The Golden Passport

by Duff McDonald

  While the list of HBS graduates who think they would have made a better president than George W. Bush is probably as long as the list of HBS graduates itself, there is one man the majority of them might have voted for if they were prohibited from voting for themselves. That man is Michael Bloomberg (’66), the founder and CEO of Bloomberg LP and erstwhile three-term mayor of New York. He is also the richest HBS graduate by a long shot, worth some $41.2 billion at last count, making him the eighth-richest person in the country.

  A card-carrying member of the Northeast elite that Bush so clearly disdains, Bloomberg is also one of the world’s most generous philanthropists—he’s actually “making a difference in the world”—and is both an avowed environmentalist and supporter of gun control. In other words, he’s the kind of guy a place like HBS could really get behind. While the waning days of his third term as mayor of New York were bedeviled by criticisms that the wealth gap in New York City had actually increased during his tenure, that’s also the kind of thing that isn’t that important to the people at HBS. That is, unless you want their advice on how to solve it, which basically boils down to putting one of their own people in charge. Someone like Michael Bloomberg. Quite the logical conundrum, that one.

  “My view is that Michael Bloomberg is going to run for president and Michael Bloomberg is going to win,”13 said hedge fund manager Bill Ackman in October 2015. Calling the United States “the biggest business in the world,” Ackman said it only made sense that a businessman should run the country. And like any good hedge fund manager, he boiled it all down to stocks, suggesting that the stock market would rise 5 percent if Bloomberg announced and 10 percent on the day he eventually won.

  But is the United States “the biggest business in the world”? Or is it a country with ideals that extend well beyond what the stock market would do if someone is elected? No matter. “When Jesus is compared with a CEO, it is Jesus who is thought to gain by the comparison,” writes Matthew Stewart. “Whether the problem is a soul in search of salvation, a relationship on the rocks, or a superpower in trouble, according to the received wisdom the answer is to turn it into a private corporation and then manage it like a CEO.”14

  Unfortunately for Ackman and anyone else who wished Bloomberg would run, the former mayor was too savvy to throw his hat in the ring unless he thought he could win. And he didn’t. Not only that, he feared what effect he might have for even trying. In early 2016, Bloomberg revealed that he’d decided against running, in part due to the challenge of winning as an independent and in part due to the possibility that by doing so, he might inadvertently facilitate the election of Donald Trump or Senator Ted Cruz. “That,” he said in March 2016, “is not a risk I can take in good conscience.”15

  For a school so successful at placing its graduates at the top of pretty much every hierarchy there is, its record with the U.S. presidency is as follows: a two-term failure as a president, a two-time loser as a presidential candidate, and a man who might have been a good one but waited until it was too late to run.

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  The Shame: Jeff Skilling

  In his 1969 book about consultants, The Business Healers, Hal Higdon observed, “There are those within the business community who might consider ‘a highly articulate con man’ to be a rather effective definition of a management consultant.”1 Some thirty years later, a man who fit that bill precisely—Jeff Skilling (’79)—closed the loop. “Harvard Business School doesn’t teach you accounting or finance,” said the still-high-flying CEO of Enron. “They teach you how to be convincing.”2

  But sometimes not convincing enough. Within a few years of that remark, the energy company had collapsed under the weight of a massive accounting fraud, Skilling was serving a twenty-four-year term in federal prison, and the Harvard Business School found itself on the defensive once again as one of its most celebrated graduates had turned out to be a leader of the most corrupt sort.

  McKinsey was dragged into the scandal as well. Skilling spent more than two decades at the consulting giant, only to leave almost immediately after he had finally grasped the brass ring of business school students everywhere—a directorship at the firm. But part of McKinsey’s genius is that former employees are among their best customers, and Skilling was no different. To him, the secret to Enron’s success was no secret—it was the company’s recruiting of top “talent”—aka MBAs—from places like HBS, and the $10 million or so Enron spent annually on getting access to the talent that McKinsey had gotten to before Enron could. What, exactly, had Enron been getting for its money? “We advise clients on their strategy,” said another HBS grad, McKinsey chief Rajat Gupta (’73), when asked about the firm’s culpability in Enron’s demise. “They are responsible for what actions they take.” (As was Gupta himself, a fact made crystal clear when he was later convicted of insider trading.)

  “Enron’s difficulties have a lot more to do with financial engineering and practices we weren’t involved in,” Gupta added, raising the question of whether touting such practices in the McKinsey Quarterly at the same time that Enron was sending substantial amounts of money McKinsey’s way could be said to amount to no involvement. In its defense, McKinsey has always insisted that its job is really only to do the talking, and neither the credit nor the blame for what its customers actually do is theirs for the taking. Harvard Business School, on the other hand, wants credit for both their talking and their graduates’ doing. Except when it doesn’t.

  Celebrated by Fortune as America’s Most Innovative Company six years in a row, Enron was held up as the kind of company you could build if you didn’t just hire MBAs but also let them run wild—to “take risks”—once they were there. Enron was hardly the first company to bet big on MBAs, but it was one of the few to go all in. And it didn’t end well.

  Skilling is a real-life example of the caricature of the arrogant MBA. He earned a reputation for having an oversize ego almost immediately after joining McKinsey in 1979. “Skilling worked for me indirectly for a short period of time,” recalls Tom Peters. “God knows, he was intellectually arrogant in a way that beggars the imagination.”3 Skilling himself once told BusinessWeek that he had “never not been successful at work or business, ever.”

  In a way, he was right. At McKinsey, Skilling eventually rose to head the firm’s worldwide energy practice, in large part because of his success with one client—Enron. In the 1980s, for example, he helped the company enhance its use of derivative contracts to “smooth” its earnings. And he was working with Enron when he had the singular insight of his career, one that would launch both Enron and Skilling himself into the stratosphere. Deregulation and its attendant uncertainty had prompted participants in the natural gas industry to move from predominantly long-term contracts to using the so-called spot market for 75 percent of its gas trading, and the change had left both buyers and sellers vulnerable to rapid swings in the price of gas. Skilling suggested Enron step into the breach, creating a “gas bank” to buy from gas producers and sell to gas consumers, capturing the spread between the two. Previously, Enron had been a humdrum operator of gas pipelines. The gas bank turned it into a financial wheeler-dealer.4

  Skilling was elected a director at McKinsey in 1989. But within a year, he had done as countless McKinsey consultants had done before him—he took a job in the upper ranks of one of his clients. When Skilling’s future partner in corporate crime, Enron’s chief financial officer Andrew Fastow, asked him how he could have left a cushy partnership at McKinsey, Skilling told him, “How often do you get a chance to change the world?”5 In other words, he was ready to fulfill his destiny as a Harvard MBA. He was named president of Enron in 1997.

  By changing the world, Skilling apparently meant turning an energy services company into a financial trading platform. For a time, it all seemed to work. By the year 2000, trading accounted for 99 percent of the company’s income. And the company had been overrun by MBAs: John Wing (’80) was chairman of the Enron Power Group. His protégé Rebecc
a Mark (’90), the eventual chairman of Enron International, attended HBS while working for Enron. (The company paid.) She hired Sanjay Bhatnagar (’93), CEO of Enron India. HBS grad Paulo V. Ferraz Pereira was an Enron director. And those were just the ones who made it to the top.

  Skilling’s seemingly successful wager on an MBA-led overhaul of the company had come at a crucial moment for the entire MBA Industrial Complex. At the time, both business schools and the old guard of consulting firms were grappling with a brain drain of alarming proportions. The Internet was hot, and technology startups held out the possibility of a faster and larger payoff than anything in the history of corporate employment. The only problem was that as far as the entrepreneurial community was concerned, the jury was still out on the value of an MBA to companies like Netscape, AOL, or even Microsoft.

  And then, as if out of nowhere, Skilling put all those questions to rest and then some. Overnight, he and his elite corps of MBAs turned Enron into a New Economy darling without sacrificing the revenue stream of an Old Economy industrial giant in the process—the company reported $60 billion in revenues in 2000. A job at Enron promised Wall Street pay without having to take a Wall Street job, it offered New Economy mojo and Old Economy respect, and it had taken the most frequently cited criticisms of MBAs (impatience, lack of follow-through, self-interest, excessive faith in analytical ability) and practically turned them into job requirements.

  And then a massive accounting fraud was revealed, and it all came crashing down. The way HBS would have you believe it, that makes Enron anomalous in all things, save for the simple observation that somewhere along the way, there had been a failure of oversight. Skilling was anomaly personified, a bad apple and nothing more. And HBS has never claimed to have eliminated all bad apples from the world, only to be the best at teaching good apples how to stay that way. But to isolate the fraud like that misses the point entirely. Few people actually set out to commit fraud, and that includes Jeff Skilling. Except in the case of a truly talented con artist such as Bernie Madoff, the fraud almost always comes just before the very end, at the point when you’re flat out of new ideas but notice a couple of bad ones lying around. What’s more, the speed with which you can move from day one on the job to running out of new ideas has nothing to do with your ethical compass but rather everything else you bring to the job.

  It gets a little complicated in the details, but the following is a short summary of those things that Skilling brought to the company, which combined to then bring Enron to the point where he felt he had no choice but to commit fraud.

  1.He deemphasized the distinctive capabilities of the company—knowing how to build power stations and the like—and promoted those that most anyone can do, such as negotiating, financing, lobbying, and trading. Most of all, trading. Because it was Skilling’s disavowal of hard assets in favor of trading that doomed the enterprise. “All that trading and marketing is wonderful,” said one former Enron executive, “but if you’re going to be in the energy business, sooner or later you need to be turning on a generator or producing gas or oil.”

  2.He let the talkers take over. Under Skilling, confidence garnered respect, even when it didn’t deserve it. He learned that at HBS. But he also found himself in a prison made of his own bullshit. Just before it all came crashing down, Enron shares were trading at 60 times earnings, despite it basically having turned itself into a bank, and banks tend to trade for 10 to 15 times earnings. To keep it up there, he had to keep giving the market what it wanted. It’s not easy being a winner. People start to expect things from you.

  3.He gave in completely to the temptations of financial engineering, specifically off-balance-sheet financing and securitization. While you don’t need to be an investment banker to know when a financial engineering decision is being made for the wrong reasons, you probably need one to help you pull that kind of move off. Skilling wouldn’t work on Wall Street, but he’d work with them, just for this one thing. To ramp up growth on paper, he turned Enron into a company without enough assets to sustain the debt that had been piled on top of them. Fraud both caused this problem and was used in an attempt to solve it. That rarely works.

  4.He mistakenly believed that success was scalable, replicable, and transportable. The rap on MBAs is that they think they can run anything because they’re generalists first, specialists second—their skill is management, and it goes where they go. That they have successfully convinced both themselves and others that expertise is overrated stands as one of the great achievements of HBS, one that persists despite regular instances that even the one skill they do purport to have—management—doesn’t tend to travel well, either. Enron was a transformational player in the natural gas industry, a first mover in the newly deregulated world of energy trading. When it tried to replicate that success in other realms, from weather to bandwidth to advertising, it failed. “Enron didn’t have a clue about how the industry worked,” said an executive who worked in Enron Media Services. “They were very gung-ho but clueless. Young MBAs reading textbooks on advertising.”6

  At Enron, concept trumped reality, and future trumped present. But when you lean out too far into the future, you eventually end up with both feet in the air as well. All that’s required is a push. That came in early 2001, courtesy of short seller Jim Chanos, when he started to pitch his idea that Enron was up to no good. Both the Wall Street Journal and Fortune jumped in with their own skeptical analyses. Skilling retired unexpectedly in August. And then the roof fell in: Much of the company’s success was revealed as accounting fraud of the most basic kind. Using so-called special purpose vehicles, the company had pretended to be far less indebted than it actually was. Enron’s balance sheet at the end showed debts of $13 billion. Add in the off-balance-sheet liabilities, though, and the total nearly tripled, to $38 billion. It was the largest bankruptcy in U.S. history.

  All of which prompted the New Yorker to wonder out loud whether the country had wandered too far down MBA Avenue. Malcolm Gladwell’s 2002 story “The Talent Myth” was a searing indictment of the so-called War for Talent. The gist of it: The MBA crowd had finally built the perfect echo chamber, with the unsurprising result that it loved the sound of its own music. But that’s being too charitable. What really happened was that Jeff Skilling and his crack squad of MBAs had burrowed inside Enron and ripped its guts out.

  An example: John Wing somehow managed to get Enron—a public company—to give him and his team personal ownership in large-scale power projects that the company built. When Enron was forced to sell one of them to raise much-needed cash, Wing earned 10 percent of the $90 million deal plus $400,000 a year for five years for early termination of his contract7—even though he hadn’t lost his real job. The point here is that Enron wasn’t brought to its knees simply by fraud alone but by the greed of the people who ran it. The shock came only at the very end, and it was revealed that there were no guts left to Enron at all. The whole thing had been reduced to a façade.

  Skilling hadn’t just injected Enron with a dose of the HBS/McKinsey ethos, as a corporate steroid of sorts—a short-term boost that became dangerous in excess. He’d gone all Barry Bonds on them, with practically the same result, and at the exact same time that Bonds did.

  A description of him by Bethany McLean and Peter Elkind reads like that of a prototypical McKinseyite or HBS grad, or, as it was in his case, both: “He could process information and conceptualize new ideas with blazing speed. He could instantly simplify highly complex issues into a sparkling, compelling image. And he presented his ideas with a certainty that bordered on arrogance and brooked no dissent. He used his brainpower not just to persuade, but to intimidate. . . . But he also had qualities that were disastrous for someone running a big company. For all his brilliance, Skilling had dangerous blind spots. His management skills were appalling, in large part because he didn’t really understand people. He expected people to behave according to the imperatives of pure intellectual logic, but of course nobody does that. .
. . He was often too slow—even unwilling—to recognize when the reality didn’t match the theory. Over time his arrogance hardened, and he became so sure that he was the smartest guy in the room that anyone who disagreed with him was summarily dismissed as just not bright enough to ‘get it.’”8

  It shouldn’t be surprising that Skilling also brought the righteous language of the cult of moral leadership with him. It would have been surprising if he hadn’t, given how firmly it is embedded in the language of HBS. “Given the financial churning many investment banks do, I’m not sure I’d feel real good about it when I went home at night,” he told BusinessWeek while still at McKinsey. “[McKinsey] has its values in the right place. You feel like you’re doing God’s work when you’re there.”9 Enron was the same thing all over again. “If you walk the halls here, people have a mission,” he said. “The mission is we’re on the side of angels. We’re taking on the entrenched monopolies. In every business we’ve been in, we’re the good guys.”10

  They were certainly good to themselves. Under Skilling, Enron paid bonuses based on forecasted profits, not actual cash flows. But here’s the thing about that: You can forecast anything. Delivering actual results is a different story. The emphasis on forecasts also neutralized Enron’s risk management group, which became a shrinking violet in the face of ever-more-outrageous estimates. The failure of those risk managers stood as the most egregious of its type for nearly a decade, until Wall Street’s own risk management divisions showed their inadequacy in the face of the profits offered by the real estate boom—another crisis, it should be noted, that arose in large part because of the decisions of people dealing in abstractions, not reality, the same kind of abstractions that they dealt with using the case method and which they were promised were not a substitute for experience but experience itself.