My Prejudices Unmasked
I am admittedly not a fan.
The direction the nation’s business schools have taken since the end of World War Two seems to me to be a cure in search of a disease. In their mucking about, what they have presented us is an unrestrained virus. Restless, often pointless and consumer (student and business) driven, the MBA is a ticket to membership in a club that traded off the American job and industrial base for a quick buck and ruined industrial base.
The return on that ‘investment’ is bubble economics, disastrous personal and national debt, a trail of economically failed nations, offshore sweatshop production and the concentration of wealth among an ever shrinking global minority. There are complicated and numerous reasons for American divergence from its manufacturing to consumer focus, but the business schools are high on my hit-list.
I grew up in what would seem a fantasy world to today’s average American. When I was a kid, we actually made things. My uncles were in the shoe business. There are no American made shoes today and the Freeman Shoe Company, a “70-year-old men’s footwear resource, has effectively gone out of business and the State of Wisconsin has appointed a trustee to “get the most he can for creditors.”1 The shoe industry these days is in Asia, Europe and South America. Try to find an American made brand on L.L. Bean these days other than their trademark Maine Hunting Shoe®, an icon they are reluctant to outsource. It’s a tough search.
My uncle’s fine old home on the Wisconsin River at Beloit is now a restaurant. So, on that thin evidence, I can be accused of having a horse in this race, but he’s thirty lengths back, all alone on the rail and clearly winded. It’s the same (or a similar) story with the mills of New England, apparel manufacturing, appliance manufacture, up to and including automobiles and steel.
My grandfather, my father and I all participated in the small business of landscape design and construction and in those heady post-war days it was competitive, yet provided a fine living for three generations. We were what Garrison Keilor called ‘steel-rim eyeglasses’ Republicans at the time of the Eisenhower administration, feeding our families, building homes and sending our offspring to college in one wage-earner families. In 2004, Keillor wrote,
2“Something has gone seriously haywire with the Republican Party. Once, it was the party of pragmatic Main Street businessmen in steel-rimmed spectacles who decried profligacy and waste, were devoted to their communities and supported the sort of prosperity that raises all ships. They were good-hearted people who vanquished the gnarlier elements of their party, the paranoid Roosevelt-haters, the flat Earthers and Prohibitionists, the antipapist antiforeigner element. The genial Eisenhower was their man, a genuine American hero of D-Day, who made it OK for reasonable people to vote Republican. He brought the Korean War to a stalemate, produced the Interstate Highway System, declined to rescue the French colonial army in Vietnam, and gave us a period of peace and prosperity, in which (oddly) American arts and letters flourished and higher education burgeoned and there was a degree of plain decency in the country.”
Yeah Garrison, perhaps like you, I didn’t leave the Republican Party, it left me.
Even so and getting back to the subject at hand, I make the case that these business education stalwarts (some of them dating to the 1890s) became victim of their own snake-oil. To a very large degree, they gave up teaching what was known, to chase conjecture in support of a consumer-base; their high-paying and soon to be highly-placed students.
Collectively, they began to believe that there actually was a new economy, with previously unknown principles that relegated all earlier theories to the dustbin of economic history. Now, thanks largely to the MBA influence on Wall Street and government, we have finally been driven off a cliff, like so many stampeding buffalo.
At the hundredth anniversary of the Business School, no less a luminary than its Dean, Jay Light, stood before the attendees with the chutzpah of a failed banker, denying any responsibility for the chaos. This was his statement at the celebration, a festivity somewhat tarnished by a concurrent collapse of American wealth and economic promise:3
“We all failed to understand how much had changed in the past 15 years or so, and how fragile it might be because of increased leverage, decreased transparency and decreased liquidity: three of the crucial things in the world of financial markets.
So, if I understand this properly, Jay, Harvard is charging its MBA entrants something upward of $50,000 a year to depend upon an educational institution that failed to understand what changes were occurring in three of the crucial things in the world of financial markets.
“We all failed to understand how that fragility could evidence itself in a frozen short-term credit system, something that hadn’t really happened since 1907. We also probably overestimated the ability of the political process to deal with the realities of what could happen if real trouble developed.
“What we have witnessed is a stunning and sobering failure of financial safeguards, of financial markets, of financial institutions and mostly of leadership at many levels. We will leave the talk of fixing the blame to others. That is not very interesting. But we must be involved in fact in fixing the problem.”
That is not very interesting? Well, it interests the hell out of me and very possibly interests the millions who lost so much so quickly. What is interesting and essential to many of us is not interesting to Harvard because so many of the culprits wore your colors, Harvard crimson, down to the finish-line. But it takes amazing balls—there is no other word—to insist that so failed an educational process be trusted to fix anything, much less an economic catastrophe of this scale or its own curriculum.
My old daddy always said that business acumen amounted to two nails on the wall and there better be bigger numbers on the income nail than the expense nail. The most intriguing of the many complicated derivative investment vehicles invented to date (by your and associated BS alumni), have yet to put the lie to my old daddy. But you all pretty much wrecked the family car and, when I did that in my younger days, I had sense enough not to ask for the keys again—not for a very long and chastened time.
Further, the dots between an MBA and great wealth never actually connected in any relevant terms. Dean Light and his brethren created an OZ-like environment in which the Wizard held seminars, made the whistle blow, graded papers on a closed curve, pulled various disconnected levers and bestowed the final honor of Apprentice Wizard.
It’s interesting to follow that Harvard-paved Yellow Brick Road and see who has walked it:
Jack Welch, GE’s engine of destruction and Rock-Star business executive, holder of the record for most business magazine covers (severance includes a $4 million annual pension)
Stanley O’Neal, ousted as Chairman and CEO of Merrill Lynch, after the firm posted its first $8 billion in losses due to its sub-prime activity (severance package $161 million in stock and options)
John Thain, who succeeded O’Neal at Merrill Lynch, subpoenaed by the New York Attorney General over billions in executive bonuses paid out to Merrill employees just before Merrill’s collapse
Christopher Cox, former Chairman of the SEC, the organization that missed Bernie Madoff’s massive Ponzi Scheme and a man known for his lax enforcement of Wall Street.
Henry Paulson, Secretary of the Treasury, who spoke ardently (and effectively) against government regulation of Wall Street.
Andrew Hedley Hornby, failed former CEO of what used to be the UK’s largest bank group, HBOS, which had to merge with Lloyds in the face of mortgage loans gone south.
Lawrence Summers, former President of Harvard University and (until 2011) head of President Obama’s National Economic Council. As former Deputy Secretary of the Treasury, Summers prevented government oversight of derivatives, those toxic Wall Street investments now believed to be at the root of much of the current crisis.
Franklin Raines, former CEO of Fannie Mae, took “early retirement” amid an accounting investigation into the organization’s near collapse.
Daniel Mudd, took over Fannie Mae from Raines and increased the number of subprime mortgages it guaranteed until the government dismissed him in 2008, when the Feds had to put Fannie into conservatorship to keep it afloat.
George W. Bush, who officiated over the most alarming financial meltdown since the Great Depression, as a tsunami of unregulated Wall Street derivatives collided with the bursting housing bubble. As America slid from disaster to disaster, he professed continuing faith in the economy and then high-tailed it for the ranch, conveniently leaving the ruins to his successor.
Mitt Romney, founder and CEO of Bain Capital and presidential candidate.
When Dean Light speaks of ‘we’ failing to see and ‘we’ who must be involved in the fix, one wonders if he meant The Harvard Business School or the collective sum of its graduates. Perhaps not and maybe that’s a cheap shot, but those who undervalued the right things while overvaluing the wrong, remind me of Donald Rumsfeld with his known unknowns and unknown unknowns. They are possibly our least able sniffers-out of right and wrong, those listed above who so thoroughly stunned and sobered us. They were there at the creation.
I don’t know about you, but I am sufficiently stunned and sober to swear off the hooch. If only Harvard would devise a 12-step program to free the addicted from the booze of their MBA program, they might actually become involved in fixing the problem.
Glancing elsewhere for success stories, Steve Jobs, Bill Gates, Warren Buffett, Lawrence Ellison, Charles and David Koch, Sam Walton and his heirs, Sergey Brin and Larry Page come to mind. How could they not? They are movers and shakers, these men and women, holding down 11 of the top 14 places on the Forbes 400 list of richest Americans (2008).
They all have two outstanding traits in common. None of them contributed to the wreckage of the economy and not one of them holds an MBA from Harvard or anywhere else.
They are builders.
The chop shop theory of business is not in their education and thus not in their game-plan.
The Considerable Price of Admission to the Club
Let’s get down to the nitty-gritty. A Masters Degree in Business Administration is (or was) the ticket to a seat on the corporate jet and, if you want to sit up front and decide when it takes off, that MBA better be from Harvard, Princeton, MIT or Yale. Not so much because of their rankings, but because of who you might meet and add to your network in such extracurricular activity as the (Harvard) Immersion Program.
It’s not water-boarding, but what Harvard designates as a supplement to the in-class academic experience. Designed to integrate, to advance and open-out those mundane old educational objectives with other elements.
Other elements (in Harvard-speak) include student-led 12 day treks to China, Europe, or India. For the less financially mobile, there’s Boston itself, New Orleans or Silicon Valley. In either format, it’s an experience through which students are immersed in what the program identifies (without the slightest irony) as academic, cultural and organizational fieldwork.
One can but wonder what New Orleans has to offer this program, other than crawfish étouffée and jazz, it being home to but one remaining Fortune 500 corporation and a still soggy 9th Ward. Actually, when I was last there in pre-Katrina 1999, there was precious little jazz left either, the French Quarter immersed in hip-hop.
But academic fieldwork suggests Barack Obama’s years spent in Chicago’s ghetto society. Cultural immersion brings to mind images of a decade or more in Europe or Asia. Organizational research should include something more than which bag is appropriate for the overhead compartment. Any of the above is a bit much to expect from a 12 day trek, no matter the style of trekking-shoe. Don’t con me, you Harvard marketing gurus, I know a junket when I see one. Junkets presuppose a Jack Abramoff style itinerary, a famous-family hobnob, perhaps a rooming-with-the-rich-and-famous opportunity. All three wrapped as one is too neat a package, led by a student facilitator and not included in the base price.
Speaking of base price, don’t forget to bring your wallet, this is not your daddy’s college experience. Is that relevant? I think it is. It’s fair game because the price of things brings certain expectations. When you put out the hundred-grand for a Porsche, you are not buying a way to transport yourself to Wal-Mart. You by-god expect to be noticed. There’s a bit of sticker-shock in Cambridge, as the cost of admission to the lower rungs of that long corporate climb to the boardroom is steep. Mere pocket-change perhaps for a Saudi Prince or a Bush scion, but it amounts to a pretty big wallop for the average family budget.
First, there’s the undergraduate four-year requirement and it better be from a top ranked school as well. The menu includes (top five);
# 1 University of Virginia, $38,650 per year (non-resident), four year degree total $154,600
# 2 Notre Dame, $47,627 per year (resident and non-resident, plus $1,514 per academic credit), four year degree total (less credit charges) $190,508
# 3 University of Pennsylvania, $49,200 per year (resident and non-resident), four year degree total $196,800
# 4 University of Michigan, $43,133 per year (non-resident, plus $1,341 per academic credit), four year total (less credit charges) $172,532
# 5 Brigham Young University, $15,740 per year (non-resident, plus $418 per academic credit), four year total (less credit charges) $62,960
For academic quality at a budget, it’s hard to beat Brigham Young. But then, having spent something between $63,000 and $200,000 on university so far and probably unable to get away for any immersion programs other than two off-campus jobs, visits to student aid and some study time, there’s still the MBA to be achieved.
Fasten your seatbelt and take a look at two year total costs of the top five (Princeton and Yale not among them);
# 1 University of Chicago, $158,000
# 2 Harvard University, $153,000
# 3 Northwestern University, $147,000
# 4 University of Pennsylvania, $160,000
# 5 University of Michigan, $130,290
And there you are. Finally a graduate, Master of Business Administration and perhaps, the universe.
Worn out, flat broke, deeply in debt and ready to go out there and get it all back, by any legal means. Who can possibly blame you? Having indentured yourself to the tune of something between $200,000 and $360,000, you’re primed and ready. At least you have a few numbers to call, so you can maybe get a job at Goldman and begin to make payments on a student loan that somehow got to be the size of an average American mortgage.
In case you were wondering, an average mortgage is currently $225,000, but an MBA doesn’t include a two-car garage.
Disdaining Hooks, Lines and Nets, to Chum the Waters
In the days when we were actually creating things (like consumer-goods and the jobs that came from producing them), a corporation went to the bank or sold stock to finance a factory. The features and benefits of such an arrangement (in the marketing vernacular) were well paid jobs and the bricks and mortar commitment to those jobs.
Factories anchor productive societies, or they used to until it became more profitable to chop shop rather than upgrade and modernize. Ask around any rust-belt community.
Shoes and clothes and bridges and toasters are still manufactured in the world, just not in Detroit, Flint, Cleveland, Philadelphia, Pittsburgh, Erie, Duluth, Buffalo, Minneapolis and St. Paul, Akron, Toledo, Syracuse or St. Louis.
Those environments once (but no longer) provided the security and social fabric on which stable communities are based
I know, that’s the old paradigm—working forty years for one company, keeping a boat in the driveway for weekend fishing, taking the kids to ball games and socking away something for their college education. Growing up in a town meant being there, certainly through school and sometimes for generations. Sticking with it meant having something to stick with.
The new business paradigm doesn’t much care for bricks and mortar (or long-term employees). Henry Ford introduced the $5 day, not out of altruism, but so his employees could afford to buy one of his cars. And buy them they did, by the thousands. Nasty stuff, industrial overhead. Musses your hair, wrecks the crease in your pants and comes back to collect on promises. Not up to date and modern. We’re too fast-moving today, even for modern, and our up-to-date changes are done by mouse-click (where usually the clicker is a temp). Those steady, reliable employees are anchors to quarterly profit and as any newly-minted MBA knows, stable communities are for horses.
Quarterly earnings drive stock price and stock price and its ancillary personal benefit is what drives the hired-gun CEO. It’s a money game and he’s been educated to believe money is a game. In markets where, for decade after decade, too much capital chased too few investments, bad stuff happens. But it makes money, often gobs of it.
A lack of business capital is not the problem. There’s plenty of cash for production facilities, but no will to produce. What drives a ‘burn the furniture for quarterly warmth’ mentality is executive compensation and market speculation. Neither of those irresistible forces ever machined a gear or built a factory—unless it was in Asia, India or Mexico.
Chumming, any fisherman can tell you, is the practice of throwing fish-parts (usually heads and guts) into the water to attract edible, catchable fish. The quarterly report has become the chum that attracts speculators and rewards management when the hook is set. A slight movement, only a few dollars, can produce enormous profits when management owns or controls hundreds of thousands of shares.
In this financial Land of OZ, one can own without owning, a stock option invention by the compensated to further reward themselves and not available to the outside investor.
Insider trading was (and still is) a felony, but stock options at an artificially low share price are elegantly arranged to meet the letter rather than the spirit of that law. Our boys have been working nights while the regulators worked days, if at all. By craftily reserved options to buy conveniently underpriced shares, it becomes heads I win, tails you lose. Thus, corporate bad news is most likely to be discovered shortly after the announcement of quarterly earnings, while seventy or eighty days yet remain to juice the next quarter.
It’s no coincidence that chumming is most effective for attracting sharks, because of their keen sense of smell and the waters of American markets fairly churn with sharks.
In the decades when America was busy becoming the world’s great industrial power, Andrew Carnegie sought to control the means of steel production. Henry Ford specialized in efficiency, Harriman’s railroads monopolized transport and Sears brought innovation to the distribution of production. Those were structures designed for the long-term investor, built by men who evidenced their faith in an American future by patience. The structures still exist, but no longer are they anchored in America.
We no longer have patience. It’s possible that we no longer have faith.
Inquiry and Innovation; Harvard Business School, 1908 to 2008—a Hundred Years in 2,000 Words
It was early days in 1908 when the MBA program was conceived and Harvard couldn’t quite figure out what body of knowledge might make up a profession, around which a business school might be built.
4“The medical profession, for example, achieved its present stature only after people understood how the body functioned . . . “
The Harvard Business School’s first Dean, Edwin Francis Gay, decided the school would have only three required courses; Principles of Accounting, Commercial Contracts and Economic Resources of the United States.
“In addition, Dean Gay arranged for elective courses in Banking and Finance, Transportation (dominated by railroad-related courses) Insurance, and Public Business. These were the first sub-professions that the School would try to “carve out” of the larger business universe.”
They were reaching, these men of dreams, looking for a fulcrum upon which to lever the financial universe. A dangerous activity, akin to a dictator’s dream of world domination, but they would find it and wreck us twice in a century.
Medicine and Law, the two professions Harvard looked to for inspiration, were circumscribed by forces entirely outside their control. Business, however you may care to define that elusive beast, is inhibited by none of those forces. HBS could no more declare a prescriptive treatment for an as yet unknown disease than it could conjure up a law to jump out of the woodwork and support its cause. Medicine answers to precedent, as does law. Business speeds recklessly down unfinished highways and dares law to stop it.
“A somewhat radical idea began to emerge among the faculty: Maybe the purpose of the School was not to teach a core body of knowledge, but rather to teach a way of thinking . . . Could you teach a way of thinking that didn’t depend on a natural science or a body of case law as its frame of reference?”
Well of course you could if there were no restraints upon curriculum other than applied guinea-piggery. A delicate and dangerous direction at best, one that would have paled medicine or law at the thought.
These people were not charlatans, they were simply inventing from ignorance, there being no essential guidance even for what business was. Think of the times. This was soon to be post-WWI America and the soon to be repeated basic principle of ‘the only industrial base left standing’ was for the first time upon the land. It urged us onward and upward. We were kings, deep into the anything-goes bosom of prohibition, flappers, a soaring stock market, jazz and the Lindy-Hop.
You only live once and (in those days) living once averaged only 54 years. The Dow Jones Industrial Average hit a decade high of 100. Everything was the cat’s whiskers or the real McCoy. A good suit was twenty bucks and cigarettes were ten cents a pack. Lindbergh was in the air and Al Capone in Chicago. What could possibly go wrong?
“The School’s second Dean, Wallace B. Donham, presided over a shift in emphasis at HBS, driven by the search for a core content. After an extended discussion near the end of 1922, the faculty concluded that it should consider itself a faculty of applied economics, with incidental responsibilities toward law and engineering. In other words, HBS would adopt classical economic theory as its intellectual foundation, and provide a bridge between that theory and its practical applications—helping students understand business, and making economic theory useful to business practitioners. A new publication, the Harvard Business Reports, was launched to capture and disseminate the lessons of applied economics.”
My god, people. Applied economics is a moving target, that’s how it gets ‘applied.’ Applied economics can teach valuable lessons in how to avoid bubbles, cyclical recessions and the madness that infects continual increases in market prices. But you have to listen. You have to pay attention to what is or was and not get carried away by what might be.
Harvard considered itself to be a reinvented faculty of applied economics, but it takes more than consideration to make it so. What ten years earlier had been separated like an ignored and ugly child (the department of economics) was now embraced.
Life is short, timing is everything and the moment is now. Or not.
5The Harvard Economic Service pioneered the business of economic forecasting by publishing a weekly newsletter on economic conditions, starting in 1922. The Harvard forecasting model, developed by the statistician and economist Warren Persons, gained international renown for its three-curve A-B-C chart, which rendered business fluctuations as the ebb and flow of speculation (A), business (B), and banking (C).
The service was directed by C. J. Bullock, who promoted Harvard’s forecasting service around the world by forming collaborative agreements with John Maynard Keynes, Lucien March, Corrado Gini, and other prominent economists of the time. The Harvard Economic Service, however, attracted criticism for its purely empirical approach, its failure to make consistently accurate predictions, and its pursuit of commercial objectives in a university setting. The Harvard group’s efforts to build a forecasting service are an early chapter in the evolution of the social sciences, the growth of a class of financial analysts, and the commercialization of academic knowledge.
That was arguably the first recorded instance of the economic lame leading the blind. Seven years later, economic forecasting lay in ruins, along with the stock market crash of 1929.
6Irving Fisher, a celebrity neoclassical economist of the day and author of The Theory of Interest, famously predicted, a few days before the Stock Market Crash of 1929, “Stock prices have reached what looks like a permanently high plateau.“
He stated on October 21 that the market was “only shaking out the lunatic fringe” and went on to explain why he felt the prices still had not caught up with their real value and should go much higher. On Wednesday, October 23, he announced in a banker’s meeting “security values in most instances were not inflated.”
Six days later, the financial world came apart. For months after the Crash, he continued to assure investors that a recovery was just around the corner. Does that sound familiar? A helluva corner, it encompassed twelve years of unprecedented economic agony and an additional five of World War. On the plus side, the irony was that lessons learned would last for nearly two decades. Then, unfortunately, an early example of Alan Greenspan’s irrational exuberance jumped into the economic driver’s seat and we were once again off to the races. What goes ‘round, comes ‘round—seemingly forever. High spirits, economic ruin and war, not necessarily in that order (but always within shouting distance) seems a uniquely American template.
Enter Robert McNamara, who would go on to become one of Harvard’s most famous MBAs, influencing that template as few others would be able. Bob got that particular degree in 1939, then ducked out for a year into public accounting and circled back to teach statistics in the Business School, the youngest (at 24 years old) Assistant Professor. His gig was teaching business-style analytics to Army Air Force officers preparing for war. That led, according to Harvard,
“to a unique convergence of multiple disciplines, including statistics, accounting, budgeting, marketing and human behavior. The field of “management control,” which became prevalent in U.S. industries in the postwar period, grew directly out of this and similar efforts.”
So HBS was rapidly converging on several flawed concepts;
That the ’29 crash was merely an aberration
That having the only industrial base left standing, was the same as having cutting edge technology and
What works in a military command structure is applicable to a competitive business environment
Shortly after the war, McNamara moved on to Ford, where he did great things through the fifties and early sixties, becoming the first president of the company from outside the Ford Family. Then President Kennedy fatefully tapped him as his Secretary of Defense, where he went on to do less great things.
Managers and Leaders: Are They Different?
Harvard Professor Abraham Zaleznik argued in an article of that title, that they are and must be, based on his work in psychoanalysis. The traditional view of management, back in 1977 when Zaleznik wrote this article, centered on organizational structure and processes. Managerial development at the time focused exclusively on building competence, control and the appropriate balance of power.
That view, Zaleznik argued, omitted the essential leadership elements of inspiration, vision, and human passion that drive corporate success. The difference between managers and leaders, he wrote,
lies in the conceptions they hold, deep in their psyches, of chaos and order. Managers embrace process, seek stability and control, and instinctively try to resolve problems quickly-sometimes before they fully understand a problem’s significance.
Leaders, in contrast, tolerate chaos and lack of structure and are willing to delay closure in order to understand the issues more fully. In this way, Zaleznik argued, business leaders have much more in common with artists, scientists and other creative thinkers than they do with managers. Organizations need both managers and leaders to succeed, but developing both requires a reduced focus on logic and strategic exercises in favor of an environment where creativity and imagination are permitted to flourish.
Zaleznik beat the drum for creativity and imagination in a business environment, even if the cost was reducing the focus on logic and strategic exercises. Wow.
Salt that with a dose of government deregulation, pepper it with creative executive compensation packages, move toward chop-shopping businesses and industries and you’ve a prescription for runaway markets and 1929 all over again. We’re in pretty deep water here and paddling a shallow-draft boat, credentials wise.
At Boston Psychoanalytic Institute (where Zaleznik studied), he was granted a waiver of medical and psychiatric prerequisites. Holding no other previous degree other than an AB from tiny Alma College, he was graduated as a clinical psychoanalyst in 1968, then certified in 1971 by the American Psychoanalytic Association. But all of his work in that controversial field was done at Harvard. Psychoanalysis is a very foggy business, even today.
Different is not a clinical diagnosis. Zaleznik’s mice in the clinical-study were (essentially) future CEOs, later set loose in society. There was no control-group, unless one considers the ups and downs of the American economy itself. What other psychoanalytic laboratory would allow such lunacy?
Having given us his somewhat dramatic support for teaching leadership by toleration of chaos and lack of structure, Zaleznik does a neat about-face thirty years later, entirely devoid of irony. Irony has long been dead and buried within the confines of the Harvard Business School.
A Leadership State of Mind7
Leadership cannot be taught. But would-be leaders can develop a state of mind that enhances leadership capacities. The particular state of mind that interests me is “psychological mindfuless,” which begins with the capacity to listen and deepen one’s understanding of another person’s point of view. The impulse to argue is contrary to the state of mind that encourages listening.
Well, he got that right. Today’s CEO doesn’t argue, he demands, rolls heads and communicates by news-conference. One can hardly call an arbitrary firing of the bottom 10% of managers (based purely on their profitability) listening. So much for contrariness, the sidekick of chaos and deconstruction.
But, after 45 years deep in the HBS saddle, our man of late had second thoughts, as the fruit of his psychoanalytically persuaded graduates begin to fall from the tree. In 2004, he was signatory to an open letter to President George W. Bush (possibly the best-known holder of a Harvard MBA degree):
Dear Mr. President:
As professors of economics and business, we are concerned that U.S. economic policy has taken a dangerous turn under your stewardship. Nearly every major economic indicator has deteriorated since you took office in January 2001. Real GDP growth during your term is the lowest of any presidential term in recent memory. Total non-farm employment has contracted and the unemployment rate has increased. Bankruptcies are up sharply, as is our dependence on foreign capital to finance an exploding current account deficit. All three major stock indexes are lower now than at the time of your inauguration. The percentage of Americans in poverty has increased, real median income has declined, and income inequality has grown.
A classic example of university professors abandoning the sinking ship they launched, 169 professors of business and economics at U.S. business schools signed that letter (only a portion of which is shown). Fifty-six of them, almost exactly a third, are HBS professors. Man the lifeboats. All of that attributable to three short years of Bush administration leadership, as by ‘tolerating chaos and lack of structure,’ he brought us to our knees. Ten dollars of accusation by the accusers and not a dime’s worth of responsibility.
Now I’m not a particular fan of that presidency, but fair is fair. You guys up there at Harvard were mucking about for a hundred years just trying to define a profession and it’s your conclusion that leadership can’t be taught. Then please, for the sake of the country, get out of the business. George W. Bush is one of your own.
Consider the fogginess of Harvard Professor Michael Jensen’s conclusion about why business even exists, in an article titled “Value Maximization and Stakeholder Theory.”
Many managers are caught in a dilemma: between a desire to maximize the value of their companies and the demands of “stakeholder theory” to take into account the interests of all the stakeholders in a firm. The way out of the conflict, says Jensen, lies in a new way of measuring value.
Enlightened stakeholder theory is easy to explain. It can take advantage of most that stakeholder theorists offer in the way of processes and audits to measure and evaluate the firm’s management of its relations with all important constituencies. Enlightened stakeholder theory adds the simple specification that the objective function of the firm is to maximize total long-term firm market value. In short, changes in total long term market value of the firm is the scorecard by which success is measured.
Conclusion: The more hollowed-out and profitable the firm, the higher its score. One can but wonder if anyone told Henry Ford that the Model-T was but a stepping stone on the way to his real goal—getting himself and his investors rich as Croesus.
This is what Harvard and the Business Schools that follow its curriculum to compete have given us as goals. Research, development, all that nasty old difficult clap-trap of process, stability and control are out the window. The new Paradigm is to juice the books, inflate the share price, skim the winnings and call it a day. Just be sure it’s a sustainable process over the long term.
Harvard, the business community and the nation’s well-being have all had periodic indigestion over Jensen’s ‘simple’ specification.
Witness to a Midnight Stumble Through a Minefield
This Michael Lewis piece cracks me up.
8To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.
I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable.
Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.
Michael Lewis, author of Liar’s Poker
Continuing to tippy-toe between explosive devices, this is not so funny, as well as reconfirming our collective misunderstanding of what the hell the Federal Reserve actually is. Apparently, the Washington Post is confused as well. In their defense, they are a Washington newspaper and confusion and misunderstanding are almost the entry-fee for that weird section of the nation.
Washington Post, 10-21-08, Fed Prepared to Prop Up Money-Market Funds:
The Federal Reserve yesterday (10-21-08) created a program to provide cash to money-market mutual funds, the latest step in a vast expansion of the government’s safety net for the financial system.
The Fed will make up to $540 billion available to buy assets from money-market mutual funds — in which pension funds, university endowments and millions of Americans stash money — if they need it. The measure is intended to keep the funds from experiencing cash crunches.
Money-market mutual funds invest by lending money on a short-term basis to companies, banks and other financial institutions, as well as the government. They are normally considered safe places to park cash because they buy only debt that is highly likely to be paid back.
Highly likely has just been redefined by the Federal Reserve. A primer on the Federal Reserve includes the fact that, although it was created by the United States Congress (in 1913) and the Congress claims oversight, the Federal Reserve is otherwise independent within government in that
“its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government.”9
Very interesting. The Fed monetary policy is run by and for the banking industry, without a shred of legislative or executive approval. Sort of brings a whole new meaning to “In God we trust.”
So it’s not truly “a vast expansion of the government’s safety net for the financial system,” it’s a half-vast cocked-up increase in the money supply to keep the sinking economy and its flailing banks afloat. The flotation device of choice is your and my currency and that decision, now has grown (since the October, 2008 date of the Washington Post article) to some $16 trillion.
Just for the record, that stupendous watering-down of our national currency was done without either asking permission from (as none was required), or even specifically notifying the Congress of the United States. It was a unilateral decision by the banks for the benefit of the banks.
Bear in mind that in 1913, when the Federal Reserve was created, banks were actually in the business of banking—the collection of deposits and loaning of a proportion of those deposits to credit-worthy customers. Banks have since morphed into financial institutions, allowing themselves (with the complicit permission of Congress) to gamble away their deposits in any wild-eyed scheme Wall Street was able to invent. And Wall Street is, if nothing else, home base for financial invention.
Now all that scheming and invention has come home to roost and banks, rather than trot themselves off to a twelve-step program for addicts, created their own heroin-hit by inflating our national currency. Presumably, they have now lain down for a while (after cleaning up their gambling losses) until their heads clear. Certainly they have not made any of the $16 trillion available for American business loans. They are very tight with this newfound loot.
Chris Hedges is a journalist with background and experience in spades, from covering war in the middle East to putting his own dusty boots on the ground covering the poorest parts of America. Here are some of his thoughts;
10Our elites—the ones in Congress, the ones on Wall Street and the ones being produced at prestigious universities and business schools—do not have the capacity to fix our financial mess. Indeed, they will make it worse.
They have no concept, thanks to the educations they have received, of the common good. They are stunted, timid and uncreative bureaucrats who are trained to carry out systems management. They see only piecemeal solutions which will satisfy the corporate structure. They are about numbers, profits and personal advancement. They are as able to deny gravely ill people medical coverage to increase company profits as they are able to use taxpayer dollars to peddle costly weapons systems to blood-soaked dictatorships.
The human consequences never figure into their balance sheets. The democratic system, they think, is a secondary product of the free market.
And they slavishly serve the market.
Tip-toeing further into the minefield, we can make out the shadow of something ahead of us even though it’s only by moonlight. It’s big and throws a hell of a shadow. We freeze, expecting an explosion.
11Of all the rescues mounted by the government this year (2008), none carries with it more symbolism, or more irony, than that of Citigroup.
Until recently, Citi was not only the largest U.S. financial institution, but the very embodiment of the new financial order. Under the relentless empire-building of Sandy Weill, it was Citi that brought down the old regulatory wall that had separated commercial banking from investment banking and insurance.
The combination of Citibank with Salomon Smith Barney under the bright red umbrella of Travelers Insurance was accepted with a regulatory wink and nod by the Federal Reserve, until Fed Chairman Alan Greenspan could persuade Congress to make it legal. The hurdle was the Glass-Steagall Act, put in place during the Great Depression to prevent another market crash like that of 1929. Now that another market crash has required the government to rescue a commercial bank done in by its investment banking subsidiary, there will certainly be those who wonder whether the New Dealers didn’t have it right all along.
– Steven Pearlstein, columnist and financial writer
12Three weeks later, the Washington Post said it was Wall Street’s version of an inside joke. Some joke.
Take a motley collection of largely unwanted assets, repackage them into a new set of bonds, and name it after the pristine white-sand beaches of an exclusive New Jersey town where Katharine Hepburn once summered.
No one is laughing now.
The Merrill Lynch bond deal known as Mantoloking has ended up with a different punch line: proof of the frenzied, foolhardy drive for upfront fees that helped bring down the world’s financial markets and trigger the largest federal bailout in history.
Wall Street firms thought they had a surefire way to profit from the booming real estate market without much risk to their companies. They engaged in a kind of financial alchemy, creating a trillion-dollar chain of securities on the back of subprime mortgages and other loans, which were sold to investors in private offerings that no government regulator scrutinized.
With these deals, known as collateralized debt obligations, the world glimpsed the raw power of unchecked financial markets operating full-throttle to the point of self-destruction.
The destruction went way, way beyond self. Some eight million Americans lost everything they had along the way and the clock is still running on those lost hopes.
Back briefly to the Havard Business School.
13“Many other fields have evolved along parallel paths, over the course of the hundred-year history of HBS. The continuing tension has been between achieving a level of significant specificity—the granular detail that makes each corner of the business world unique and challenging—and a level of generalization that allows the practitioner to keep seeing the forest for the trees.”
Not surprisingly, that quest defines the ‘forest’ as shareholder value. The proper purpose of an education is not to see the forest for the trees, but the trees within the forest. Education’s challenge is to make one continually able to identify, respect and understand individual trees within that forest.
Parse the phrases. They are not unimportant in a statement of purpose from a university that has lost that purpose. It’s a telling revelation that Harvard fails to get the metaphor right in its closing statement of a hundred-year history.
1 Footwear News, July, 1992
2 Common Dreams, Aug 27, 2004, by In These Times, Garrison Keillor, We’re Not in Lake Wobegon Anymore
3 The Sunday Times, Harvard’s Masters of the Apocalypse, March 1, 2009
5 Duke University Press, Walter A. Friedman, The Harvard Economic Service and the Problems of Forecasting
7 Washington Post, On Leadership, 4-21-09
8 Michael Lewis, Liar’s Poker
9 Wikipedia: Federal Reserve System
11 Washington Post, 11-25-08, A Bailout Steeped in Irony
12 Washington Post, 12-15-08, Frenzy
published: 10. 8. 2014