The Golden Passport

by Duff McDonald

  Under McArthur, the School also began a shift toward the study of entrepreneurial management. That started with the dean’s success at luring Howard Stevenson back to the School. And it could point to a number of significant entrepreneurial ventures that some graduates had launched, including Jim Koch’s Boston Beer Company and Michael Bloomberg’s financial information empire. (There was also Litton Industries, which the School chose to see as “one of the first entrepreneurial conglomerates,”14 instead of what it was, the product of financial engineering and stock market hype.) By 1996, the courses offered by the School’s Entrepreneurial Management unit had enrolled a total of more than 1,100 students.15 Howard Stevenson’s reconception of entrepreneurship away from personality traits and toward a decision-making model continues to permeate the School’s instruction in the subject today.

  The jury was still out on the extent and seriousness of HBS’s commitment to ethics in the mid-1980s. In 1986, Harvard’s then president put in words what the nation was thinking: “[F]ew influential voices from our schools of management speak out on issues of corporate responsibility or the role of free enterprise, even though many prominent executives believe that public attitudes about the corporation’s place in society will have a decisive influence on the future of American business. Corporate leaders sometimes complain that academic critics have a bias against business, citing authors such as John Kenneth Galbraith, Charles Lindblom, and Robert Heilbroner. Yet the wonder is not that critics exist, but that so few members of the leading management faculties are willing or able to contribute significantly to the debate.”16

  To their credit, however, professors Piper and Paine were focused squarely on the challenge that has bedeviled the teaching of ethics at HBS from its very start, and that is that the winner is rarely inclined to question the system underlying the game which they have won.17 They also took a shot at Jensen: “Americans are philosophically inclined to believe that the well-being of the whole results automatically from the individual pursuit of pecuniary goals. We, however, contend that a focus on maximizing along only one objective function can lead to a deadened imagination and a foreshortened measure of empathy. And this, in turn, is a poor basis for strategic calculation in business.”18

  While the Business History group at HBS lost its leading light, Alfred Chandler, when he retired in 1989, under McArthur the discipline still flourished, one result of which was the publication of a list of things that “Business Historians Have Learned at HBS.” It’s a concise list, and one that one hopes is presented to each and every incoming class of MBAs. Among those lessons: (1) Capitalism comes in several flavors, and the department’s course Creating Modern Capitalism described as “a conscious assault on nationalism and on the unconscious American exceptionalism that many incoming students bring with them.” (2) Government has legitimacy as a developer and regulator, including arguments against the demonization of government. (3) Social equilibrium should not be assumed, an argument that business must be concerned about social harmony and not exist as an island unto itself. (4) Business requires moral choice, not just of the obvious variety, but also when it comes to “competitive practices, labor relations, and policies that bear on the distribution of wealth.”19

  The final significant change during McArthur’s tenure was the rise of Michael Porter and the reconception of corporate strategy at HBS. Under Andrews, the School had stuck to its position that strategy is situation-specific, even if the outside world had been gravitating toward the more stripped-down, quantifiable, and seemingly universally applicable concepts that emerged in the 1970s and 80s, particularly the Boston Consulting Group’s growth-share matrix. Porter changed the focus from the company to the industry and delivered the holy grail—“a powerful framework to inform the kinds of systematic analysis that had been so often called for by the preceding generation of strategy scholars.”20 By 1986, almost 2,700 students had taken Industry and Competitive Analysis, and they were increasingly taught by faculty with PhDs in business economics.

  McArthur kept the alumni money flowing by handing out awards like they were free samples at Costco. Consider the Alumni Achievement Award, which historically had been given to just one or two recipients each year. During McArthur’s first seven years on the job, twenty-five alumni received the prize. And new awards were introduced; in 1982, HBS introduced the Bower-Gordon Award, given to alumni who raised large sums for the School. Its inaugural recipients were the men after whom it had been named: Marvin Bower and Albert Gordon. All together, the School’s endowment rose from $106 million at the start of McArthur’s tenure to $600 million by the end of it.

  The new Harvard Business School Press was launched in 1984, and the Harvard Business School Publishing Corporation, a for-profit arm of Harvard University, in 1993. McArthur also invested heavily in renovating a campus that was in dire need of it, spending $200 million on buildings and infrastructure between 1980 and 1995. All told, under McArthur’s tenure, some 500,000 square feet of HBS buildings were renovated, with another 300,000 added. He banned vehicles from most of the campus, going so far as to remove roads to make sure the prohibition was effective.21

  The McArthur era at HBS can be summarized as one of self-congratulation. Still insular by any standard—as of 1983, the odds of being promoted from assistant to associate professor were markedly better for those with an HBS degree (40 percent) than for those without (32 percent)—the odds of making it all the way from assistant professor to a tenured position had dwindled for all involved, to just 16 percent.22 True to form, when McArthur noted a drop-off in the rate of appointments of minority faculty over the previous dozen years, he blamed it not on failed attention to diversity, but on “the status of academic appointment pools from which we recruit young scholars.”23 McArthur’s 1983 report on the state of the School was little more than an eleven-page letter about how difficult it was for HBS to find people it could promote to tenured positions because its standards were so high. But they eventually found them. Under McArthur, the faculty did become more diverse, with the percentage of females rising from 23 to 29 percent, minorities from 7 to 18 percent, and foreigners from 18 to 25 percent. At the same time, however, some friends of the School saw a yawning gap starting to open up: “I’m very critical of the School because, in spite of John’s efforts, there are very few members of the Faculty with previous business experience,” said Goldman Sachs chief John Whitehead. “This tends to make the School ingrown and not knowledgeable about changes in business.”24

  Student applicants, on the other hand, were not hard to find, and in 1983, the School raised its application fee from $35 to $50. That same year, a faculty committee came to the conclusion that it had been working the MBAs too hard. Whereas in 1958, first-year students faced required reading of some 5,500 pages of cases, by 1978 that number had increased to 9,800, and the decision was made to reduce the number of weekly classes from 15 to 13. The second-year workload was trimmed as well, the result of the committee’s reporting that, “in order to prepare adequately for the previous demands of the fall semester, a student would have to put in a 76-hour work week, with only four to five hours of sleep a night, a schedule that the committee felt was not sustainable.” While it’s remarkable that one would need a committee to arrive at such a conclusion, it did reduce requirements to the equivalent of a 65-hour workweek.25

  The recruiters, too, kept lining up at the door. In 1986, 301 employers conducted 12,600 interviews with Harvard MBAs, with the average student having 12 first-round interviews and receiving 3 to 4 offers. That year, more than half of all graduates entered just three fields, investment banking and brokerage (29.4 percent), consulting (17.5 percent), and real estate (8.1 percent),26 with median starting salaries of $48,700 in banking and $58,000 in consulting. The class of 1987 saw 210 students take jobs in investment banking (40 of which were in mergers and acquisitions), 136 in consulting, and 21 in venture capital. Just one took a job with the federal government.27 If consulting still had a
grip on the HBS student imagination, Wall Street was definitely giving it a run for its money. One study of the employers of HBS graduates at the end of the 1980s showed that McKinsey & Company employed the most, with 366, followed by Goldman Sachs (242), IBM (203), Digital Equipment Corporation (192), Morgan Stanley (186), Bain & Company (185), Bank of Boston (177), Merrill Lynch (176), General Motors (166), Shearson Lehman (156), Citibank (138), Drexel Burnham Lambert (130), Boston Consulting Group (127), and Hewlett-Packard (125). (HBS also employed a substantial number of its own graduates, with 173.28)

  Of course, a lot of those companies were hiring back their own employees. In 1994, the following companies sent the most students to HBS: Procter & Gamble (46), McKinsey (39), Andersen Consulting (26), Bain & Company (26), Goldman Sachs (22), IBM (20), Morgan Stanley (20), Price-Waterhouse (18), Boston Consulting Group (15), the U.S. Navy (15), CS First Boston (14), Lehman Brothers (14), Monitor (14), and Citibank (11).29 When critics point out that the School shifted away from its historical role as a source of talent to the country’s manufacturing industries during this time, it’s important to note that nearly half of its incoming students came from consulting, banking, and accounting jobs, while just 15 percent came from manufacturing. It’s hard to see a former employee of Goldman Sachs, who might just have a job offer on the table after graduation, going into heavy industry.

  At that point, the brand was now working for itself. All that mattered was to keep the engine running, the money coming in, the consulting fees healthy, and the recruitment machine well oiled. Roger Martin, a former partner at Porter’s Monitor Group, and later the dean of the University of Toronto’s business school, told the New York Times that he would have been delighted to recruit for Monitor using HBS’s admissions list.30 “You could lay them on a beach for two years and they would still do awesome jobs,” he says. “That way, you wouldn’t even have to spend the first part of their first year deprogramming them so they understood their proper place in life. Either way, they are a great raw material.”

  Martin might be understating the challenge of deprogramming, mind you. When asked about the same challenge, the head of the New York office of a major consulting firm in 2015 criticized HBS for “creating a club of people enamored with themselves.” The problem with that, he says, is that “three to four years later, reality sets in, usually around the first time in their lives that someone tells them that they’re not the best. But that’s not exclusive to HBS; it’s the same with all the elite business schools. I constantly find I’m telling them that it’s a commercial operation they’re working for, not some sort of self-actualization exercise.”

  In the 1980s, however, the Harvard MBA still basked in the glow of a credential which by that point had become a cultural touchstone—indeed, a golden passport. In 1982, two HBS graduates published The Official MBA Handbook, the contents of which alternated between extolling and satirizing the talents of the now-ubiquitous MBA. Among its memorable observations: There was “no BS like HBS,” a Harvard MBA was “often wrong but seldom in doubt,” and the suggestion that MBA was really an acronym for Master of Blind Ambition. It was the age of the yuppie, when it was suddenly “respectable and even perversely hip to work on weekends and to substitute networking for a social life, to wean the libido from carnal desires and direct it instead toward the wooing of wealth.”31 In GQ’s 1985 roundup of the country’s most desirable women, a handful of Harvard MBAs even made the cut. It’s not that surprising when you consider the numbers: Whereas in 1949 there were fewer than 50,000 people alive with MBAs, some 60,000 MBAs were granted in 1985 alone.32 At least some of them had to be “desirable.” Said one 1986 graduate at the time: “The people at the business school actually looked like the people in ads for Caribbean vacations or expensive liquor; they looked like winners.”33

  They remained winners in the workforce, too, but at the expense of “losers,” a list that included American workers, communities, and the economy itself. “In the 1980s, when American management was pressed on its profits by the rise of Japanese corporations, they had a choice to make,” says Robert Locke. “They could either increase the efficiency of their firms to compete with the Japanese or they could distribute their wealth away from their workers to their upper class. They screwed the American working class people. They got rid of pension plans. They got rid of health plans. All the costs of the dream of an American industrial democracy were eliminated in the 1980s because they wanted to distribute profits to stockholders and the managerial class. . . . In the 1960s, we talked about us as a people of plenty. And now they’ve gone from shafting workers via pensions and the like to shafting the American people by inversion and taxes. They’re still not addressing the main point, which is to run a business better.”

  But if more HBS graduates were headed to Wall Street than to the corporate suite, how much blame can be laid at the foot of the Harvard Business School in this regard? Quite a bit. In their paper, “Corporate Malfeasance and the Myth of Shareholder Value,” Frank Dobbin and Dirk Zorn point to the shifting nexus of power of the nation’s business elite during the era. “If the classical view of capitalism was that factory owners were enriched by the sweat of workers, extracting surplus value from the production process,” they write, “what we see happening here is something quite different. The business-knowledge elite manipulates the behavior of large corporations, enriching themselves (money managers and institutional investors, securities analysts and bankers, and corporate executives) by skimming profits from the pension reserves of workers and from the investments of the lumpen bourgeoisie.”

  Securities analysts, for example, saw the market for their services explode. Whereas the typical large company only had eight analysts covering it in the late 1970s, by the early 1990s, eighteen did. Along with their institutional investing peers, they focused the entire edifice of American industry on a single metric: the quarterly earnings target, the achievement of which had the most direct influence on a company’s stock price. An obsessive focus on that single number continues to this day, despite near-universal agreement that it is both distorting and destructive.

  “What takeover specialists, institutional investors, and securities analysts managed to do was to change the perceived interests of both corporate executives and shareholders,” write Dobbin and Zorn. “Executives were now convinced that they were better off after hostile takeovers . . . and that they were better off with firms managing earnings.” And then the most damning conclusion of all, and that which has been leveled at HBS and its graduates since day one: The majority of them weren’t original thinkers, but simply high-performing automatons, ready and willing to buy into the prevailing ethos, whatever it happened to be. “They did this not exactly with malice aforethought, in part because these groups of business experts could not have guessed exactly where all these changes would lead, and in part because they brainwashed not only CEOs and shareholders, but themselves. . . . They conned themselves first and foremost. Takeover specialists convinced themselves that they were ousting inept CEOs. Institutional investors convinced themselves that CEOs should be paid for performance. Analysts convinced themselves that forecasts were a better metric for judging stock price than current profits.”

  Why? For the money, of course. The share of the national economy’s proceeds grabbed by the combination of the CEO class and the financial services industry is as high as it’s ever been. The audacity isn’t in the money grab itself—greed isn’t very interesting when it comes down to it—but in the fact that they’ve all convinced themselves that this is as it should be. “The ultimate evidence of the ideological power of these finance professionals,” write Dobbin and Zorn, “is that the idea that remuneration in the tens and hundreds of millions, whether for fund managers or executives, is necessary to attract able talent goes unchallenged. Just a generation ago, CEOs seemed perfectly happy to show up at work for $1 million a year and now they demand $20 million. The cost of living well has not gone up as fast as that.�
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  Remarkably, even those whose job it was to pay attention to this kind of thing—meaning, the faculty of HBS itself—didn’t fully comprehend what was happening or, worse, didn’t seem to care. In 1987, McArthur compared the rush of MBAs into consulting and financial services to a bubble, remarking, “I think it’s crazy where they’re going, but we ought to just relax and enjoy it; it won’t last long.”35

  50

  The Money Mill

  If consulting has taken the lion’s share of HBS grads over the past several decades, Wall Street comes in a close second. The reason isn’t quite so simple as the money, although that’s the reason. It’s about prestige, and the types of success that garner it in America. In the first half of the century, prestige came primarily through being CEO of a large manufacturing concern, because that was the narrative that America liked about itself, that of the world’s leading industrial economy. Not only that, but those were the jobs that seemingly took the most brainpower. In the 1960s and 1970s, the management elite got a little ahead of themselves, and thought that they could run sprawling conglomerates of infinite complexity. For a time, it actually seemed that they could, and those were the most coveted jobs in the country.

  But when the American economy’s day of reckoning came, the most complicated tasks in business—or at least those requiring the most ingenuity—were not the building of things, but the dismantling of them. That’s the kind of thing that draws ambitious types like MBAs. They wanted the money, to be sure, but that wouldn’t have been enough had they not been able to sell themselves on the intellectual challenges of the jobs, as well as their seeming importance to the entire economy. In 1986, when nearly a third, or 29 percent, of that year’s class took jobs in investment banking, that’s what they told themselves. And they might have been right. The economy needed to be reconfigured, and Wall Street took the lead in doing so.