The Golden Passport

by Duff McDonald

  While the rise of investor capitalism came with a concomitant decrease in CEO job security—the mean number of years in office of sitting CEOs of Fortune 500 firms fell from 9.7 in 1982 to 6.8 in 2002—it did provide those same CEOs with pseudolegal justification for doing almost anything they could to goose corporate profits, the most obvious manifestation of which was the sudden epidemic of layoffs, even for companies that were doing well. In 1993–94, a boom year for the economy, nearly half of all firms laid off an average of 10 percent of their workforce.6 “Not only did the uppermost managers of the nineties now receive compensation packages that towered over those of their predecessors,” observes Thomas Frank, “but as Wall Street placed a very predictable value on layoffs and downsizing, CEOs often saw their own pay rise in direct proportion to the number of employees they could expel from the firm. . . . This equation was the origin of many of the big management ideas of the decade: delayering, disaggregating, outsourcing, reengineering, disintermediating.”7

  Having achieved most of their objectives—including the freedom to hire and fire at will and the weakening of regulations—it is at this point, Mizruchi argues, that the American corporate elite lost any vestiges of cohesiveness, whether that was its moderately liberal stance of the postwar years, or its viciously probusiness response to the economic crisis of the 1970s. Of course, the lack of any discernible national cohesiveness might simply be the result of the fact that they’ve gone global—not the companies, but the people who run them. Mizruchi doesn’t discount such a possibility: “Perhaps the decline of the American corporate elite is a consequence of the rise of an alternative: an increasingly cohesive, transnational ‘capitalist class.’ . . . The annual meeting of the World Economic Forum at Davos, Switzerland, attended by business and government elites from dozens of nations, certainly has the trappings of a worldwide version of the kinds of ‘ruling class’ get-togethers that appear in the writings of C. Wright Mills. . . .”8 Indeed, several books have been written on the subject, including Leslie Sklair’s The Transnational Capitalist Class and David Rothkopf’s Superclass: The Global Power Elite and the World They Are Making.

  While there’s an argument to be made that much of the change in executive behavior was forced on the nation’s managers—most of us will do as we’re told if the alternative is being fired—the fact of the matter is that once they recovered from their 1970s setbacks and realized the potential magnitude of their own equity upside in the 1980s and 1990s, American managers proceeded to execute a remarkable about-face on just about every aspect of managerial responsibility they had vehemently argued for over nearly three-quarters of a century. In 1982, top executives received options worth 80 percent of their salary. In 1987, that proportion had risen to 141 percent, and in 1993, 173 percent.9 Thanks, too, to such compensation arrangements, the interests of the CEO began to diverge not just from his or her company, but from their senior management team as well. In 1987, the average salary of the number two executive was 84 percent of the number one. In 2001, it was just 55 percent.10 Not surprisingly, the constitution of corporate boards shifted, too. In 1987, boards had an average of 16 members, and an average of 3 current or retired CEOs from other companies. In 2001, boards averaged 12 members, with an average of 6 current or retired CEOs from other companies.11

  The CEO had emerged as a distinct social class, with loyalties no longer vertical (that is, to the company or the community), but horizontal (to other CEOs). And to shareholders, of course, to which they now pledged allegiance. You can see the shift in the way the Business Roundtable, an organization of CEOs of the nation’s largest companies, chose to describe corporate responsibility.

  In 1981, the Roundtable’s “Statement on Corporate Responsibility” had argued in support of stakeholder theory:

  Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholders must receive a good return but the legitimate concerns of other constituencies also must have appropriate attention. Striking the appropriate balance, some leading managers have come to believe that the primary role of corporations is to help meet society’s legitimate needs for goods and services and to earn a reasonable return for the shareholders in the process. They are aware that this must be done in a socially acceptable manner. They believe that by giving enlightened consideration to balancing the legitimate claims of all its constituents, a corporation will best serve the interest of the shareholders.

  But by 1997, that whole idea had been jettisoned:

  In the Business Roundtable’s view, the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders. The notion that the board must somehow balance the interests of stockholders against the interests of other stakeholders fundamentally misconstrues the role of directors.

  In his 1927 speech dedicating the Baker Library at HBS, General Electric’s CEO Owen Young had compared the large firm to a public utility and told the assembled crowd that managers had a special obligation to serve the public interest. Arguably self-serving—Owen was effectively saying, “The person in charge must have a public perspective, and by the way, that person is us”—it was nevertheless an optimistic sentiment. In response to questions of how to square political democracy with corporate autocracy, American managers—and the business schools that produced them—sold the nation on a professional creed that was rooted in moral authority. As to the subject of organized labor, HBS had boasted of its efforts to help labor and management find common ground through its Trade Union Fellowship Program. And if executives had always taken care of themselves, they had also managed, for decades, to share the wealth, with wages and productivity rising in sync.

  And then it all went out the window. In their paper, “The End of Managerial Ideology—From Corporate Social Responsibility to Corporate Social Indifference,” Ernie Englander and Allen Kaufman summarize the transformation succinctly: “During the 1990s, U.S. managerial capitalism underwent a profound transformation from a technocratic to a ‘proprietary’ form. In the technocratic era, managers had functioned as teams to sustain the firm and to promote social welfare by satisfying the demands of competing stakeholders. In the new proprietary era, corporate bureaucratic teams broke up into tournaments in which managers competed for advancement toward the CEO prize. The reward system of the new era depended heavily on stock options that were accompanied by downside risk protection. The tournaments turned managers into a special class of shareholders who sought to maximize their individual utility functions even if deviating from the firm’s best interest. Once this new regime became established, managers discarded their technocratic, stakeholder creed and adopted a property rights ideology, originally elaborated in academia by financial agency theorists. Managers hardly noticed (or cared) they were capturing a disproportionate share of the new wealth generated in the U.S. economy. When critics brought this fact to light, managers replied like well-schooled economists: markets worked efficiently. Whether they worked fairly was a question they did not address.”12

  The answer to that question was that they did not: The new creed of shareholder wealth maximization resulted in a massive transfer of wealth—away from labor and toward ownership—that raised inequality in the United States to levels not seen for nearly a century. Workers saw their pay stagnate while their workload increased and their job security fell, while management saw its compensation multiply in part by draining company equity with off-the-books stock options.13 More to the point, it was later revealed that the markets most certainly did not work efficiently when it came to executive compensation, a fact evidenced by the widespread repricing of stock grants and options that came to light at the turn of the century.

  Where was HBS in all this? They were busy rewriting everything down to the company letterhead. While the School’s specialists in organizational behavior an
d general management might have been stressing the nonpecuniary responsibilities of the manager, they were effectively drowned out by their colleagues in the finance area. After painstakingly making the case for the corporation’s place in public life for more than half a century, the School jettisoned it all in favor of Friedman and Jensen’s argument that the corporation had no place in public life. After arguing for the preeminence of technocratic managerial talent for decades, they ditched that argument in a flash. While they adopted the fuzzier concept of “leadership” to try to cover up the stain, they nevertheless embarked on a transformation from a school for managers of companies to a school for managers of portfolios. (They didn’t lose control of the narrative, however. As the sociologist Robert Putnam points out, even as unions went into terminal decline, CEOs were “leaders” while union chiefs were “bosses,” despite the fact that unions are often democracies and corporations are almost always dictatorships.14)

  Mizruchi is remarkably forgiving of business schools’ roles in the transformation of corporate purpose. “I would advise some caution in terms of making a close link of what people learn in school and what they do in the real world,” he says. “They face real constraints from shareholders and financial analysts. Even the most well-meaning people aren’t able to carry out some of the things they were taught. It’s a tricky thing to know how much of an influence the specifics of what you learn in school have on your actions later on. It’s probably non-zero, and it’s obviously better that people learn about such things as corporate social responsibility than they don’t. And while it would be great if they learned alternatives to a pure shareholder value conception, having that curriculum won’t ensure that twenty years down the road, they will act any differently than if they hadn’t.”15 He’s right. But that’s the thing about doing the right thing: It’s always harder than simply doing what’s convenient.

  44

  The Kindergarten Class Play

  In 1983, John Van Maanen, a management professor at the MIT Sloan School of Management who was on leave in England working in the sociology department at the University of Surrey, wrote “Golden Passports: Managerial Socialization and Graduate Education,” a twenty-page paper analyzing the differences between the MBA experiences at HBS and MIT. His goal wasn’t just to line up the two curricula side by side or to compare salary statistics, as the now-ubiquitous business school rankings do with an obsessiveness that defies belief, but rather to try to tease out something deeper about the student experience at each of the two schools, specifically the transmission of values, or ideologies, and their effect on students’ social skills once they had graduated.

  “[Graduates] of some education institutions never seem to get over the experience of their attendance,” he wrote. And in the case of HBS, he argued, that wasn’t accidental. Everything about the place—from its setting to its schedule to its section orientation—has been refined over the years to leave an imprint that never goes away. While much has changed since 1983 at HBS, much has stayed exactly the same, and Van Maanen pointed to a number of important aspects of the MBA program at HBS that persist more than thirty-five years later.

  “Graduate students seeking the Harvard MBA do so in splendid isolation from both the undergraduate and other graduate schools of the university,” wrote Van Maanen. “The business school campus is across the river from the main campus and is literally a self-contained educational plant with its own bookstore, press, libraries, pub, health center, administrative offices, recreational facilities (tennis, squash and hardball courts, pool, running track, etc.), barber shop, post office, and semi-attractive living quarters to house the majority of the student body. The school also operates on its own quite distinctive class schedule (incomprehensible to outsiders) and academic calendar that neither begins nor ends a term in harmony with other schools at Harvard (or elsewhere). It is altogether possible, if not probable, that a student in the business school will complete a two-year course of instruction without meeting another Harvard student outside those already enrolled in the B-School.”1

  “You enter a different world, when you go to HBS,” says Joe Haggenmiller (’97). “The grounds are sculpted, and the fitness center is, to this day, the nicest one I’ve ever belonged to. It’s like entering a cocoon. You could live in there and think everything was fine in the world. There was little, if any affiliation between our lives and the rest of Harvard. The only interaction you would have with them is when you went out for sushi on Friday night.”

  Van Maanen pinpointed the class section system—at the time, each had about seventy students—as one of the crucial differentiating factors at HBS. “Akin to jolly coppers on parade, during the first year all students in the 11 or so marching units must take, in lockstep, the same classes, in the same order, at the same time, with the same 70 fellow marchers. Identical academic tasks face all members of a given section so that whatever educational problems a student encounters are problems at least nominally shared by every other member of that section. . . . [The] vast majority of students at the B-School form within-section study groups as a way of handling what is almost universally regarded as a very heavy work load. . . . Relief comes in the second year when only one course is required and the remainder of a student’s course load is filled by electives.”

  Most of us don’t remember much of the specific content of our college (or graduate) studies, but we do remember the people we spent the most time with, whether it was on a sports team, in a social club, or otherwise. What HBS has done with the section system is to ensure the experience is memorable by making it about the people as well as the product. Consider this: For students at HBS, the section system is quite likely the first time that they have spent an entire semester with the same people since elementary school. “Given such intensive exposure to one another,” writes Van Maanen, “it is little wonder that students come to appreciate and know very well, indeed, virtually all their section-mates. . . . Although tight friendship networks are hardly section wide, sections do come to possess something of a collective identity (e.g., the friendliest, the jocks, the brightest, the most social, the hardest working, or, more common perhaps, the best). Students can, and usually do, support these images in everyday conversation by contrasting the characteristics of their own sterling section to others in the school who are, more often than not, found wanting for various and sundry reasons.”

  Because case discussions put an imperative on calling into question the conclusions of one’s classmates, the fact that students must interact with the same people whose conclusions they are seeking to one-up day in and day out requires a kind of diplomacy that successful graduates say comes very close to modern work environments. Stephen Schwarzman, the billionaire founder of the Blackstone Group, puts it this way: “It was interesting because I hadn’t been in one classroom with the same group of students all year since elementary school. You’re interacting with people that you’re going to be seeing in the next class and the next class and the next day and the next month, for an entire year. You learn how to distinguish yourself without diminishing anybody else in the classroom, because they will retaliate. You learn how to maneuver and to develop the patience to listen to somebody who doesn’t know as much about an area, which includes figuring out how you as a class or as an individual can take someone who is off on a wrong track and get them on a right track without embarrassing them. That’s an art. The combination of the section system and the case method basically forces that process to happen.”2

  MIT Sloan, on the other hand, had no nameplates in the classrooms, and class participation was an insignificant or nonexistent portion of students’ grades. “As might be expected,” writes Van Maanen, “attendance norms at Sloan are far more variable than at Harvard where one’s absence is sure to be detected quickly by one’s section mates, if not the faculty.” As in Socrates’s own day, most of the classrooms at HBS are hundred-student amphitheaters, with five rows in a half circle. The case method has had the effect of
turning lectures into a kind of performance, making HBS as much a school of dramatic arts as it is one of business. In many ways, the business education one receives at Harvard is as much about presentation as it is learning any technical rudiments of management.

  The section system, in other words, has the effect of raising appearances to an equal, if not higher, level with academic performance. “Within Harvard sections, impression management skills are highly valued,” writes Van Maanen, “wherein the human relations necessary for cooperative effort—even among those (or especially among those) who detest one another—must be sustained over the long graduate school haul. Particular problems are many, but considerable effort apparently goes into ‘pegging production’ by controlling both the rate-busters who could make other section members look bad, as well as rate-shirkers who might draw unwanted faculty attention to the entire section. By applauding, booing, or even hissing, it is relatively easy (however crude) for a well organized section to check the classroom antics of potentially deviant members.” By contrast, “MIT students would never think of booing or hissing the public foibles of a classmate.” Nor, for that matter, would almost any group of adults save the fans of a sports team. But there you have it: At HBS, it was and is okay to hiss your disapproval of a classmate’s remark. So much for enlightened leadership.

  “This is not to say that everyone is equally well integrated within the culture. Certainly subcultures of varying size and composition exist within the school and within sections (e.g., carpoolers, married students living off-campus, ‘genericists’ with overarching perspectives on business problems independent of industry or firm, such as would-be consultants or investment bankers, ‘floor polishers’ with industry and firm-specific views who actually enjoy the so-called soft, bullshit courses emphasizing the behavioral aspects of management, students who share similar recreational predilections, such as skiing, partying, or drug use, etc.). Even small countercultures are visible (e.g., leftists, environmentalists, women’s rights advocates, libertarians, etc.). Deviance from the general pattern is not widespread, but the mere presence of such recognizable groups suggests that at least some students adopt alternative lines of thought and action during the years of their business school education. . . .”