The Golden Passport

by Duff McDonald

  Put simply, Jeff Skilling was Robert McNamara all over again. Indeed, in a 2002 article in Vanity Fair, Chip Bupp, a professor at HBS, said Skilling “may have been the single best student I ever had, and he did not suffer fools,” before likening Skilling to none other than McNamara himself.11 It was in Bupp’s class, recalled classmate John LeBoutillier, who went on to be a congressman, that a case discussion, in which the students were debating what the CEO should do if he discovered that his company was producing a product that could be potentially fatal to consumers, revealed Skilling’s moral core. “Jeff was one of the brightest members of Section A,” said LeBoutillier. “With thinning blond hair and wire-rim spectacles, he had a mature persona to go with a slight Southern drawl. He often expressed disdain toward any government intervention. One of the natural leaders inside Section A, when he talked . . . everyone listened.” And here’s what Skilling said: “I’d keep making and selling the product. My job as a businessman is to be a profit center and to maximize return to the shareholders. It’s the government’s job to step in if a product is dangerous.” Several students nodded in agreement, recalled LeBoutillier. “Neither Jeff nor the others seemed to care about the potential effects of their cavalier attitude. . . . At HBS . . . you were then, and still are, considered soft or a wuss if you dwell on morality or scruples.”12

  And just as had been the case with McNamara, HBS was right there beside him almost to the bitter end, at which point its Enron case studies were suddenly nowhere to be seen. In April 2001, just months before Enron’s collapse, Skilling made a speech at HBS titled “Enron’s Transformation from Gas Pipelines to New Economy Powerhouse.” If that sounded familiar to HBS students, it should have. Professors Christopher Bartlett and Meg Wozny had published a case by the same name in January 2001. All told, the School published five case studies touting the Enron model as worthy of emulation.

  At the time that HBS professor Pankaj Ghemawat coauthored one of them, “Enron: Entrepreneurial Energy,”13 he was also a member of Enron’s advisory council, earning a $50,000 retainer for his troubles. (That case has also disappeared from the School’s catalog.) Ghemawat later claimed that his interest in writing about Enron predated his council membership, adding that the post gave him no access to confidential information. Using the typical HBS justification, he claimed that he used the position “to get [chairman] Ken Lay to agree to let me interview him and other top managers for my case.”14 (And to pad his bank account. But the case was the important thing!)

  For his part, HBS dean Kim Clark told the Chronicle of Higher Education in 2003 that it was still “extraordinarily useful for faculty to have firsthand experience” at companies in the process of case writing, even if that included earning money from companies for consulting work, or serving on boards. (But what else could he say? If you’re going to stake out a position that a conflict of interest is actually a good thing, you’ve got to hold the line on it.)

  All of this returns us to HBS’s dubious claim that both case writing and corporate consulting—or better yet, both at once—allow its faculty to get closer to the action than everyone but company insiders themselves, the fruits of which are revealed in penetrating insights about the things that really matter. Say, for example, a massive accounting fraud. That’s not to condemn Ghemawat for failing to discover Enron’s, but to serve as a reminder that when there really is some secret to a company’s success—it really doesn’t matter whether it’s good or bad—they’re never going to broadcast it, no matter who is asking or why.

  “In any commodity, there are always people who have too much and others who have too little, so there’s always going to be a need for them to trade and exchange,”15 then–HBS professor Peter Tufano told the New York Times in a discussion about Enron in 2002. That’s nothing more than the definition of a market. And an indication that it would take more than an accounting fraud to stop HBS professors from adding nothing of value to the Enron discussion whatsoever.

  “When we write a case [at HBS], the idea is that it will illustrate some important concept,” HBS professor Robert Kennedy, who coauthored a 2001 case on Tyco International, told CFO Magazine in 2003. “The idea is not to say that this is a great company or an evil company. When the Tyco case was written, it was because there was this lore that conglomerates don’t work. We wrote it to let Tyco make its case about why they felt it worked for them.” Allowing company executives to review cases, Kennedy continued, lets them speak freely while also ensuring that no confidential company information is inadvertently revealed. “Of course,” Kennedy continued, “it’s also important for them to understand that we’re not writing a hagiography.”16 That seems clear enough, doesn’t it? HBS writes cases to let companies “make their case” about why their decisions are the right ones, and then they let them review them before they are published. God bless the naive soul who thinks such an arrangement might constitute the writing of hagiography. Especially when there’s money involved.

  In a 2003 article that he coauthored with his colleague Paul Healy, HBS professor Krishna Palepu pinpointed “governance and incentive problems” as the primary causes of Enron’s failure. But he also hung auditors, sell-side analysts, fund managers, financial regulators, and rating agencies out to dry. “A range of academic research findings have found evidence that sell-side analysts are influenced by their proximity to investment banking,”17 the professors wrote, referring to the well-known fact that sell-side analyst objectivity tends to disappear when there’s money on the table. So what about professorial objectivity? It’s a relevant question, but probably not one for the nonexpert in corporate governance that Palepu was subsequently shown to be. As mentioned earlier, in 2008, India’s Satyam Computer Services was revealed to have perpetrated the largest corporate fraud in the country’s history while Palepu was a member of its board.

  When HBS professor Malcolm Salter wrote Innovation Corrupted: The Origins and Legacy of Enron’s Collapse in 2008, he claimed to have traced the rot to the source. But not once in the book did he mention Skilling’s education. This is hypocrisy of the most blatant sort. HBS brazenly claims credit for the careers of its most successful graduates, as if anything those graduates ever do, for the rest of their lives, is a reflection of the School’s teachings. But when one of their most prominent alums—who they’d been celebrating ad nauseam—was revealed as a fraud, they saw no trace of a link between that behavior and his education.

  Likewise, when then–HBS professor Ashish Nanda wrote a case study on the disaster in 2003, “Broken Trust: Role of Professionals in the Enron Debacle,” he noted that, “[s]pectacular as Enron’s sudden collapse was, extraordinary as the failings of the board and leadership of Enron were, equally extraordinary was the combined failure of the various professionals associated with the firm—accountants, financial analysts, investment bankers, lawyers, consultants, and credit raters—to anticipate the impending collapse and warn shareholders, financial markets, and the public.”18 But he was being too polite. Almost all of the above professionals had been co-opted by Enron’s money, and had abdicated any professional obligation to independence. Considered in that light, their failure to anticipate its collapse was not extraordinary in the slightest. That the faculty of HBS had been co-opted as well is not in doubt. What is? Whether they’d ever felt that they, too, had an obligation to interests other than to Enron, a list that would seem to include their students, capitalism, and even, because they’re part of a university, truth itself.

  If you’re in the market for more damning accusations, you can find them in the 2002 report of a group called HarvardWatch, which starts by laying out the extensive ties between Enron and Harvard itself. And then raises questions such as the following: Does it concern anyone that Highfields Capital, an investment firm that oversees $2 billion of Harvard’s endowment and is run by HBS grad Jonathon Jacobson, was way out ahead of most of the investment world in betting against Enron stock—it earned a reported $50 million by doing so—while
oversight of that same Highfields account lay in part with Herbert “Pug” Winokur, a member of the Harvard Corporation who also happened to be a longtime member of Enron’s board? On the other hand, it seems quite certain that Skilling wasn’t providing his fellow HBS grads with inside information. When Highfields analyst Richard Grumman pressed Skilling during a 2001 conference call about why the company didn’t provide analysts with more information, Skilling replied, “Well, thank you very much. . . . We appreciate that. . . . Asshole.”19

  Things only get more interesting when it comes to the Bush family, the energy lobby, and people like Lawrence Lindsey, Bush’s chief economic advisor, who had also served on Enron’s advisory board. Or Larry Summers, who upon being appointed Bill Clinton’s Treasury secretary in 1999 received congratulations from Enron chairman Kenneth Lay, to which Summers responded, “I’ll keep my eye on power deregulation and energy-market infrastructure issues.” When Bush was elected, Summers left to become president of Harvard. When asked for his reaction to the HarvardWatch report, consumer advocate Ralph Nader said it was simply the “latest chapter in the long-running story of the hijacking of Harvard University’s name and reputation by corporate interests.”20 But those are stories for another book.

  Jeff Skilling holds the record for the most mortifying corner-office behavior by a graduate of HBS, at least that we know of, save for some that George W. Bush engaged in while in the ultimate corner office, the White House. Amazingly, though, Skilling has also probably proved more of a boon to the School than anything else. For starters, he provided a touchpoint for fraud, a specifically egregious example of that which one should not do. If the School celebrated the company too much in case studies in the years before its demise, it has likewise been unrestrained in its condemnation of it afterward.

  Ironically, too, Skilling’s self-destruction has led the School to double down on the thoroughly bogus notion of the moral authority of the CEO. That’s what Bill George is doing when he yammers on about authenticity. The fact that the Enron fraud was so massive has allowed the School to argue that Skilling is a singular HBS grad rather than a typical one. They point to his behavior when they’re talking about what they don’t teach, even if that’s what some of their students learn.

  If things had played out differently, Enron chairman Lay might have ended up teaching alongside Bill George at HBS. After all, when news of the fraud broke, Lay’s response was to appear on television “sermonizing like a teaching elder on the ‘core of values’ in the heart of every ‘leader.’” But whereas Skilling surely knew that he was doing wrong, Lay, a simpler man, seemed to believe that his job was merely to be himself, that is to say, authentic. “Lay probably, truly, not hypocritically, believed he could run the company by going around telling others what a good person he was,” writes James Hoopes. William Deresiewicz calls Lay’s mood upon hearing that people wanted him punished to be one of “injured sanctimony,”21 a sense of impunity that’s available only to the truly holier-than-thou.

  While assigning blame for Jeff Skilling’s behavior, most of it belongs with Skilling himself. But assigning some of what remains to HBS isn’t a stretch, even if being the source of an insidious and flawed philosophy of management doesn’t quite capture the attention as effectively as an accountant at Arthur Andersen shredding Enron-related documents does. Although don’t think for a second that HBS will ever apologize for Skilling—even as they continue taking credit for the successes of other graduates.

  The closest they came to doing so was in 2006. That year, while sitting on a panel of scholars discussing whether the maximization of shareholder value was to blame for corporate malfeasance, Michael Jensen flat-out rejected the idea, saying, “There is no doubt that there have been many more incidents of inappropriate behavior in the business world in the last decade, but those who attribute that to a problem with the MBA degree or what’s being taught in business schools will have a tough time explaining it.”22 His colleague Rakesh Khurana then proceeded to explain it, without it seeming a very tough task in the slightest. Enron’s executives were probably using techniques “premised on tools students had learned in business schools,” Khurana said. “If universities and business schools just educate people with highly sophisticated financial and technical skills without the underlying values, then they’re educating mercenaries and unleashing potentially dangerous members of society.” Of course, he said “potentially.” How nice it would be if the destruction of Enron were just a theoretical thing.

  56

  The High Art of Self-Congratulation

  One of the secrets to HBS’s success during its century of existence is that it has perfected the art of the pivot. What does that mean? For one, they have an almost unbelievable ability to earnestly present themselves as the solution to problems they have helped cause. Robert Kaplan, for example, serves as the institutional response to Michael Jensen. Michael Porter offers up a set of prescriptions for helping address an inequality that the School’s graduates—and its tilt toward shareholder value—helped create. When Jeff Skilling took the teachings of HBS too far, HBS declared that the way to avoid Enron happening all over again was . . . somewhere in the teachings of HBS. The most recent example of such? The financial crisis of 2007–09. We will return to that in chapter 59.

  But they do it in other, more subtle ways, as well. Consider the case of James Burke, the longtime CEO of Johnson & Johnson. Burke worked for J&J for forty years, eventually rising to CEO, a position he held from 1976 through 1989, when he retired. He later chaired the Partnership for a Drug-Free America, which earned him the Presidential Medal of Freedom from Bill Clinton. Fortune named him one of the ten greatest CEOs of all time.

  The company’s performance during his tenure was impressive: Through the early 1980s, sales and profits had both more than doubled. And he’d proved his capabilities as a peerless marketer even before that. It was Burke who’d overseen the success story that is Tylenol, which the company somehow managed to convince America to buy despite the fact that it was nothing more than a branded version of the widely available aspirin substitute acetaminophen and it was selling it for up to ten times the price of nonbranded alternatives. Even more impressive was the fact that by the early 1980s, Tylenol had captured more than a third of the $1 billion market for analgesics. In 1982, despite accounting for just 7 percent of sales, Tylenol contributed 15–20 percent of J&J’s profits.

  The defining moment of James Burke’s career came that same year, when cyanide-laced bottles of Tylenol killed seven people in Chicago. Burke’s response was so clearly a case study in corporate leadership that HBS has written several of them. First, he ordered the recall of all 31 million bottles of Tylenol on store shelves. He offered a $100,000 reward to anyone who helped capture the killer. The company then introduced a tamper-proof bottle, which soon became an industry standard, and used a discount coupon to juice sales. And then Burke instructed his sales force to sell like they’d never sold before.

  It worked. Despite widespread predictions of Tylenol’s demise, and a decline to just 7 percent share in the aftermath of the murders, the pain reliever had recaptured 80 percent of its market share within a year. “It’s been about as effective a rescue job as I’ve seen in marketing,” HBS professor Stephen Greyser told the New York Times.1 And then, in 1986, it happened again. Burke responded just as swiftly, and Greyser did too. “I give him high marks for the way he has handled the situation thus far,” he told the Times just days after another person had died from another poisoned bottle of the drug. Greyser had a point. James Burke’s leadership served his company well when it needed it most.

  In other words, there were lessons to be learned. Unfortunately, the business sages at HBS focused on the only thing that wasn’t a lesson at all. Before getting to that, it’s easy to list the things that any CEO in a crisis would like to know about Burke’s response. When you had to recall every bottle of Tylenol, what did you do to try to protect your hard-won territory on drug
store shelves? Where did the idea for the tamper-proof bottle come from? What went into the decision to discount the new bottles, from the size of the discount to the way it was offered? Did you need to incentivize your own salespeople to focus them on the obviously difficult task of selling Tylenol again? If so, how?

  What did HBS choose to focus on in its case studies on the crisis? The “courage” of the recall decision. And the fact that, per Burke himself, he found that courage in the company’s code of ethics. Burke even went one step further, commissioning a report in 1984 that showed that fifteen companies with written codes of ethics had outperformed the Dow Jones Industrial Average over a thirty-year period. (The next year, Enron was created through a merger, and by 2000 its code of ethics had become so carefully thought out that it filled a sixty-four-page book.)

  The point here is not to suggest that Burke didn’t do the right thing, ethically speaking. He most certainly did. It’s that he didn’t really have a choice in the matter, for reasons not just ethical but economic as well. The ethics are simple: People were dying from consuming the company’s product, so the product had to be taken off the shelves. The economics follow: Who would have bought it if they hadn’t? Surveys showed that nearly 100 percent of consumers were aware of the poisonings.

  Still, because HBS has put so much effort into staking a claim to moral leadership, it couldn’t resist—and still can’t resist—drawing all the wrong conclusions from the events. In 2004, Professor Thomas Piper wrote an entire case on J&J’s Corporate Credo, which highlighted “the role the credo played during the Tylenol poisoning crisis.” The point of the case—and of another written by Greyser—was to highlight how the whole thing was just one big lesson in corporate responsibility. “It should not be surprising that numerous alums have been acutely conscious of their social responsibilities as executives,” David Ewing writes in Inside the Harvard Business School, and then starts his list with Burke.2