The Golden Passport

by Duff McDonald

  When Stephen Covey wrote The 7 Habits of Highly Effective People in 1990, he not only shot to the top of the list of bestselling books by HBS alumni; he also encapsulated an entire era. Before you could change, he argued, you had to undergo a personal “paradigm shift” into a new understanding of how the world really works. Four years later, Jim Collins and Jerry Porras came out with Built to Last: Successful Habits of Visionary Companies, another of the genre’s bestselling books. Most people missed the paradigm shift that the second book represented, but it was a whopper: In the 1990s, observes Frank, we somehow swallowed the notion that a company itself could contain metaphysical properties that had previously been restricted to actual people. Legally speaking, American corporations have been granted the same constitutional protections as people for decades, a view that was reaffirmed as recently as the Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission, which upheld the rights of corporations to make political donations under the First Amendment. But this was something else entirely. And it only got weirder from there. In 1996, Allan Cox gave us Redefining Corporate Soul.

  You didn’t have to dig too far beneath the rah-rah enthusiasm of the New Economy boosters, though, to be reminded that while managers could talk until they were blue in the face about empowering others, much of what actually went on in American business during the decade was dictated by the ruthless logic of the market. Did the idea behind that new Internet company seem a little stupid? Let the market decide. Did the number of people laid off from that healthy company seem excessive? Let the market decide. The same year that corporate souls were being redefined, AT&T laid off 40,000 employees in a single stroke—a shocking number, to be sure, but not a record-setting one. That honor belonged to General Motors, which had laid off 70,000 in 1991. The second-place finisher: IBM, which laid off 63,000 in June 1993. But whereas GM and IBM had laid off their employees in the wake of substantial losses,7 AT&T had decided to do so at a time that the company was healthy, and all its divisions profitable and growing. The stock rose 4 percent in response to the news. The market had decided.

  If HBS and its publishing imprint provided the rhetorical glue to paper over the contradiction between management’s touchy-feely language and the reality of its treatment of workers in the 1990s, the School was ultimately forced to submit to the same brutal market logic that it had been pushing since the early 1980s. While various rankings of MBA programs had been making the rounds since the 1970s—the very first appearing in MBA magazine in 1974—the majority of those rankings had relied on the opinions of those working within the MBA complex itself. In 1988, BusinessWeek stuck a finger in academia’s eye and instead ranked the schools based on the opinions of corporate recruiters and second-year MBAs, the number of job offers, and the starting salaries of graduates.

  BusinessWeek writer John Byrne, who created the rankings, explained the genesis of the idea using the vocabulary of the day. He said it would create a “market” for MBA programs focused on their two customers, students and corporations. Forbes, the Financial Times, the Economist, and the Wall Street Journal all soon created their own versions. It was delicious irony: Having championed market logic, the business schools had it shoved right back into their own face. And they’ve been dealing with it ever since. Byrne, once referred to as “the most important man in North American management education,” now runs the MBA news site Poets & Quants.8

  If the rankings reduced business schools to a number, that reductionism did have benefits for HBS. When BusinessWeek ran a cover story in 1993 asking whether the School had fallen behind the times, John Nevin (’52), the former chairman of Bridgestone/Firestone, wrote a letter to the magazine suggesting that it need only consult its own calculations for the answer. “Harvard MBAs typically receive 60 percent more job offers and starting salaries 40 percent above the averages reported for the 20 B-schools that BusinessWeek ranks as the nation’s best,” he wrote. “The employers, here and abroad, which are Harvard B-school’s ultimate customers, must, therefore, also be very satisfied. Harvard today cannot be complacent but certainly need not be apologetic.”9

  HBS may have been reluctant to accept criticism from the likes of BusinessWeek, but it was still attuned to the changing desires of its students, and in the mid-1990s realized that the pull of Silicon Valley—and the rise of its West Coast rival, Stanford’s Graduate School of Business—could no longer be ignored. Thus began what is undoubtedly the most important overhaul of its curriculum in the last half century, away from the needs of big business and toward the needs of a student body that increasingly had eyes on being their own boss, as entrepreneurs. In 1997, HBS opened a Research Center on Sand Hill Road in Menlo Park, California, and promptly began organizing job-hunting trips for MBAs to the West Coast.

  Just as it had argued almost a century before that going to HBS provided more experience than actual experience, the School began crafting an argument that going to HBS provided more entrepreneurial juice than working at an actual startup. While there was some truth to the claim—the venture capital presence in the HBS network is unrivaled—other parts of it rang as hollow (and nonsensical) as they had long ago. “We run a simulator where people are taking live shots at them,” Professor William Sahlman told the New York Times in June 2000. “This is the big time, but still low risk. You can’t get that in the outside world.”10 In other words, if what you want is to pretend you’re an entrepreneur, the real world is not for you—HBS is. He’s surely right about that.

  Sahlman was making the case for HBS-as-a-school-for-entrepreneurs, but he touched on an issue that had wider implications. At the same time that the School was belatedly playing catch-up in Silicon Valley, it was facing another unwelcome development: a growing trend at consulting firms (including McKinsey & Company) toward hiring non-MBAs. While that shift was at least partly in response to competition from the technology world for MBAs, it was likewise a whole new kind of competitive threat that was popping up in investment banking circles with increasing frequency as well: The choice was no longer which business school to go to, but whether to go to business school at all. “If Bill Gates or Jeff Bezos didn’t need an MBA,” wrote David Leonhard in the New York Times, “some people wonder why they do, either. Also, with technology rapidly and fundamentally changing so many industries, other people worry that two years spent outside the work force is too long.”11

  Such headaches aside, the 1990s was a good time to be at HBS. Not surprisingly, the School had no trouble raising money—in 1995, alumni contributed a record-setting $20 million to the HBS Fund, and in 1996, $38 million was raised to honor John McArthur and his wife, Natty, on the occasion of his retirement, $5 million of which was earmarked for the creation of a University Professorship to be named after them. Two years later, HBS professor Robert C. Merton was awarded the Alfred Nobel Prize in the Economic Sciences for his work in derivatives, and in 1998 he was named the John and Natty McArthur University Professor.

  As for the career prospects of its graduates, things could hardly have been better. They’d always made good money, but in ironic counterpoint to the shift toward entrepreneurialism, in the 1990s, for the first time in history, it was possible to make an enormous fortune without having founded your own company. All you had to do was get to the top, to be a big company CEO, and riches of heretofore unimaginable proportions were there for the taking. Whether or not you actually managed well while you were there was increasingly beside the point. Whether or not HBS graduates were doing so was, too. And they weren’t.

  Business schools love to boast of the number of their graduates that have become corporate CEOs. For career-oriented MBAs, it’s the catnip of recruiting. And among business schools, HBS loves it most of all, because it dominates such lists. They’re obviously very effective in teaching their students how to get to the top. But what about after they get there? After all, the School makes the boldly explicit claim that its most important teachings don’t begin to reach fruition unt
il that moment, when it all starts to come together in Technicolor managerial vision. So how do they rate in that regard?

  As it turns out, that statistic isn’t as easy to come by as the first one. Indeed, it’s a far more complicated endeavor to gauge managerial performance than to count CEOs. But that doesn’t mean it’s not one of the most important questions that can be asked about HBS. That said, to try to capture the performance of every CEO who has come out of the Harvard Business School in one summary statistic would be folly. A sample will suffice. But which sample? How about one put forth by HBS itself?

  In 1990, former HBR managing editor David Ewing published Inside the Harvard Business School: Strategies and Lessons of America’s Leading School of Business. What value there is in the book is smothered under the almost comical level of self-love that accompanies it. For the purposes of this chapter, however, all that’s needed is a list of nineteen HBS grads whom Ewing described as “a tiny sample of B-school alums who have made it to the top.”

  —William Agee (’63), head of Morrison Knudsen, a construction and engineering firm with $2 billion in sales

  —Warren Batts (’63), CEO of Premark International, a maker of household products with $2 billion in sales

  —Roy Bostock (’64), president of New York ad agency Benton & Bowles

  —Robert Cizik (’58), chairman of Cooper Industries, a manufacturer of heavy equipment with $3 billion in sales

  —Marshall Cogan (’62), head of privately held Knoll International Holdings

  —Lou Gerstner (’65), CEO of RJR Nabisco, which had $16 billion in sales

  —Robert Haas (’68), CEO of Levi Strauss, with $2.7 billion in sales

  —Robert Hauptführer (’57), CEO of $4.8 billion Sun Exploration & Production

  —Richard Jenrette (’57), chairman of Equitable Life Assurance, with sales of $5.7 billion

  —Victor Kiam II (’51), CEO of Remington Products, [then] owner of the New England Patriots

  —Frank Lorenzo (’63), CEO of Texas Air, with $8.5 billion in sales

  —Vernon Loucks Jr. (’63), CEO of Baxter International, a health care firm with $6 billion in sales

  —Robert Malott (’50), head of FMC, with sales of $3.1 billion

  —Joseph McKinney (’57), CEO of Tyler Corporation, with $1.1 billion in sales

  —Jerry Perlman (’62), CEO of Zenith Electronics, $2.4 billion in sales

  —James Robinson (’61), chairman of American Express, $18 billion in sales

  —John Rollwagen (’64), head of supercomputer maker Cray Research

  —Richard Thomson (’57), CEO of Toronto Dominion Bank (TD Bank)

  —William Timken (’62), chairman of steel company Timken, with $1.2 billion in sales

  “The real test of the school is . . . how its alumni perform,”12 Ewing writes in the book. Agreed. And so it was that a decade after the publication of that list, management professors Henry Mintzberg and Joseph Lampel decided to evaluate the performance of those nineteen HBS superstars since they’d been held up—by HBS, no less—as the best of the best. The results were published first in Fortune in 2001 and later in Mintzberg’s 2004 book, Managers, Not MBAs.

  So how did they do? The professor’s conclusion: “Badly.” A majority of them—ten—had failed as CEOs, meaning that the company went bankrupt, they were forced out, a major merger backfired, and so on. Another four had questionable records. “Some of these 14 CEOs built up or turned around businesses, prominently and dramatically,” writes Mintzberg, “only to see them weaken or collapse just as dramatically.”13 Just five of them were doing well.

  The ten failures:

  —William Agee left Morrison Knudsen after large losses, and the company declared bankruptcy soon after.

  —Roy Bostock retired in 1997 after a decade running Benton & Bowles; it shut down five years later.

  —Robert Cizik gave up his CEO role after a problematic acquisition, and gave up the chairmanship soon after.

  —Marshall Cogan was forced out of Knoll in 1999 and accused of “looting” in the wake of the company’s bankruptcy.

  —Robert Haas gave up the CEO position at Levi Strauss when the company ran into severe difficulties.

  —Frank Lorenzo ran three airlines, with two going bankrupt and one forced to sell itself.

  —Vernon Loucks gave up the CEO job at Baxter under pressure, and the company was convicted of a felony.

  —Joseph McKinney was forced into retirement when Tyler, the conglomerate he built, came unglued and had to be dismantled.

  —Jerry Perlman was forced out after failing to turn Zenith around, and the company was sold shortly thereafter.

  —James Robinson was dismissed by the board of American Express.

  The five successes: Warren Batts, Lou Gerstner, Victor Kiam, Richard Thomson, and William Timken.

  To what did Mintzberg and Lampel attribute the poor performance, inasmuch as it could be summarized? Lampel noted “an often-fatal tendency to pursue a formula—some kind of generic technique—in disregard of nuance.”14

  “There’s a correlation with the degree here,” the professors wrote in Fortune. “The MBA tends to be heavy on the ‘B’ and light on the ‘A,’ teaching business functions, yet not developing the practice of administering. These programs give students the confidence to make decisions but not the competence to deal with the messy reality in which decisions are executed. Students learn to analyze situations and propose ‘implementation.’ Unfortunately you cannot replicate true managing in the classroom.”15

  (Especially if you don’t even know what true managing is. In a 1996 paper, “Management Education and Competitiveness,” HBS professor emeritus Wickham Skinner was quoted as saying that “many Faculty people are so removed from industry that they have no idea what they are really preparing students for.”16)

  “The MBA confers important advantages on many of the wrong people,” continues Mintzberg. “The very characteristics that [got them] into senior positions undermine their performance once there. They are too smart, too fast, too confident, too self-serving, and too disconnected. Many of the white knights of heroic management turn out to be the black holes of corporate performance.”17

  Looking back another fifteen years after that appraisal, Mintzberg says he remains less surprised by the findings than by the response to those findings. Or, more precisely, the nonresponse. “[The findings] did not prove anything,” he says, “but they certainly deserved consideration. . . . More surprising is what happened next. Nothing. We hardly hid [the] results. . . . You might think that [they] would have set off some alarm bells, or at least evoked a bit of curiosity. That they did not may suggest as much about business schools as these results do about their graduates.”18

  53

  The Microsoft of Business Schools

  When Kim Clark was appointed the eighth dean of HBS in 1995, one of the first things he did was to invest more than $11 million in the School’s outdated technology infrastructure, including giving email to its students. “My sense was that we were at an inflection point, and we needed to seize the moment and take action,”1 Clark later told the New York Times. By the first week of 1996, every student and professor had an email account, which brought them up to speed with the other 45 million Americans who were online by that point.2 Some inflection points arrive later than others.

  Indeed, at HBS, an “inflection point” is more Microsoft than Apple. Never way out in front, the School rarely falls too far behind the pack. In their defense, those at the top of corporate hierarchies had the luxury of being fashionably late to both email and the Internet itself. If you’re already at the heart of the human network, you don’t need email to get you there. John McArthur never used email; Kim Clark’s first message to the faculty did.3

  Just like Microsoft, HBS has long refused to pay that much attention to what others were doing until it had to. For the longest time, HBS had prided itself on its insularity. “HBS used to be unique,” says Donald
Hambrick (’72), a professor of management at Penn State. “It used to be that HBS was very incestuous—they almost only hired their own products. Almost the entire faculty had doctoral degrees from HBS, and they only valued one kind of research, which was clinically based, qualitative, field-based research, which dovetailed with their interest in writing cases. So they were very close to practitioners, and the style of research that they did reflected that; they almost never did quantitative or strictly theoretical research. What’s more, back in the day, they were a league apart in their emphasis on and excellence in MBA teaching. To be a student there was to be in the hands of master teachers, in course after course after course. The thought that you could, over just two years, have as many as 18 or 20 extraordinary teachers kind of boggles the mind.”

  But the School’s insularity had, by the turn of the century, presented it with a serious problem: They were having trouble hiring good people. The School, so used to a feeling that it was deep inside the intellectual corridors of American business, suddenly seemed to be on the outside looking in. “The problem they started facing is that they had all these young assistant professors trying to do what HBS valued, which was to write cases and be an effective teacher, but if they didn’t get tenure, they couldn’t get a job anyplace else because of their idiosyncratic CVs. Kim Clark and others must have come to realize that they were at risk of being left completely outside of the academic labor market, and that it had probably already affected their intellectual capital. Really good people who want to be mainstream top-flight academics would never, in their right mind, go there, because they weren’t developing a portable CV. I can’t imagine that HBS alumni loved or proposed the shift that occurred. They may not have been aware of it. It might have been touted as something that was innocuous. In any event, the distinctiveness of their super high-quality teaching is no longer as pronounced as it once was. When I was a student, you could not be better taught as an MBA student than at HBS. It’s lost a lot of its uniqueness, which is not to say that it’s a lesser school, just that it’s become more mainstream.”