, “co-led [HBS’s] Corporate Governance, Leadership, and Values initiative, launched in response to
the recent wave of corporate scandals and governance failures.”19 The kind he should have seen coming while simultaneously pulling down consulting fees from and serving as a director of Satyam Computer Services, which collapsed under the largest corporate fraud in India’s history.

  A court in Hyderabad, India, later fined Palepu about $430,000 after finding him guilty of financial irregularities in his role as a director of Satyam, during which assignment he was pulling down up to $200,000 a year consulting for the company until he resigned in late 2008 as the scandal broke.20 An accounting professor, Palepu somehow missed the fact that Satyam had fraudulently overstated its assets by more than $1 billion. He did, however, forward an email from a whistle-blower about the fraud to other board members in December 2008, prompting him to conclude that “I did more than my job to bring the problem to light.” But Palepu hadn’t “brought the problem to light”—the whistle-blower had. He’d merely forwarded an email about it, at which point it was too late to save the company from collapse. More to the point, his “job” as a director of the company had been to prevent such fraud from occurring in the first place.

  One might think that being fined nearly half a million dollars21 for falling down on the job of being a board member would result in one losing one’s reputation as an “expert” on corporate governance. Instead, Faust decided to reward him for his international experience. “So the apparent message from Drew Faust is that being directly involved in an Enron-level scandal doesn’t count if it took place in a third world country,” wrote Susan Webber (’81) in a blog post titled “On the Continuing Oxymoron of Ethics at Harvard.” “She is happy to have what amounts to a corporate governance fraud as a face to the international business community. . . .”22

  On the subject of individual entrepreneurship, it’s a sign that a professor has made it at HBS when they’re able to institutionalize their consulting by starting an actual company to handle all that outside business, with a hilarious number of them using the word institute in their name. There is John Kotter’s Kotter Institute. (Like Kanter, Kotter sees no problem in enjoying a company’s largesse while simultaneously promoting it. In 2006, while serving as the Konosuke Matsushita Professor of Leadership at HBS, he wrote a book, Matsushita Leadership, in praise of the company’s founder.) There is Dr. Harry Levinson’s Levinson Institute. Clayton Christensen’s nonprofit Christensen Institute applies his theories about disruption to health care and education, while the for-profit Innosight does the same thing for business. A complete list of consulting firms set up by current professors would be nearly as long as the faculty directory itself, but when it comes to consulting success, none comes close to that of Michael Porter’s Monitor Group. That is, until it went bankrupt in 2012. (We’ll return to that subject in the next chapter.)

  How much money can they make? Consider the case of James Cash, who spent twenty-seven years at HBS, serving at various times as chairman of Baker Library, chairman of the MBA program, and chairman of HBS Publishing. While that’s quite the career, it gets even more impressive when you consider the corporate boards on which he has served: General Electric, Microsoft, Wal-Mart, Sprint, Chubb, Scientific Atlanta, Knight Ridder, and more. Since retiring in 2003, Cash has consulted through his firm, the Cash Catalyst, and is a special advisor to Highland Capital Partners and General Catalyst Partners. All told, Cash managed to scrape enough cash together to join a group of investors in the ultimate rich man’s game: buying a sports team. In 2003 he was part of a group that bought the Boston Celtics and he became a fixture at home games in his courtside seats. The point here is not to suggest that there’s been even the slightest impropriety in Jim Cash’s career. Rather, it is to raise a question regarding what is possible at HBS: Have you ever heard of another professor being part of the ownership group of a professional sports team?

  HBS professors are also a hot ticket on the professional speaking circuit. In 2014, the website Poets & Quants noted that the three highest-paid speakers in all of academia were at HBS: Michael Porter, Clayton Christensen, and John Kotter. Porter was the top biller, at $150,000 a speech, followed by Christensen ($100,000) and Kotter ($85,000). Remarkably, those numbers were too low. A source familiar with prices from the Stern Strategy Group, which represents several HBS professors, says Christensen’s most recent fee was $300,000 plus a private jet plus expenses, and Professor Nancy Koehn’s rate was $75,000 plus first-class travel and expenses. All of which suggests that Rosabeth Moss Kanter is definitely charging more than the $40,000 Poets & Quants cited as her rate in 2014. Ask nicely, though, and she might throw in some praise of IBM for free.

  46

  The Monopolist: Michael Porter

  Michael Porter (’71) is the most famous professor HBS has ever produced, and arguably the most famous business professor in history. Before all that, however, he was the very kind of overachiever that HBS looked for in its MBA program. An all-state football and baseball player in high school, Porter earned an undergraduate degree from Princeton in mechanical and aerospace engineering, while also making the NCAA’s all-American team in golf. In search of adding a “practical” component to his education, he took the advice of one of his professors at Princeton, Burton Malkiel (’55), and decided to attend HBS.

  The author of A Random Walk Down Wall Street, Malkiel is one of the leading proponents of the efficient-market hypothesis, which argues that stock prices reflect all available information, that the market is all-knowing. Had Porter, who graduated a Baker Scholar in 1971, gone down the same road as Malkiel, into finance, he might have ended up an intellectual peer of the other influential Michael of his generation, Michael Jensen. But his interests lay elsewhere, and after earning his MBA, he crossed the Charles River to pursue his PhD in economics. Ultimately, he ended up in a similar place as Malkiel: For Michael Porter, capitalism is all-knowing, the solution to all problems, including those for which it is the cause. For his part, Malkiel received the School’s Alumni Achievement Award in 1984; while he deserved the honor on the merits of his own singular career, it probably didn’t hurt that he’d sent Porter their way.

  In the economics department, Porter was quickly drawn to a subdiscipline known as industrial organization, or IO, where he was influenced by a young economics professor by the name of Richard Caves. The majority of economics has no “theory of the firm”—it simply assumes that firms do not exist. Better said, it assumes that they are rational economic actors working within perfect markets, so their individual behavior doesn’t have any influence on economic models. But another Harvard economist, Joe Bain, had made a noteworthy observation in the 1950s that gave birth to the field of IO. In a perfect market, Bain argued, all industry sectors should, over the long run, converge on a single rate of return on capital. At least that’s what mainstream economics would have told you: When one sector starts making outsize profits, new investors should rush in, driving the rate of return back down. When a sector is suffering, on the other hand, capital will exit it in search of greener (that is, more profitable) pastures, which should allow returns on the remaining capital to move upward. So why was it, Bain asked, that rates of return, or profitability, vary across industries over long periods of time? If those “excess” profits were both real and persistent, he continued, then they could be explained by market imperfections, or barriers to competition. Among those barriers: economies of scale, product differentiation, and cost advantages. He laid it all out in his 1956 book, Barriers to New Competition.

  Here’s where it gets interesting. Bain was writing from a public policy perspective, with an ultimate goal of helping to identify not just outright monopolies, but also so-called soft monopolies that didn’t meet the strict definition but whose industry structure nevertheless had monopolistic characteristics and was thus depriving the public of the benefits of competition, including, primarily, lower prices. “So the bespectacled, tweed-wearing academics on the north side of the Charles thought excess profits were a bad thing,” writes Matthew Stewart i
n The Management Myth. “But, as Porter could not help but have noticed, the flashy go-getters on the other side of the river thought excess profits were just fine. In fact, the point of their courses on business policy was to figure out how to make them all the more excessive. . . . Instead of using the IO research to pursue the economists’ goal of reducing the market imperfections that cause excess profits, why not use this same research to pursue the goal of exploiting market imperfections in order to create and sustain excess profits?”1 And so that’s what he did: Michael Porter took IO, turned it upside down, and called it strategy.

  In Porter’s conception, IO was no longer merely “descriptive,” but “prescriptive.” According to IO, excess profits derive from industry structure, so Porter argued that strategic analysis must begin at the industry level. And if perfect competition led to low returns, then the search for excess profits (that is, monopoly rents) must begin with a search for where the forces of competition were weakest. Porter eventually developed his “Five Forces” framework as the means by which one conducted that search. The five forces: (1) the bargaining power of suppliers, (2) the bargaining power of buyers, (3) the rivalry among existing firms, (4) the threat of new entrants, and (5) the threat of substitute products. He concluded that there are three “generic strategies” for success—overall cost leadership, product differentiation, and market specialization (a focus on a particular niche). With rare exceptions, he added, the strategies were mutually exclusive. If you aim for low cost and high quality, for example, you’re likely going to end up “stuck in the middle.” And you don’t want to be stuck in the middle. Was it Nobel Prize–level work? No, it wasn’t. Porter simply took something that already existed, inverted it, packaged it extremely well, and tied a ribbon around it. But when they first opened it up at HBS, it exploded like a bomb.