Capitalisn’t: The Moral Case against the MBA

Kate: Hi, I’m Kate Waldock, a professor at Georgetown University.

Luigi: And I’m Luigi Zingales, a professor at the University of Chicago.

Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism, and more importantly, what isn’t. On today’s episode, we’re joined by Duff McDonald, author of The Firm: The Story of McKinsey and Its Secret Influence on American Business, and Last Man Standing, a biography of Jamie Dimon, who is the CEO of JPMorgan. But today we’re here to talk about his most recent book, The Golden Passport.

Luigi: That has the subtitle, “The Limits of Capitalism, and the Moral Failure of the MBA Elite.” It’s a pretty aggressive title that implicates directly me and Kate, because we are the trainers of this failed elite. Duff, tell us a bit about this book, and what is the moral failure of our MBA elite?

Duff McDonald: If I had to summarize the takeaway from the book that led us to that subtitle, both the educators involved in the graduate business school phenomenon, and the graduates themselves, had a set of responsibilities that they have failed to live up to. They’ve dropped the ball. I fall into the camp that says, “The purpose of a corporation is to give us a way to work communally, to achieve our communal objectives.” The system that we have today, that came about as a result of the way things were done in the ’80s and ’90s in particular, is just tilted toward the shareholder in an obscene, and unfair, and unsustainable way. The capital experiment has been a failure, except for the few for whom it hasn’t. While it’s still probably the best idea out there, in terms of economic systems, another generation of this kind of division of the economics of this country, and we’re headed for a revolution, or civil war.

Kate: I want to point out that you’ve talked about defining the corporation, ideally as this body that would maximize communal welfare, as opposed to shareholder value. You’ve talked about the rise of inequality. You’re sounding a little bit like you’re just a communist. We haven’t talked about the MBA at all, or the role of business education. It just sounds more like you have a problem with capitalism itself as a system.

Duff: Or like a Canadian; I’m from Toronto.

Luigi: What’s the difference?

Duff: No, I don’t have a problem with capitalism. I don’t have a problem with business schools. I have an undergraduate degree from Wharton. My first job out of college was on Wall Street; I worked in corporate finance at Goldman Sachs. I have many friends who work, both on Wall Street, and who have MBAs. My problem is that the notion that we have a system that is perfect, and that we do not need to look at its foundational assumptions, to do so is heresy, and endangers the welfare of us all. The fact is that there’s no reason that we can’t reinvestigate the assumptions that we built it on.

Luigi: Duff, you’re absolutely right, but to be honest, we are running a podcast about what is working in capitalism, what isn’t. So we are recognizing there are a lot of things that don’t work in capitalism, and we are from two business schools. So I think that maybe you are misrepresenting, or confusing the rhetoric of business, which is clearly very strong, but they’re lions, and they want to eat, they defend their own interests, and what is discussed in business school, and by academics.

Duff: Good point, but I also think, having studied and written an institutional history of Harvard Business School, that I could sit here for you and name 50 things in very short order that they are not doing, that they should be doing, both in terms of their own relationships with the corporate benefactors, as well as the way they teach their students, which ultimately leads to how those students think about what it is they do.

Luigi: Why don’t we start with three?

Kate: Let’s start with one, and let’s start with the relationship between business schools and corporate benefactors. Do you think that that’s broken?

Duff: Broken according to who? With HBS, which I’m most fluent in, you have corporate donations to the school. Those corporate donors invariably end up being the subject of case studies, which are studied by the students, and supposed to be realistic representations of the way that things happen in the corporate world, and give them the tools to make decisions when they ultimately go out into it themselves. In its sort of basic description, that all sounds like it makes sense. But you immediately run into a question of, “Is it difficult to write a critical case study about a corporate donor that’s given you tens of millions of dollars? Are you inclined to positive bias? Are you inclined to any kind of revisionist history?”

You have a system that by design maybe was supposed to help students in a really reasonable and interesting way, to prepare them for how the choices, and how they’re going to have to make the choices that they face in their managerial lives. It’s been totally corrupted by money, to the point where it’s almost embarrassing.

Luigi: I think you’re absolutely right, but let’s recognize that this is not unique to Harvard Business School. It’s not even unique to business school. So why pinpoint just Harvard Business School?

Duff: Well that’s easy, I had narrative objectives and constraints. The goal of the book was to tell the history of the MBA, through the prism of its most dominant brand. There is another excellent book on the history of the MBA by an HBS professor, Rakesh Khurana. It was called From Higher Aims to Hired Hands. It’s an excellent book, but it’s a different kind of book. Khurana was writing for an academic audience, which doesn’t demand or require the same kind of narrative thrust or approach, as a more mainstream one would. At the same time, there is no other school that comes even close to its long-term and enduring influence. So it was both an obvious choice, because who else were you going to use as the central character in that narrative, just because it’s easier to hang onto?

Kate: OK, I want to go back to this point about case studies, and the topics of case studies, and who is writing them, and whether they are actually doing an accurate job of depicting the characters in those studies. I’m teaching a financial management class this semester. This is the first time that I am actually teaching some cases in a class. So I had to look through HBS’s case study repository and pick out some that were appropriate for my class. We care about teaching these ideas of discounting cash flows, and understanding systematic risk, and capital budgeting. So I simply wanted to pick out the easiest studies that could get those ideas across.

Also, it happens to be the case that when you’re putting numbers into a model, it’s easier if those numbers are positive. Are there case studies out there that are about complex financial transactions, and scenarios in which people did things that were maybe morally questionable? Yes, but those wouldn’t have really gotten across the basic ideas that I was trying to teach in my class. I think that at least from a pedagogical perspective, there’s just not much demand for those types of tools, those types of teaching tools, because most people, they take basic finance classes. So the reasoning for why people write case studies is relatively benign.

Duff: Sure. I’m of two minds on the case method. One, it seems like it’s obviously a great way to teach that is memorable for students. Every single graduate I spoke to from HBS credits the case method for making them better decision makers and managers. I’m not going to question their word on that. I believe them. At the same time, there’s all sorts of downsides to the method: some moral ambivalence, positive bias, CEO hero worship, and you could go on. As I point out in a number of instances in The Golden Passport, not only is HBS not that concerned about guarding against some of the obvious ones like the corrupting effect of consulting fees on professors writing those cases, but on any number of the other ones.

I think one of the most tragic things that I saw in The Golden Passport is the fact that students tend to come out of HBS believing in their hearts that there really is no one right answer to any business situation. But I think that in many corporate situations, there are answers that are more right than others. Sometimes, there is only one right answer. So I think they are failing their students, and therefore the rest of society, by even giving them the inclination to think that.

Luigi: Let me step in here, because I think that you’re mixing two things. One, I think you’re absolutely right, which is the fact that, of course everybody tries to do their best, tries to produce the best cases, et cetera. But there is a sort of corruptive influence of closeness to sources, in the sense that even in your own experience, when you wrote the book about Jamie Dimon, you had more access to Jamie Dimon, the book ended up being more positive about Jamie Dimon. You did not have access to HBS, and the book came out more negative about HBS. Not necessarily because you are set up to have an agenda, but it’s simply because of closeness to the sources.

Duff: It’s harder to criticize someone when you know them.

Luigi: Number one, and number two, many of these executives, to be honest, they are there because they’re super charming and super smart. I think this is a problem, because we don’t have enough objectivity. I got interested in this topic of how the closeness to sources might distort things. Actually at the time, I had a co-author at Harvard Business School, so I heard a story that back in the days when Enron was still a powerful company, one good professor at Harvard decided to write a case about a controversial action that Enron did. They created an electric plant in India, and rumors were that they actually corrupted some local sources. While the case did not say that explicitly, because there was not a smoking gun, it was hinting enough that that was the case.

Enron did not directly complain about the case, but went to another faculty at HBS and said, “We want you to write a case about this topic, and we will provide you all the sources.” I should have said that the first case was written from public sources, so it was interesting, but was not juicy. There’s not all the elements, the things that are typical of the Harvard cases. The result was that the second case was much nicer, and sold much better. At some point, the first faculty was approached and asked, “Do you really want to keep that case on the roster, given the fact that it doesn’t sell very well?” He said, “OK,” and so the case was removed, and there was no record of the more controversial case. Now, if you were to look in the roster of Harvard, you will not find now any case about Enron, because after Enron blew up, they actually took them all away.

Duff: Enron is a great example, because as you know, in the lead up to the fall of Enron, there were five overly positive case studies out of HBS that purported to explain exactly why Enron was one of the greatest companies that ever was. What we found out later, obviously, was that the secrets to Enron’s success were deregulation, political influence, and fraud. Those were three of the central ones.

Luigi: Market manipulation also.

Duff: Market manipulation, OK. So the contents of the five Enron case studies leading up to that really didn’t touch on those things. Right? There was an HBS professor who served on an advisory board of Enron at the time, and right up to the demise of the company. His role was later explained as, “We let guys serve in that role, paid roles, so that they can get so close to the action that they understand it in such a way that we are giving our students this kind of insight.” His name was Pankaj Ghemawat. He never pointed out the frauds. Whatever access he got did not reveal to him what was actually happening at this company. We don’t need to condemn him for failing to discover the fraud, but stop letting professors get paid by the companies they write cases about. Let them consult for money, but don’t write cases about those companies.

Kate: Yeah, I mean, that’s just seems obvious. It seems to me like you are caught up, and extremely annoyed by how much bullshit there is out there, in HBS case studies, in the curricula of business schools. But I do think there is a broader value to what’s taught in business schools. There’s a reason that business schools exist. Students don’t sign up to pay hundreds of thousands of dollars, just to be patted on the head and to make themselves feel good about wanting to make money, or the prospect of making money in the future. I mean, there is something that they learn. They learn how to make investment decisions. They learn about the time value of money. They learn about financing investments through debt, or through equity. These are things that are valuable to society. It seems to me like ... To use a phrase that Luigi likes to use a lot, “You’re throwing the baby out with the bathwater.”

Duff: I hear that, however, I take issue with the suggestion that I am throwing the baby out with the bathwater. I’m not calling for the abolishment of business schools. I am not calling for the abolishment of Harvard Business School. What I’m saying is, you have obtained a position of great influence, and with influence comes responsibility. You are exactly right about what drives me crazy about the place, but I’ll use a more specific word for it. It’s hypocrisy. I totally get the guy who steals money to feed his family. You hope he doesn’t hurt someone while he’s doing it, but you get the motivations and the desperation. None of these people are desperate. They are in fact extremely fortunate, because the effects are the way that the managers who run a huge chunk of our country’s companies think about how the world works, and why they do what they do. I ultimately end up saying, “Shame on you. You don’t have to be this way. You don’t have to do this. Shame on you. Are we not better than that?”

Luigi: What was the response of Harvard Business School, or other business schools, to your book?

Duff: Harvard Business School officially didn’t really acknowledge it, except for once. Nitin Nohria, the dean, did an interview with The Harvard Crimson, a college newspaper, and said, and I paraphrase, the author—he didn’t mention me by name—misses a lot of important points, understates all the good we do, overstates a bunch of things, and by the way, I haven’t read the book. So that response was infuriating, if still to be expected.

Kate: My take is that the causality is going in the opposite direction. That things were great, growth was great in the 1950s and 1960s. You even mention in your book that back then, most people who were at HBS were going into manufacturing. But the economy has changed now. Growth is slower. When you’re working at a mature company, the areas of growth that you look for tend to be in squeezing margins and cutting costs and looking for synergies. Those are the types of things that business school students are well trained in.

Duff: An overly analytical approach to decision-making that can affect thousands of people, to favor one constituency over others, that you can try and explain away in the context of global competitiveness, but you can say to yourself, “No, the reason that I put these 50,000 people out of work, on a day that we reported record earnings, is because this is what I was taught was the way that you do this.” So who taught you that? Who told you that? You may actually ultimately believe it, after serious self examination, but I would venture to say that not every MBA student out there has the capacity for this kind of introspection. Therefore, you need to be very careful about what you teach people.

Kate: But they have a responsibility not to be overly analytical? I mean, that seems to be cutting straight to the core of what business school should be. It should be teaching people how to be analytical. It seems to me that you’re suggesting that in the process of studying a company, and trying to figure out what’s right to do, and putting together a model, and projecting cash flows into the future, if you realize that the company is employing too many people, and it can’t afford to continue to employ them, then at some point, a business school professor should step in and be like, “But also, you should be thinking about the moral side of things,” and that we should insert, somehow, something that offsets some of the analytical skills—

Duff: That’s called humanity. Otherwise, let’s just install a bunch of computers to make the decisions for us.

Kate: But how do we actually insert that into a curriculum, without undercutting exactly what we’re trying to teach?

Duff: I think that’s your problem, not mine—

Kate: No, it is your problem, because you wrote a book about it.

Duff: I do not suggest that I know the perfect business school curriculum. What I suggest is that the academy seems to have taken its eye a little too far off the ball of the humanity of it all.

Luigi: I think what we don’t realize is that today, corporations have an enormous amount of power in society. If you were to stack up the hundred largest organizations in the world, including governments, 69 of the top 100 are corporations, not states. Walmart has more power and more revenues than all but nine countries in the world. These organizations are run in a pretty autocratic way by the CEOs. Yeah, there is a board of directors, there are some checks and balances, but it’s nothing with respect to the checks and balances of modern democracies in the political system. So the people at the top matter tremendously. The value system, the objectives, is shaped by basically business school, because most of these guys went through business school. They are shaped as businesspeople by, of course, their experience, but even before, their education. So the way we teach them, and the cases are a big part of it, affects the way they run those large corporations. The way they run those large corporations affects our lives in a tremendous way.

Duff: Yeah, it’s like, “This is America, we play to win.” But do we want to win at all costs? No. While I’m not asking you guys to start teaching philosophy, there is a philosophical underpinning to everything we do. It would be great if the academy, the business academy could remember that, and refocus on it.

Kate: So Duff, you’ve talked about things like social unrest, and layoffs, and not being accountable to various stakeholders in a company, a CEO or a manager not being accountable to stakeholders. You’ve talked about humanity itself. Do you think that these problems that you’ve discussed, are they just symptomatic of a flawed system? Is capitalism itself too flawed to fix this idea that greed is good?

Duff: I hope not, and I don’t think so. If you look at the, say, executive pay gap, is it even the free market that’s determining that? Or do we have an insider’s game going on, whereby CEOs justify other CEOs’ salary? It’s sort of everybody is in the club, and they’ve designed a system that works for them. Can we talk about ways that we can keep compensation more equitable? We can always be having that conversation. It’s manmade. Of course it can be improved. We just need to decide how we want to try to do it.

Kate: Thanks so much for coming on the show, Duff. This has been a great conversation. I really enjoyed your book, The Golden Passport. I recommend it to everyone.

Duff: Thanks for having me. I think one of the things we can take away from here is, this, by its very nature, is not going to be a fun conversation every time we have it, right, because what we’re talking about is fairness, and human relations. Everybody has a different point of view on that, but thank God for podcasts like yours, because otherwise, I think a lot of these things would go unasked, and therefore, unanswered. So I appreciate the opportunity to be on.