The Golden Passport

by Duff McDonald

  For his part, Locke has advocated for closer contact between business schools and industrial and manufacturing firms, similar to that which exists in his adopted homeland, Germany. “If U.S. business schools could integrate [programs that combine the technical and the commercial] into their offerings,” he says, “they could play a useful role in the development of manufacturing, while downplaying the harmful effects that the takeover of neoclassical economics has had in promoting the exaggerated growth of investor capitalism in the economy.”7

  J.-C. Spender says they’re talking about the same thing, “the rise of the specialist and the disappearance of the generalist who had a broad interest in and grasp of the business.” And while he credits HBS for holding the line, as long as it did, on its approach to general management, he thinks that its recent drift toward becoming a traditional research-centered institution has left it just as helpless when it comes to giving MBAs the wide-ranging view that effective management requires. “[We’ve seen] the disappearance of an essential situated holistic understanding of how the bits fit together to create vitality and value,” he says. “The business schools conspired to accelerate this trend to ignore the big picture, wiping out the ‘general management’ syllabus and replacing it with specialist curricula. One interesting result is that none of the faculty bothers to claim to understand (or research) the firm as a whole. They thereby conspire to forget [Ronald Coase’s fundamental questions about the nature of the firm itself]—‘Why do firms exist?,’ ‘Why are their boundaries where they are?,’ ‘Why are their internal arrangements as they are?,’ and ‘Why is their performance so varied?’ Instead business school teachers happily presume answers to these questions and fiddle around at their edges and theorize marginal improvements.”8

  It’s heady stuff, but it’s also incredibly important. What Johnson is effectively arguing is that the thing that many, many businesspeople think made America great—the pursuit of ambitious financial targets—has set the country on a course for ultimate disaster. Citing Alfred North Whitehead’s “fallacy of misplaced concreteness”—when a theoretical construct is mistaken for reality itself—he thinks financial information should be used only for its original purposes, which was to look backward, and deliver an “accounting” of what has already happened, and that a surer pathway to sustainable long-term results is not to “manage by results” but to “manage by means”—to manage the concrete human activities from which financial results only emanate.

  “Many scholars and business practitioners agree with my criticisms of managing by results, especially people in the fields of operations management and manufacturing engineering,” he says. “The fields of modern accounting and finance, however, are dominated by the opposing conviction that abstract financial generalities give managers firmer control over the financial performance of enterprises than does an immediate familiarity with actual operating conditions.”9

  American management, he says, has imprisoned itself in a “mechanistic” view of what causes financial results. The view, which considers financial results as a linear, additive sum of contributions from throughout a business, leads to the belief that to reduce annual costs by, say, $1 million, all a manager needs to do is manipulate parts of the business that generate total spending of $1 million in any given year—such as reducing salary expenses or renegotiating contracts with suppliers. On the other hand, he says, “were managers to assume . . . that the financial performance of business operations results from a pattern of relationships among a community of interrelated parts, and is not merely the sum of individual contributions from a collection of independent parts, their approach to reducing costs could be entirely different.”10

  Instead, we are left with this:

  Focusing exclusively on accounting abstractions and convinced that long-term financial results can be predictably changed by manipulating financial accounting quantities, managers . . . ignore how the steps they take to manipulate these accounting categories can adversely affect concrete reality. Such steps might include, for instance, laying people off, cutting workers’ compensation and benefits, outsourcing jobs to lower-wage regions, forcing suppliers to cut their prices, forcing communities to cut a company’s taxes, violating safety or environmental regulations, and much more. . . . They also fail to regard the non-human world of Nature that provides, among other things, all the material resources consumed by businesses and all the restorative processes that regenerate the waste created by businesses. [And they] end up causing financial crises, disrupting human life, and producing environmental “externalities” (a euphemism favored by economists and accountants) that have afflicted American society for the past 40 or more years and will undoubtedly cause even more harm in the future.11

  Johnson’s favorite counterexample to this way of managing is Toyota’s performance in the last four decades of the 20th century. “Toyota’s approach to organizing work considered the company to be an organic whole of interdependent parts and every part embodied a pattern of relationships designed to flow work continuously, without interruption,” he says. “American manufacturers, by contrast, then and today view a company as a mechanistic sum of more or less independent parts, each of which works in whatever ad hoc way it takes to produce their local output at the lowest possible cost per unit. Invariably this means increasing the volume and speed of output in order to achieve lower and lower costs per unit of output. Put simply . . . Toyota’s cost strategy was to reduce total cost by consuming less, whereas the American strategy has always been to reduce unit cost by producing more.”12

  In the last decade of his teaching career, Johnson was a professor of sustainable management at the Portland State University School of Business Administration. It was there that he developed a management course that “[offered] students a radically different view of recent American business history than the view that has informed virtually all business school teaching in the past two generations.” His main point was that if work processes are properly organized, managers could actually dispense with American management control mechanisms once and for all, and get far better results in the process.

  “Bob [Kaplan] got really angry when I started saying that management accounting was destructive,” he recalls, “and that the business schools were the single most important influence in developing that thinking, which was teaching managers that you go into business to manage the numbers and that nothing else matters. . . . Milton Friedman had no connection to reality. He said that if your models aren’t borne out by the statistical tests, the first thing to do is check your data, not your theory. But that’s not what Michael Faraday would have said. Or Albert Einstein.”

  The apostasy cost him. “For the last ten years of my career,” he says, “I worked alone. I retired partly because no one had any regard for what I was doing. . . . They are much more interested in the message that HBS has created and which its people have so successfully spread through society—that the point of it all is simply to accumulate more.”

  Robert Locke agrees. “Traditionally universities [served the community] because they are engaged in knowledge creation through science and the teaching of that knowledge in a disinterested way to students,” he says. “Business schools are a different matter since they promote ‘business efficiency’ at the expense of knowledge. [The] information they now disperse increasingly serves only a special interest not the ‘entire community.’ . . . Nor do the curricula they develop serve the general interest of the firm. Their professors and MBAs look on firms, as do their all-powerful CEOs, as money mills that funnel money to top managers, stockholders, and other investors, and they have fashioned the management control and reporting instruments, accordingly, even if . . . that toolkit leads to underperformance and perhaps to the eventual extinction of the firm, primarily at the expense of non-management employees and workers.”13

  “To their credit, HBS never fully bought into the scientific method that emerged in the 1960s at places like Carnegie Mellon,”
says Locke, echoing Spender. “They always had this case method. But HBS didn’t try to do anything about what I call the institutionalization of managerialism. Why? Because that was where it got institutionalized, the whole idea of creating a class of people to run the world. We have an enormous number of MBAs from Harvard who are in top positions of American business. They are taught that this managerial class has the know-how and the skills to efficiently run not just modern businesses, but everything else, including hospitals and schools. The world has more or less accepted managerialism, and the notion of a managerial caste and class. But are they what Chandler said they were? Are they the people who know how to run things efficiently? Maybe when Chandler was writing, they were doing some rather significant things, like the logistics work in World War II. But things began to change later on. They managed us into economic decline.”

  Of course, it seems a foregone conclusion that it is Kaplan’s, and not Johnson’s view, that will sustain itself within the halls of HBS, and it is one that Art Kleiner also arrived at in his 2002 article on the face-off, “What Are the Measures That Matter?”

  “We know that the benefits of the Johnson approach will be slow to surface, and initial resistance will be great,” he writes. “And we know that the Kaplan approach will catch on quickly, and benefits will surface quickly. But we don’t know the long-term dangers of the Kaplan methods. What if the constant use of ‘process drivers,’ measurements, and stretch goals cripple organizations in the long run, by wearing down their people until they leave or their skills atrophy? This is exactly what Harvard professors Abernathy and Hayes noticed, in the article that started both Professor Johnson and Professor Kaplan on this long intellectual quest.

  “To my knowledge, no one has yet conducted the kind of long-term in-depth analysis of various companies’ successes and failures that might help us truly judge which professor is correct,” he concludes. “In the meantime, you can be reasonably confident that—other factors being equal—Professor Kaplan’s methods will leave you ahead of the game, able to outperform all competitors in the short run, at least. Except, of course, for those very few companies like Toyota that follow a completely different path to management success. Inevitably, they acquire the reputation of inimitable anomalies, as different from conventional business as an amoeba is from a crystal. The crystal feels like a far surer bet, but only the amoeba is poised to evolve.”14

  49

  A Decade in Review: 1980–1989

  The Anderson Bridge, which connects Soldiers Field with Harvard Square, and HBS to the rest of the Harvard campus, was once referred to by an HBS professor as “the world’s longest bridge.”1 In the 1980s, it got both shorter and longer, all at once. From the student perspective, it might as well not have been there at all, since at the same time that HBS graduates were streaming onto Wall Street, so too were a large percentage of graduates from Harvard College. From the faculty perspective, however, the intellectual distance between HBS and the rest of Harvard widened to the largest it had been since the days of the School’s founding.

  In the decade of greed, the market was triumphant, Tom Wolfe’s Bonfire of the Vanities was more aspirational novel than cautionary tale, and whatever reticence had existed at HBS about the maximization of wealth as the central purpose of business disappeared along with the seemingly antiquated notion of a corporation’s responsibility to anyone other than its shareholders. The separation wasn’t just metaphorical, either: In 1981, HBS announced the discontinuation of all non-School use of its facilities, including by others at Harvard itself.2

  “For as long as anyone can remember Harvard’s courses have mostly bubbled up from its faculty’s interests: A professor would become intrigued by something and do research on it,” wrote Walter Kiechel in Fortune. “What MBA candidates have wanted of late are financial formulas, mathematical models, and analytical tools—the kind of stuff consultants and investment bankers use.”3 The change was most apparent in the transformation of Business Policy into Competition and Strategy, from its focus on strategy as defined by Kenneth Andrews to strategy as defined by Michael Porter. “One of the last links to the general management tradition at HBS had fallen prey to the combined forces of the Ford Foundation’s recasting of American business education and the demands of a new generation of students,” writes Rakesh Khurana, “who as consultants advising firms on how to streamline and restructure themselves, or investment bankers and buyout artists carrying out the actual restructurings, would take up arms of their own in the effort to roll back the last vestiges of the managerial revolution in American business.”4

  While HBS students have always had a keen nose for those occupations with the best chances of advancement and reward, the shift represented something larger, and arguably a repudiation of the entire raison d’être of HBS. The irony was that the revolution didn’t just come at HBS from the outside. Michael Jensen and the forces of shareholder primacy had invaded the inner sanctum of managerialism, and by the time they were done, writes Khurana, it had been stripped of “the last vestiges of the professional identity, self-respect, or responsibility that had been attached to it through the efforts of business school founders, leaders, and faculty going back over a century to the birth of the university business school.”5 In 1985, the most popular courses at the School were Analysis of Corporate Financial Reports, Capital Markets, Corporate Financial Management, and Entrepreneurial Finance.6

  Not all of the deans of HBS have been game-changers. Wallace Donham was surely one. But his successors Donald David, George Baker, and Laurence Fouraker had largely sung from the same hymn sheet. And then, under the deanship of John McArthur (MBA ’59, DBA ’62), who held the post from 1980 to 1995, the School transformed itself in more ways than one. He began his tenure by commissioning a study of the history and intellectual roots of the School—the result of which was 1987’s coffee-table book, A Delicate Experiment. The history reaffirmed HBS’s commitment to its case method—by 1980, the School’s $15 million research budget exceeded the overall budget of any other graduate business school in the world,7 and in 1980–81, HBS shipped almost 100 million pages of materials from its case inventory of 18,000 to more than 6,000 customers.8 (By 1995, the research budget had topped $44 million.9) But that commitment aside, by the end of the 1980s, A Delicate Experiment represented not much more than an historical artifact, a story of the way things used to be. In 1986, BusinessWeek put McArthur on its cover, under the title “Remaking an Institution: The Harvard B-School.”10

  The biggest change was the rise of the finance faculty, Michael Jensen foremost among them. The new science of managerial decision making was encapsulated in the capital asset pricing model and discounted cash flow, models that had no space for questions like customer loyalty and responsibility to one’s employees. It was no coincidence that the School finally dropped its Trade Union Program early in the decade.

  The rhetoric coming out of HBS about finance sounded as if it had been written by the financial services lobby itself. And it might as well have been. When the School launched its Global Financial System (GFS) project in 1992, its advisory board included executives from the likes of J. P. Morgan & Company, AIG, Dean Witter, Deutsche Bank, GE Capital, HSBC, and Morgan Stanley.

  When the group described the project in The Intellectual Venture Capitalist, the tone was as patronizing as Michael Jensen: “Innovation can be threatening, of course, even when it promises to improve welfare,” the authors intoned. “This may explain why managers, regulators, politicians, and the press have expressed so much concern over the risks inherent in the new activities of financial institutions, especially derivative security products. The relative focus of concern seems particularly distorted in light of the substantial risks that are inherent in more traditional activities, such as real estate loans or LDC debt. Certainly, there has not yet been a major financial crisis associated with these new activities and instruments comparable to defaults by countries and by American savings and loan ins
titutions in the 1970s and 1980s. In fact, based solely on the record, the rise of derivative products could have been depicted as greatly reducing risks in the system rather than increasing them.”11

  Such logic was flimsy at best. It seemed to argue that just because an exponential increase in the financial system’s leverage had yet to cause a crisis, the means by which it had done so were safe. This wasn’t learning from history, but rather ignoring it. In time, too, the claim would be proved utterly without merit, as would the argument a few pages later that the “innovation spiral” HBS graduate Jeffrey Skilling had brought with him to Enron was the management model of the future. Calling on regulators to “learn to think functionally and systemically, or run the risk of becoming irrelevant,” the School’s finance faculty then decreed that all was well and good in the world of financial risk management: “Pressed by reality, many of the financial institutions that deal extensively in these complex securities have already developed risk accounting systems as part of their managerial accounting. Those that we have studied appear to be effective and could well serve as prototypes for standardized risk accounting.”12

  If the School’s teaching of production and operations management had, like the rest of the business academy, somehow failed to prepare American managers for the competitive assault from abroad, which led directly to the rise of the ideas of Michael Jensen, it enjoyed a revitalization in the early part of McArthur’s tenure, with the Production and Operations Management (POM) group churning out a number of notable articles in HBR, most notably the work of William Abernathy and Robert Hayes. McArthur even sent the entire first-year POM teaching group to Japan on a mission to study the country’s advanced technologies and management practices.13 While the School had missed the boat on the challenge facing American companies, it did, in the end, catch a later one.