The Golden Passport

by Duff McDonald

  Porter’s work advising entire nations has definitely had an impact on his prescriptions for improving competitiveness, one manifestation of which is that he has begun to sound like more of a fan of mixed economies such as China’s than the unbridled free enterprise, get-the-government-out-of-our-faces view of so many American CEOs. “There is a lot of simple stuff where we have just let it slide, and you know what other countries are doing?” he said in late 2014 during the keynote speech at the Inner City 100 Symposium. “They are getting better and better and better. If you go to China and look at the roads, look at all the infrastructure, look at the business environment, look at all the stuff that we have ignored, they are working on it. They are working on it every day. I have worked with many of these countries. They have a national strategy to improve their business environment. They work on regulations. They work on their logistical systems. They work on this stuff. They get better. What do we do? Nothing.”12

  Michael Porter represents the best and worst of HBS all at once.

  First and foremost, he broke new ground in the field of strategy. With the possible exception of his colleague Clayton Christensen, who can be credited with popularizing the concept of “disruptive innovation,” Porter’s work represents the high-water mark of intellectual influence at HBS, at least in terms of having some influence over the language that decision makers use as they go about their business. That his signature insight was as simple as the inversion of an already extant field of economic analysis doesn’t take away from the fact that he has achieved an astounding level of influence, both for himself and for HBS.

  You’ve got to give the man credit, too, for his timing. His notion of seeking structural barriers and imperfect competition to drive excess profits—the search for monopoly, in other words—dovetailed perfectly with the Reagan ethos, which celebrated greed in a way it hadn’t been since the days of the robber barons. That said, through his Five Forces framework, Porter is arguably the last member of the HBS faculty to make a significant effort to refine what should have been the central goal of almost anyone working at HBS during its entire existence: to develop a workable theory of the firm.

  At the same time, however, Porter’s theory of the firm wasn’t exactly the kind of thing that would be transformative in terms of the public debate. After all, the pursuit of monopoly profits runs counter to the American notions of fairness. Porter’s firm has no social obligation; there are no noneconomic dimensions to his socioeconomy. But it didn’t matter in the end. Regardless of how its ideological flavoring might have hampered its ultimate usefulness, Porter apparently got so sidetracked with Monitor and with advising world leaders that his theory of the firm, for all intents and purposes, has remained right where it began. Rakesh Khurana, a onetime colleague of Porter, is probably the only other faculty member who stood a chance at helping HBS to land where it might have—that is, as a beacon of insight into the ultimate social and public purpose of the firm—but having left HBS to be dean of Harvard College in 2014, his next move is less likely to be further refinement of the fine work in his book From Higher Aims to Hired Hands and more likely to be a post as president of an entire university.

  Until Porter came along, the School was perennially criticized for being long on relevance and short on rigor. After Porter, those criticisms died down. Porter also helped HBS when it came to its relationship with the rest of Harvard. There has always been a little bit of two-way penis envy between HBS and the rest of the university. Harvard proper envies the money that flows through HBS. And HBS professors, whether they can admit it or not, have always felt a lack of both the intellectual and cultural respectability that the rest of Harvard enjoys. Porter helped narrow the intellectual respectability gap, if not the cultural one. In 2000, in fact, Harvard’s then-president Neil Rudenstine named him a University Professor, the highest faculty honor at the institution. If Porter had been bulletproof at HBS before that, he was henceforth bulletproof at Harvard. There is no better example of that than how Harvard president Drew Faust responded to the complaints about the Qaddafi controversy. In short: Faust whiffed, and couldn’t even bring herself to suggest that such activities could stain Harvard’s good name.

  Porter created a template for all future HBS professors to aspire to, the one-man conglomerate around whom a consulting business, speaking engagements, and bestselling books revolve. The man who has come closest to replicating the Porter business model is Clayton Christensen, with his theory of disruptive innovation. He’s Porter’s Mini-Me. (To dedicate a chapter to Christensen would be duplicative. It’s the same story, with different names and different pseudotheories.) Indeed, Porter set the model that almost all business schools now aspire to, the cultivation of star professors, of branded ideas, and of ancillary revenue streams in publishing and elsewhere—Wharton’s Jeremy Siegel and Stanford’s Jeffrey Pfeffer being two obvious examples of such.

  Has the man spread himself too thin? It’s hard not to wonder, especially when considering that some of his more high-profile work of late seems to lack both rigor and perspective. On more than one occasion, he and his colleagues have simply interviewed HBS graduates and called the results “research.” They did it in 2012.13 They did it again in September 2014.14 In 2015, when the topic of rising inequality in San Francisco due to the socioeconomic effects of the tech boom came to the fore, HBS invited twenty-two Bay Area graduates to a series of roundtables to discuss their perspectives on that inequality,15 a move akin to convening a roundtable on gender issues and inviting only men.

  While interviewing HBS graduates about the challenges facing both them and the nation itself does offer an interesting window into the views of a very narrow slice of the population—the School’s “landmark” study of female executives’ careers in December 201416 wasn’t quite that, but it was interesting enough—it also seems to have the effect of deluding them into overlooking their own role in creating those challenges in the first place, and that includes Porter himself.

  When Porter published a piece on BusinessWeek.com in 2010, “How Big Business Can Regain Legitimacy,” contributor Charles Green responded that Porter was partly responsible for big business losing that legitimacy in the first place. “Porter’s major impact was describing business itself as an ongoing Hobbesian state of competition—not just between competitors, but between companies and their customers, suppliers, and social institutions,” wrote Green. “Adversarial relationships in Porter’s worldview are simply the Way Things Are.” If Milton Friedman and Michael Jensen provided the economist’s justification for business’s us-versus-them stance, argued Green, “Porter was the thought leader for business; business’s relationship with government and society was one of competition, not of collaboration toward some higher, joint purpose. . . . Business was the source of its own legitimacy. It needed no external endorsement. . . . Today’s message from the public and government is: We don’t trust you, the free lunch is over, and as long as you continue this adversarial mindset, we will continue to deny you legitimacy.”17

  The latest example of Porter issuing a grand prescription to solve society’s problems only to have it shoved back in his face came courtesy of Robert Reich. In September 2014, Porter and his colleague Jan Rivkin released the results of a survey of 1,947 HBS alumni about the future of America. The alums thought that the American economy was only doing half of “its job”—large and midsize firms had rallied from the Great Recession, but they were concerned that middle- and working-class citizens were still struggling, along with small businesses.

  While seemingly remarkable in that it showed that HBS at least knew about the little guy, it was more remarkable in showcasing the inability on the part of both HBS alums and faculty to acknowledge their part in the problem. Start with the wording: An economy does not have a job—people do. And when it comes to how much people are paid, “the economy” does not decide that, either—people do that as well. And when the CEO-to-worker pay gap expands or contracts, the economy doesn
’t do that, either. People do.

  Rivkin saw other culprits. “American workers are captives of what the survey shows to be the weakest aspects of the U.S. business environment,” he said. “For instance, our polarized politics and our struggling systems for educating young people and developing their workplace skills.” In other words, it’s the politicians’ fault. And the teachers. And, of course, the workers, for being as uneducated and unskilled as they are. Michael Porter, not surprisingly, thought the answer was “a strategy.”

  Even more galling was the survey’s suggestion that the solution to the country’s problems was to give business a bigger say not just in business but in education and even the nation’s infrastructure as well. It did not entertain for a second the notion that business was doing well because it was a major contributor to our polarized politics, that the public education system had suffered at least in part because when HBS alums give millions to their alma mater, they simultaneously deprive the tax collector (and the public education system) of millions as well, or that the nation’s infrastructure was being similarly pressured by companies “inverting” their tax domiciles and delivering yet another blow to the ability of the country to spend on things that really matter.

  According to another, less myopic study, “[E]xecutives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent . . . between 1979 and 2005.”18 What’s more, it showed that those incomes are very sensitive to fluctuations in the stock market. In other words, we didn’t get where we are because there are potholes on Highway 61.

  A week later, Robert Reich, secretary of labor under Bill Clinton and a professor at the University of California, Berkeley, was there to fill in some of those gaps and more. Reich’s blistering response to the survey begins with the sentence, “No institution is more responsible for educating the CEOs of American corporations than Harvard Business School—inculcating in them a set of ideas and principles that have resulted in a pay gap between CEOs and ordinary workers that’s gone from 20-to-1 fifty years ago to almost 300-to-1 today.”

  He then goes on to describe how HBS and its graduates have lost their way. A half century ago, Reich argues, CEOs managed companies for the benefit of all stakeholders, not just shareholders. For thirty years after World War II, wages rose right alongside corporate profits. And then came the 1970s, and shareholder primacy, and the link between corporate profits and payrolls was severed. Corporate profits and CEO pay continued to rise, but wages didn’t, and corporate gains began to accrue only to those at the top.

  “For years, some of the nation’s most talented young people have flocked to Harvard Business School and other elite graduate schools of business in order to take up positions at the top rungs of American corporations, or on Wall Street, or management consulting,” writes Reich. “Their educations represent a substantial social investment; and their intellectual and creative capacities, a precious national and global resource. . . . But given that so few in our society—or even in other advanced nations—have shared in the benefits of what our largest corporations and Wall Street entities have achieved, it must be asked whether the social return on such an investment has been worth it, and whether these graduates are making the most of their capacities in terms of their potential for improving human well-being.”19

  The good news? Porter himself does seem to have realized as much, and his recent efforts to address issues of corporate social responsibility are laudable. In the end, however, his legacy in strategy—it permeates the School’s curriculum—serves as an obstacle to the kind of holistic thinking that truly meaningful corporate stewardship would seem to require. Porter’s view of strategy is analytic and reductive in nature, whereas true insight comes through synthesis. You can’t just layer big picture idealism or a higher purpose on top of an inherently limiting analysis-by-measurement foundation and call it something more than it actually is. But there is hope, even at HBS. Porter’s colleague Hirotaka Takeuchi teaches a relatively underappreciated course called Knowledge-Based Strategy. “He brings a Buddhist philosophy to business strategy,” says HBS alum Casey Gerald. “It’s all about gut and vision and intuition and grasping essence and having a larger purpose. I felt like an outcast in my worldview at HBS until I took that course.”

  47

  Self-Interest, with a Side Dish of Ethics

  Over the course of its hundred-plus year history, one thing that the Harvard Business School has never figured out is how to truly integrate ethics into its curriculum. It’s not for lack of trying—ethics surely holds the record for the most failed efforts to launch a sustained institutional commitment to a subject at the School. Most of those efforts have been sincere, although a handful have clearly been pro forma, the well-rehearsed public proclamation of a redoubling of their efforts in light of yet another large scandal involving yet another herd of misbehaving MBAs.

  And why wouldn’t it be difficult? Most of us don’t enjoy the feeling that we’re being lectured to, and there’s an inevitable moment in almost any discussion of ethics that feels that way. The particularly ambitious cohort that you’ll find in classes at HBS is also an impatient one; to them, more than most, an ethical discussion feels like a digression from the more important subject at hand. Not only that but the fact that so many of them are, quite literally, winners in the lottery of life breeds a certain misunderstanding about their own ethical foundations. Most twenty-six-year-olds matriculating to HBS will be able to say, honestly, that they’ve never committed a meaningful ethical transgression in their lives. To conclude, however, that their ethical foundations are thus deep and secure—and that further discussion is unnecessary—isn’t quite the layup that it seems. Many of them simply haven’t had any need (or even opportunity) to cross that line.

  From the faculty perspective, it’s a tall order as well. While it’s easy to see a professor of organizational behavior taking a sideways step into teaching strategy, the chasm between the bulk of the MBA curriculum and ethics is wider than most. Most MBA courses are functional; ethics is philosophical. While the case method allows for any well-thought line of thinking about how company X should deal with manufacturing problem Y, those meandering paths nevertheless share a final destination. Ethical discussions are more unpredictable, and therefore more difficult both to plan and to teach.

  Difficult it may be, but that doesn’t mean it can’t be done. What’s more, if you’re going to claim to be in the business of educating the world’s future leaders, then it arguably must be done. HBS is the leading light in business education, which accounts for roughly one-quarter of all undergraduate and graduate degrees in the United States each year. The School’s attitude toward ethics radiates out from the center with an ultimate effect on how we all do business in this country. And so they keep trying.

  What do we mean when we talk about business ethics? The most obvious category includes the prohibitions, those things one shouldn’t do. That naturally includes everything that’s illegal, whether it’s fraud, bribery, price-fixing, employee discrimination, or collusion. But it also includes the gray areas of misleading accounting, insufficient corporate disclosure, or deceptive sales tactics. A second category includes the proactive aspects of ethical leadership, things that we should do. That includes honesty and integrity in internal communications, equitable resolution of conflict, and maintaining acceptable levels of workplace safety. A third—and the largest—category includes the debatable issues. What is an equitable distribution of wealth? How much should a CEO be paid? What is an acceptable reason for layoffs? What responsibilities does an organization have to the communities in which it operates? And then there’s the topic of managerial authority itself. While it does seem necessary—imagine a business in which every single decision went to a vote—it’s also necessary to remember that positions of corporate authority do no
t, in and of themselves, signal anything about one’s essential goodness.

  When we talk about business ethics, in other words, we are pretty much talking about everything that businesses—and managers—do. The teaching challenge is complicated even further by the fact that, like the edge of a knife, business ethics are usually only appreciated when they are not there. However, if you’re going to go looking for their absence, the most likely place to find it is at the intersection of profit maximization and sound judgment. Because everything gets a little trickier when there’s lots of money involved. Which brings us to the story of John Shad (’49).

  John Shad had the kind of resume that makes HBS proud. As founder and head of the investment banking division at E. F. Hutton & Company in the 1960s, Shad had to face up to the problems inherent in being late to the game. He wisely decided not to target America’s largest companies, and focused instead on its smaller, underserved ones. But it was how he decided to serve those companies that made him a legend: Shad was one of the pioneers in the development of the high-yield bond market. In doing so, he helped unleash the entrepreneurial energies of companies such as Ted Turner’s media empire. He also helped provide the fuel for the leveraged buyout boom, which, on its good days, helped bring about an essential reordering of the American economy.