The Golden Passport

by Duff McDonald

  It’s a curious thing to lionize someone for being courageous enough to take a course of action that most of us would agree was the only one available to them. James Burke didn’t just do “the right thing”; he did the only thing he could. The only way the praise makes sense is if those offering it truly believe that there was another option—the kind of alternative you spitball about when your case studies have no “correct answers” and your students “take responsibility” for imaginary actions made from the safety of their classroom chairs. Was Burke a socially responsible executive? The evidence suggests that he was, but not because of the Tylenol recall. The Tylenol recall suggests that he was a decent human being.

  In its defense, HBS may simply have been doing what it does all the time, which was to wrap a ribbon around Burke’s own words and call it a case study. The J&J credo, which dates back to 1887, states that the company is responsible first to its customers, then to its employees, the community and its stockholders, in that order. “The credo is all about the consumer,” Burke said in 2004. And after the seven deaths, “the credo made it very clear at that point exactly what we were all about. It gave me the ammunition I needed to persuade shareholders and others to spend the $100 million on the recall. The credo helped sell it.”3

  But did that actually happen? Did James Burke need to consult with that credo—as if he were seeking the wisdom of the ancients in the company scrolls—to figure out the only course of action available to him? And what, exactly, did it help sell? The idea that it is better to prevent death than to preserve profits? Why would someone—anyone—need a “credo” to make that very clear? Was there even a single shareholder who didn’t support the recall at first but changed their mind when informed about the credo? What’s more, the fact that he even mentioned that the recall cost $100 million borders on the offensive. Because scale works both ways: If you can afford to put your pain pills on the shelves of every single drugstore in the nation, you can surely afford to take them off those same shelves when they might be poisoned. Tylenol was a $350 million a year drug at the time, and J&J’s revenues were in the billions. The cost of the recall was a rounding error.

  And what about the fact that the company was able to roll out new Tylenol caplets and tamper-proof bottles within just a few weeks of the poisonings? That isn’t quite the proof of social responsibility it might seem at first blush. After all, they’d clearly already figured out how to do it, but hadn’t yet bothered. “That tells you that they knew that they had a low-probability, high-risk product event with the design of the product,” says business ethicist Marianne Jennings. “The recall was the penalty if that event happened. That’s the real ethical issue here.”4

  That Burke spent so much time talking about the credo in the wake of the poisonings suggests cynicism, too: Company credos are for team building, for keeping employees marching to the same beat. To point to it as somehow related to the recall decision is arguably an exploitation of the deaths in the service of management goals.

  If that seems like splitting hairs, that’s kind of the point. The truly tough decisions about corporate social responsibility are when the choice isn’t obvious (or at least not obvious to a CEO). As an example, consider the multiyear trend in which American companies have merged with overseas ones, then reincorporated offshore in an effort to decrease their tax burden, although one that seems to have been put to an end by the Obama administration when the U.S. Treasury Department announced in April 2016 that it would henceforth take action to limit inversions. Until that happened, though, the shareholder-friendly choice was to make the inversion. The socially responsible choice wasn’t quite as obvious. On the one hand, you might argue that by inverting, companies hurt their communities by depriving them of tax revenue. On the other, you could make the argument that for the economy to remain vibrant, companies must stay competitive on all fronts, including taxes. What was a socially responsible executive to do?

  In Laurence Shames’s 1986 book about the ’49ers, The Big Time, Burke made clear that he realized that the recall didn’t quite qualify him for sainthood. “You know, even in the response to our handling of Tylenol, there were things I found discouraging. All we did was what we thought any responsible company would have done in our position—and people reacted as if this were some radical new departure for American business. My God, what did people expect we’d do? The amount of mistrust and cynicism out there is really depressing.”5

  There are surely many things for MBA students to learn when poring over the career of James Burke. But even he probably would agree that one of them is not the answer to the question, “What should you do if you find yourself in a similar situation as Burke was in 1982?” God help us if they can’t answer that one by themselves. God help us even more if they’ve concluded that the vaunted J&J credo really is all that. Because it isn’t: In 2015, a subsidiary of J&J pled guilty to federal criminal charges after acknowledging that they had discovered that their manufacturing process introduced metal flakes into Children’s Tylenol but had not taken any steps to address the problem for nearly a year.6

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  The Loyalty Program

  While the fight for the number one spot atop the seemingly endless number of business school rankings is a highly competitive one—in 2016, INSEAD knocked HBS out of the top spot of the Financial Times Global MBA ranking—there is one category in which HBS has no rival: the opulence of its campus. Both the architecture and the grounds give off a strong scent of money and power, a fact that surely plays some part in the faculty’s periodic displays of tone-deafness about the state of things outside its gates.

  For those people who have a connection with HBS, whether they are students, alumni, or faculty, everything really is just fine in the world. For all the criticism that HBS deserves to have lobbed its way, it really doesn’t have any dissatisfied customers. It is a rare HBS graduate who regrets having gone to the School, the faculty (and their research budgets) is the envy of the business school universe, and the CEOs and companies that trade money for respect with the School could hardly hope to find a better cheerleader than they have in HBS.

  While there are many reasons one might choose to attend HBS, one of the most common is for the opportunity to supercharge one’s earning ability. At this point, the business school rankings track average starting salaries of schools’ graduates down to the penny, but those numbers vary from year to year. And salary isn’t what matters to these people; wealth is. And if you want to become wealthy beyond belief, you could do a whole lot worse than spend two years at HBS.

  Consider the number of billionaires who have come out of the School. According to Bloomberg LP, there are currently 17 billionaires with HBS degrees, for a total of 18 if you add Michael Bloomberg himself to that list. Forbes estimates his wealth at $41.2 billion, making him the wealthiest of all HBS graduates. After Bloomberg comes Len Blavatnik (’89), whose net worth of $16.6 billion put him at number forty-three on Bloomberg’s Billionaires Index in mid-2016. Six giants of finance make the cut, including Ray Dalio (’73, $14.1 billion), the founder of Bridgewater, Blackstone’s Stephen Schwarzman (’72, $10.2 billion), hedge funder John Paulson (’80, $8.0 billion), Fidelity’s Abigail Johnson (’88, $7.6 billion), and private equity veterans John Grayken (’82, $5.3 billion) and Leon Black (’75, $4.7 billion). Others: Ernesto Bertarelli, (’93, $14.4 billion), heir to a Swiss pharmaceutical fortune, oil magnate George Kaiser (’66, $13.5 billion), grocery store entrepreneur Charles Butt ($7.0 billion), Hong Kong real estate investor Raymond Kwok (’77, $10.5 billion), Hiroshi Mikitani, chairman of Japanese online retailer Rakuten (’93, $5.6 billion), and Ananda Krishnan, Malaysia’s second-wealthiest person (’64, $5.7 billion).

  Success, of course, is not entirely about wealth, even for an MBA. Another measure of ultimate success is achieving the rank of CEO, and HBS stands apart there, too. The list of current or former CEOs hailing from HBS would fill a phone book. Even the list of sitting CEOs is a long one—in 20
15, the Financial Times counted 28 HBS grads among the CEOs of the world’s 500 largest companies, the most of any business school, and well ahead of second-place INSEAD, which counted 9. The list from HBS included Jamie Dimon (’82) of JPMorgan Chase, Jeffrey Immelt (’82) of General Electric, Robert Broadway (’90) of Amgen, John Cahill (’83) of Kraft Foods, Vittorio Colao (’90) of Vodafone Group, Mark Fields (’89) of Ford, Darren Huston (’94) of Priceline, and Meg Whitman (’79) of Hewlett-Packard.

  That HBS grads rank among the wealthiest people in the world isn’t surprising. What is? The fact that the School has somehow managed to convince those same people to give substantial amounts of it back to the School years, even decades, after their graduation. One of the reasons they are able to do so is that they are one of a small number of institutions that manage to weave their credential into the fabric of their graduates’ self-image. Having done that, the ongoing success of the School becomes an important part of those graduates’ own ongoing self-affirmation.

  Consider the plight of the average HBS grad on Wall Street in 2010, having become the target of an entire country’s ire. At that point, HBS might have been the only source of affirmation they had. But it’s also something deeper than that. It’s often been said that the hardest part about HBS is getting in, that you are wonderful just for having done so. The School’s alumni outreach is dedicated to the single-minded goal of keeping you reminded of that fact for your entire life. That they should send an invoice along with that reminder isn’t exactly a shocker.

  In recent years, the School has completely outdone itself when it comes to successfully hitting up its graduates for money. In 2014, along with the rest of Harvard, the School launched an ambitious capital campaign, and Harvard president Drew Faust cannot be disappointed with Dean Nitin Nohria’s fundraising performance. By March 2016, the School had raised $925 million of its goal of $1 billion. Nohria, already the highest-paid dean of any school at Harvard—he earned more than $650,000 in 20111—will surely remain so.

  The effort was so successful that it was too successful. In late 2015, there was much consternation on campus about whether or not to rename the recently renamed Baker Hall, which had its name changed in April 2015 to Esteves Hall, after André Santos Esteves, a Brazilian billionaire who had paid for the renovation despite not being an alum, was arrested in connection with the corruption scandal at state oil company Petrobras. “We are saddened by his arrest and by the charges that have been brought against him,”2 HBS media director Jim Aisner told Bloomberg. More like embarrassed. “There are a lot of pissed-off people on campus saying everything at HBS is for sale under Nitin,” said one person with a close connection to the School.

  Such missteps aside, the campaign was successful because even if the influence of HBS isn’t quite what it used to be, the School’s alumni still populate the upper reaches of the corporate world like those of no other school. As of 2014, 139 of Fortune 500 companies had an HBS alum in a senior leadership position, and a full 50 of those companies had HBS grads as CEOs.

  As of year-end 2015, HBS sat atop an endowment of $3.3 billion. Harvard’s combined endowment of $32.7 billion puts it atop the list of the richest universities in the world, but even on its own, HBS would place 30th overall, just a shade below Dartmouth’s entire endowment of $3.4 billion. If it is indeed true that financial performance—specifically, fundraising—is the main factor in making or breaking a dean’s reputation, then Nohria’s reputation has been made. Fifty years ago, in 1966–67, the School raised a total of $730,000 from 12,140 of its alumni.

  The bulk of the previously mentioned $35 million Chao family gift was earmarked for the construction of a new Executive Education center, with the remaining $5 million for scholarships for students of Chinese heritage. Ratan Tata’s gift went to the Executive Education program, too. And no wonder: The Harvard Business School is a big business in its own right, and its Executive Education programs are the most lucrative part. While the largest contributor to the School’s $707 million in 2015 revenues was the publishing arm ($203 million, or 29 percent), the Executive Education programs trailed that by a small margin ($168 million, or 24 percent), followed by MBA tuition and fees ($120 million, or 17 percent). The remaining $216 million came from endowment distributions, gifts, and housing.

  While HBS has always been effective at raising money from its alumni—and it has more of them than any other business school—until Dean Nohria took office, it was a laggard in the big-money single-donation game, partly because the School’s name isn’t for sale. That’s the kind of thing that gets you a $100 million donation, as the University of Michigan did in 2013 when it renamed its business school after donor Stephen M. Ross. Or, if you’re lucky, you get $300 million, as the University of Chicago did when it received that staggering sum from David G. Booth in 2008. One can only imagine the intramural squabbling at Harvard when John Paulson (’80) decided in 2015 to donate $400 million to . . . the School of Engineering and Applied Sciences. And yes, they renamed that school after him.

  When a group of hackers attacked Sony’s internal network in late 2014 and proceeded to dump much of the company’s internal information onto the Internet, the media focus was where one would expect, on salacious emails and movie stars’ salary demands. Buried within the data dump, however, was an interesting window into just how big-company CEOs tap the HBS network and what the network and the School demand in return.

  Sony Pictures CEO Michael Lynton (’87) had been lured to join Sony Pictures as CEO in 2004 by Howard Stringer, Sony’s then-CEO. That made him de facto partners with Amy Pascal, Sony’s studio chief. At that point, Lynton was a journeyman HBS CEO—he’d run Penguin Books and AOL Europe. And he leaned in to the HBS network with particular enthusiasm, doing such things as arranging for a film audition for the niece of billionaire hedge funder Leon Black (’75) and plotting with Facebook COO Sheryl Sandberg (’95) to see if they could find the right blind date for New Yorker writer Malcolm Gladwell.3

  The Lynton/Pascal partnership worked for a decade, but by 2013, there was trouble. Activist hedge fund manager Dan Loeb took aim at Sony Corporation, buying more than 6 percent of its shares, and demanded that the company—particularly Sony Pictures—get its financial house in order. At that point, Lynton pulled an MBA, hiring Bain & Company to help find $50 million out of a total of $300 million in cost cuts. Internal emails show the duplicity machine in action, as the executive team was encouraged to describe the project as “Build for Tomorrow,” when it would be better described as “Dismantle for Today.” One of those cut costs: a $300,000-a-year personal assistant to Pascal. In response to an email from Pascal complaining about the decision, Lynton replied, “An assistant paid that amount suggests a lack of controls. We claim to have those controls.”

  Thinking it might be time to take his journeyman talents elsewhere, Lynton reportedly had two conversations with Time Warner CEO Jeff Bewkes about running Warner Bros. in early 2013 as well as preliminary discussions with a headhunter about the presidency of Tulane University later that year. In January 2014, he met with the board of the Smithsonian Institution about its top job. He also spent over a year angling for the job of president of New York University, and used the HBS network there as well: NYU board member John Paulson (’80) helped facilitate the candidacy.

  But the network calls upon its members in return. In December 2013, HBS’s senior development officer, Lisa Hunt Batter, emailed Lynton to thank him on behalf of Dean Nohria, who was “able to count on [Lynton’s] wise counsel and support.” She then asked him if he would review with her a list of “top HBS prospects” in Southern California who might be recruited for a regional committee. “I hope you know how deeply your leadership of Harvard means to all of us and especially your friendship and support of Nitin and HBS,” she wrote. “You are truly making a difference in the world and we are all grateful.”

  In December 2013, the late Jim Rothenberg (’70), then chairman of Los Angeles–based money mana
gement giant Capital Group, emailed Lynton to invite him to a dinner he was hosting for Nohria on January 26, 2014, during which the dean was going to “share his vision for the School in the context of the upcoming Harvard Capital Campaign.” In other words, he was hitting them up for money. But Lynton had to decline: He was due at the Grammys that evening.

  In January 2014, Lynton received an email from current MBA student Sam Hamilton (’15) congratulating him for “thoughtfully analyzing the best way to lead the company forward through innovation.” That same month, current MBA student Donnie Benjamin (’15) emailed Lynton to inform him of his “passion for the creation and production of film and television.”

  In March 2014, Lynton was fielding a hyperaggressive inquiry from one Nathan Rosenberg, a consultant whose website claims that his “innovation consulting” with a well-known consumer goods company produced more than $200 million in new revenue in the first year. Rosenberg’s connection with HBS? His oldest brother, Werner Erhard, is the “writing partner” of Michael Jensen, who Rosenberg claimed was “often mentioned for the Nobel Prize in Economics.” (By whom, he did not say. And that’s because it isn’t true.)

  In April 2014, Jeetendr Sehdev (’04), an entertainment marketing professor at the University of Southern California, emailed Lynton to see if the Sony Pictures chief might have time to talk about “further channels to continue my work.”

  In April 2014, Jennifer Rottenberg (’96) emailed to inform him that she’d voted for him to be elected to the Harvard Board of Overseers, and then asked if she could pick his brain on how she might move from her current job as chief marketing officer of USA Water Polo into the entertainment industry.