The Golden Passport

by Duff McDonald

  One hopes that whatever paltry momentum the School has finally mustered regarding the teaching of ethics can be maintained. Because it needs to be. Thankfully, an increasing number of faculty have been able to admit as much. Some were even able to do so before the most recent economic crisis. Associate Professor Scott Snook, for example, studied fifty students from before they enrolled until they graduated in 2006. He found that a full third of them were still, in some respects, stuck in adolescence when they graduated, and had trouble empathizing. Snook also found another third were inclined to define right or wrong in terms of what everybody else was doing. “They can’t really step back and take a critical view,” he told BusinessWeek. “They’re totally defined by others and by the outcomes of what they’re doing.”

  In October 2008, HBS professor Rakesh Khurana and Dean Nitin Nohria wrote an article in HBR, “It’s Time to Make Management a True Profession.” In it, they proposed a Hippocratic Oath for Managers, which included sensible and simple expressions of purpose, including the following: “I pledge that considerations of personal benefit will never supersede the interests of the enterprise I am entrusted to manage. The pursuit of self-interest is the vital engine of a capitalist economy, but unbridled greed can be just as harmful. Therefore, I will guard against decisions and behavior that advance my own narrow ambitions but harm the enterprise I manage and the societies it serves.”30

  Unfortunately, the good ideas in the piece were overridden by its call to arms—the suggestion that management will ever be a true profession. That’s pure folly, corporate utopianism masquerading as serious discussion. While his book From Higher Aims to Hired Hands is predicated on the notion that there was some sort of “professionalization project” from the very start, Khurana isn’t entirely convincing on that front, with the more obvious conclusion that it was simply Wallace Donham’s ambition—“temporary rhetorical balloon-filling,” according to J.-C. Spender—and one that ultimately failed. The best way to read Nohria’s words on the matter is not as a management expert positing that such a thing is possible, but simply as the latest dean of HBS pretending that it is so.

  In June 2009, Joel Podolny, the vice president of Apple University, wrote an article in HBR titled “The Buck Stops (and Starts) at Business School.” One of his proposals for helping improve the behavior of MBAs was that schools should start withdrawing degrees for violating codes of conduct.31 It’s not such a revolutionary idea. Doctors and lawyers can lose their license for misconduct. But because there is no licensing body for MBAs, the onus falls on the schools to police their own graduates. The need for a check on poor behavior has never been greater.

  Why can’t they sustain the commitment? If there’s one not-so-obvious reason for the failure of a full and sincere embrace of a new approach to ethics at HBS, it is this: Every business school in the country, including HBS, is so concerned about their place in the myriad rankings of business schools that they largely pay attention only to those things that the rankings actually measure. Ethics training is not one of those things. And so it is effectively ignored.

  If anyone at HBS has stayed on point on this issue, it is Rakesh Khurana. In 2010, he did what few of his colleagues have ever done, which is to admit that the School actually had a responsibility that it has failed to live up to. “If you look at the kinds of problems that our society faces, not only American society, but global society—sustainability, climate change, global pandemics, entrenched poverty—these are issues that will require business to be part of the solution,” he said. “But business will not be part of the solution if it is populated by individuals who have a very narrow conception of what their role is, who have a very narrow view about how business fits into the larger institutions of society. I believe that what we need to do is to begin that conversation among our students and to make that conversation not something that is circumscribed to an ethics course or a single course in organizational behavior, but to be part of a conversation that runs through every single course we have for our students, so that they are socialized, just like you take a doctor, that at the end of the day, the most important thing is that the role of the corporation is to improve the general welfare of the society.”32

  While the School has done some recent substantive work on ethics, in particular Professor Max Bazerman’s work on how moral and ethical blind spots can inadvertently develop in an organization, the urgency has apparently drained from the effort as the latest crisis recedes into the rearview mirror. Casey Gerald, the MBA class speaker in 2014, says that Financial Reporting and Control, a required first-year course, could be better described as “How Not to Go to Jail.” When U.S. attorney Preet Bharara came to speak to students that year, he told the audience, “It’s always nice to come to a business school. I run into a lot of your alumni in my work.” Or, to quote another crusader for justice: “To educate a [person] in mind but not in morals,” said Theodore Roosevelt, “is to educate a menace to society.”

  48

  Life Out of Balance

  In 1992, HBS professor Robert S. Kaplan and consultant David S. Norton published “The Balanced Scorecard: Measures that Drive Performance,” in HBR. The point of the scorecard, according to Kaplan, was to advocate “that nonfinancial measures be used to motivate, measure, and evaluate company performance.”1 Those included such things as product leadership, public responsibility, personnel development, employee attitudes, and a balance between short- and long-range objectives.

  The article was well received, in no small part because it represented a sensible response to the absurdity of Michael Jensen’s insistence that there was one, and only one, measure that mattered: stock price. And whereas Jensen has always dismissed the Balanced Scorecard out of hand, Kaplan has been more diplomatic about their differences. “I obviously agree with Jensen that managers cannot be paid by a set of unweighted performance metrics,” he wrote in 2010. “Ultimately, if a company wants to set bonuses based on measured performance, it must reward based on a single measure (either a stock market or accounting-based metric) or provide a weighting among the multiple measures a manager has been instructed to improve. But linking performance to pay is only one component of a comprehensive management system.”2

  Kaplan’s Balanced Scorecard has sometimes been viewed as interchangeable with the concept of “stakeholder theory,” in which companies are encouraged to define objectives for their various stakeholders—external ones (shareholders, customers, and communities) and internal ones (employees and suppliers)—and then develop a strategy thereafter. “The stakeholder movement likely developed to counter the narrow shareholder value maximization view articulated by Milton Friedman and, subsequently, financial economists, such as Jensen,” he writes. “In this spirit, I believe the stakeholder helped us appreciate the value from nurturing multiple relationships that drive long-term and sustainable value creation.”

  But the scorecard, using a spin on Alfred Chandler’s maxim that strategy precedes structure, requires that strategy precedes stakeholders. In other words, the first task of a company is to determine its strategy; its relationships with stakeholders are secondary. There are many types of customers, for example, and if a company is to avoid Michael Porter’s dreaded fate of being “stuck in the middle,” it first needs to decide which of those customers it wants to satisfy. Southwest Airlines targets different customers than the first-class cabin of British Airways, for example, and it would be folly for a company to lock itself into the goal of trying to satisfy all possible customers at once and then to try to develop a unique value proposition.

  Kaplan, an accounting professor, had been headed toward the Balanced Scorecard since his work with another accounting professor, Thomas Johnson, when the two reviewed the history of management accounting and concluded that “U.S. corporations had become obsessed with short-term financial measures and had failed to adapt their management accounting and control systems to the operational improvements from successful implementation of total quality
and short-cycle-time management.”3 They’d first met when Kaplan, then dean of the business school at Carnegie Mellon University, was asked to speak at a conference on the highly influential HBR article by William Abernathy and Robert Hayes, “Managing Our Way to Economic Decline.” In need of a business historian to help him chase down the roots of the problem, he’d been introduced to Johnson, who had worked with Chandler. The two hit it off, and their joint efforts culminated in a 1987 book, Relevance Lost: The Rise and Fall of Management Accounting.

  Kaplan then began working with Norton, and the two developed the Balanced Scorecard, with the goal that it would provide a bridge between three conflicting strains of thought. The first drew directly from Kaplan’s work with Johnson: quality and lean management, which focused on employee contributions to the production process, particularly the continuous improvement that could be derived therefrom. The second: financial economics and its historical performance measures. The third: stakeholder theory, in which the firm was an intermediary “attempting to forge contracts that satisfied all its different constituencies.”

  “We attempted to retain the valuable insights from each,” says Kaplan. “Employee and process performance are critical for current and future success. Financial metrics, ultimately, will increase if companies’ performance improves. And to optimize long-term shareholder value, the firm had to internalize the preferences and expectations of its shareholders, customers, suppliers, employees, and communities. The key was to have a more robust measurement and management system that included both operational metrics as leading indicators and financial metrics as lagging outcomes, along with several other metrics to measure a company’s progress in driving future performance.”

  They had an immediate hit on their hands. In 1993, Kaplan and Norton published a follow-up article in HBR, “Putting the Balanced Scorecard to Work,” followed by a third, 1996’s “Using the Balanced Scorecard as a Strategic Management System,” and, tying it all together, their 1996 bestseller, The Balanced Scorecard: Translating Strategy into Action. The two men built a franchise (with the requisite consulting business on the side) around their central theme.

  Along the way, however, Kaplan lost the support of his onetime collaborator, Thomas Johnson, and the two embarked on one of the business academy’s longest-running intellectual quarrels. In 2002, Art Kleiner summarized the state of the debate in Booz & Company’s quarterly journal strategy+business, in an article titled, “What Are the Measures That Matter?”

  “Like all leading characters in a good feud story, Bob Kaplan and Tom Johnson have become living symbols of something much larger than themselves,” writes Kleiner. “Once they were research partners and coauthors and shared their success. But they have not spoken in years, and each has publicly staked his professional reputation on the other one being wrong. Their quarrel, which has lasted more than 10 years, is at heart a fundamental disagreement about the source of business success. Does it accrue to those who drive their businesses with numerical targets and performance measures, as Professor Kaplan asserts? Or to those who believe, as Professor Johnson argues, that management through measurement is fundamentally dangerous?”4

  At the beginning, both men were advocates for measurement. The two championed what came to be known as “activity-based costing” as a more accurate method of corporate performance than traditional cost accounting, arguing for the inclusion of so-called hidden costs into the analysis of a product’s profitability—the fallout of production failures, for example—as well as more accurate allocation of company overhead to specific product lines. While acknowledging that America’s management accounting systems had made the country’s giant corporations possible—when it was a scale and cost game, those with the tightest grip on the corporate budget usually won—the two professors concluded that those same accounting systems had become an albatross around America’s neck. When the pressures of competition were less intense, managers had supplemented calculations like return on investment with human judgment. But when all hell broke loose in the 1970s and beyond, and managers spent less time at the helm of any particular business, writes Kleiner, “human judgment was diminished [and] the net effect was to make managers more dependent on the numbers.”

  It was then that they hit the fork in the intellectual road. Kaplan doubled down on measurement with the Balanced Scorecard, arguing that by adding it to the precepts of activity-based costing, the combination made “the concepts of economics operational for complex organizations.” Johnson, on the other hand, had an epiphany, which is that organizations are systems of relationships, and that the mere act of measuring one part of the system, whether it is for production goals, compensation targets, or otherwise, does such violence to one’s understanding of the system’s interplay that it is inevitably destructive. In his 2000 book, Profit Beyond Measure: Extraordinary Results Through Attention to Work and People, he decries the quantitative orientation of business school curricula. “In time, this teaching contributed to the modern obsession in business with ‘looking good’ by the numbers,” he writes, “no matter what damage [it] does to the underlying system of relationships that sustain any human organization.”

  As Kleiner points out, the battle lines were drawn. “The two stopped speaking, and in their next books—Relevance Regained: From Top-Down Control to Bottom-Up Empowerment (Free Press, 1992) by Professor Johnson, and Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance (Harvard Business School Press, 1997) by Professor Kaplan and Professor [Robin] Cooper—they each devoted a chapter to excoriating the ideas of the other.”

  The evolution of Professor Johnson’s thinking brings to mind the 1982 documentary Koyaanisqatsi, the Hopi word for “life out of balance.” A startlingly beautiful work of cinematography, the documentary nevertheless takes a pessimistic view of how humanity has grown apart from nature, by contrasting natural landscapes and elemental forces with scenes of modern civilization and technology. But whereas Koyaanisqatsi is focused on man’s separation from nature, Johnson’s late-career work is focused more on the manager’s separation from the nature of his work.

  Johnson’s early career, it should be noted, can be characterized as getting as close to HBS as one can possibly get without actually working there. In the late 1960s, he was approached by Chandler to provide his accounting expertise as part of the research project that eventually resulted in Chandler’s Pulitzer Prize–winning 1977 book, The Visible Hand: The Managerial Revolution in American Business. He wrote extensively for the School’s Business History Review, and even sat on its board of editors.

  “Once in a while I had lunch with Michael Jensen and would have to hear all that bullshit about how the only thing that mattered in business was to maximize profit,” Johnson recalls. But if Johnson and Kaplan were of like mind on that point, the two eventually parted ways on another one. Kaplan thought the reason for American management’s problems was that it was measuring the wrong things. Johnson eventually came to believe that it was the measurement itself that was the problem. “[People] in top management ranks before 1970 had a clear sense of the difference between ‘the map’ created by abstract computer calculations and ‘the territory’ that people inhabited in the workplace,” writes Johnson in Confronting Managerialism, his 2011 joint effort with J.-C. Spender. “Increasingly after 1970, however, managers lacking in shop floor experience or in engineering training, often trained in graduate business schools, came to dominate [American manufacturing]. In their hands the ‘map was the territory.’ In other words, they considered reality to be the abstract quantitative models, the management accounting reports, and the computer scheduling algorithms.”5

  Unlike Kaplan, who by this point has parlayed the Balanced Scorecard into a personal profile rivaled only by the likes of Michael Porter at HBS, Johnson lacks a substantial following not just among his academic peers but in industry itself. And that’s because along with a few other idealistic souls, in particular the business histo
rian Robert Locke, he has spent the past twenty years arguing not just for a new way of conducting business, but for an entirely new way of thinking about business—and his challenges are aimed at both the heart of the academy and of business itself.

  “American business schools must ground their study of business and the human economic system in the view of reality that comes out of 20th and 21st-century science,” says Johnson, “particularly modern life science, evolutionary cosmology and astrophysics. In doing this the business schools will move beyond the mechanistic, reductionist, and individualistic 18th-century view of reality that informs neoclassical mathematical economics and finance. Instead, business school teaching and research will view reality and ask questions through the lens of the systemic, process-oriented, and complex feedback view of reality that informs modern life-oriented cosmology. A dividend that business schools can earn by making this change is to become the first institution in our society to properly address the question ‘What will it take to conduct human activities sustainably?’ This is certainly the most important question facing our species at the present time. But any answers that assume the view of reality implicit in neoclassical economics and finance are demonstrably insufficient. That means that any present-day business school teaching or research programs designed to achieve ‘sustainability’ fail at the start.”6