十 IVY DRIP: "The most powerful man at HBS in the early 1990S was MichaeI 」 ense ル ... Those students were all going to WaII Street, and WaII Street firms were all sending money back to HBS. " that tippe mvestigators 0 圧 to LeV1ne. A num er 0 HBS graduates were ensnared in the ensuing inves- tigation, including Siegel, paul Bilzerian ( ' 77 ) and lra Sokolow ( ' 81 ). Fred Joseph ( ' 63 ) was CEO of DrexeI during this scandal, although he denied any involvement in the insider trading schemes and claimed he was only guilty 0f "surprising naiveté. " The feds bought that, and the Securities and Exchange Commiss10n merely reprimanded him for failing to properly supervise his star employee. ln a 2005 interview with The N ビル剏 en - sen discussed the propensity Of execufives tO be overly optmistic about forecasts that support lofty share pnces. 。 [lf] executives would present the mar- ket with realistic numbers rather than overoptlmistic expectations, the stock price would stay realistic. But I admit, we scholars don't yet know the real answer to how to make this happen. ” That's called ethics, and Jensen is right: Harvard Business SchOOl doesn t know how to teach ethics as well as it knows how to teach financial e ngineenng , and it never will. ln 2003 , the Harvard Business Sch001 added a Leadership and Corporate Accountability course that sounds like a direct repudiation Of Jensen: decisions that involve responsibilities tO each Of a company S core constltuencles—mvestors, custom- ers, employees, suppliers, and the public, ” with dis- cusslons on insider trading rules, the fall Of Enron, human character, employee responsibilities, labor laws, corporate citizenship, socially responsible investing and serving the public interest. But in this, its influence is akin tO pushing on a string, because Michael Jensen helped create a Franken- stein monster no one knows hOW tO kill. ロ A REPORTING NOTE: Whenl began researching The Golden Passport, from which this excerpt derives,l asked the Harvard Business Schoolif it would be interested in making administrators and faculty available for interviews or providing access t0 the school's extensive historical collection. TO my surprise, HBS tO 旧 me that it had zero interest in engaging with me, and would not make a single person at the schoolavailable for an interview, from the dean on down. HBS did offer to make histori- cal material available to me on an ad hoc basis, except fO 「 any material from the past 50 years—something thatl could getmyself, thanks tO the internet.l asked on a handful Of occasions over the next three-plus years iftheyd changedtheir mind, and when ー went back tO them one finaltime, they declined again. GOLDENPASSPORT. COPYRIGH 02017BYDUFFMCDONALD. REPRINTED HEREWITH PERMISSION OFHARPER BUSINESS,AN IMPRINTOF HARPERCOLLINS PUBLISHERS. 0 American managers loaded their companies With debt, per Jensen, they started paying themselves in equity and options, per Jensen, and they did every- thing they could t0 juice the value of that equity ・ And in doing SO, they sacrificed long-term value for short-term gain, Often engaging in outright fraud tO bring it about. Here's one thing Jensen didn't talk about much when he talked about the wondrous world of hos- tile takeovers: the insider trading it unleashed. Those crlmes first came to light ⅲ 1986 , when Dennis Levine Of Drexel Burnham Lambert was arrested, accused of making $ 12.6 million from insider trading and charged 'with -obstructing Jus- tic &and ー atte mptiwto¯d e stroy•ecords=L evin implicated lvan Boesky, an arbitrageur, whO then implicated Martin SiegeI (HBS ' 71 ) , formerly of Kidder Peabod but then workin for Drexel Burn- ham Lambert. And here's a fun fact for your next cocktail party: lt was insider trading in the shares of Enron, which Michael Milken had helped finance, 45 N E W S W E E K A P R 比 14 , 2 017

work ofmidcentury thinkers at HBS, the faculty stood almost alone ⅲ insisting that characte r had a part tO play in manage ment. Until it decided t0 hire the man who thought manage rs had no character at all. The U れ ho ツ Birth 0f CO 「 po 「 ate Raiders BY THE LATE 1970S , after nearly three-quarters Ofa century Of existence, Harvard Business SchOOl had carved out a nice little niche in the management universe. lt had proved itself a dependable supplier 0f prescreened and highly motivated graduates t0 big business. HBS was still a dependable supplier 0f highly motivated graduates in the 1980S , but they weren't going tO big business anymore. They were headed to Wall Street and consulting ・ HBS also continued to put a high gloss on the management myth 0f the day, but those myths were increasingly finance-related, in particular the [whereas] moral virtue is immoral when it does not. Even in 2005 , Bakan was able t0 find a professor at HBS who was willing to channel Friedman's "brand oftynicism lthat isJ old-fashioned mean-spirited, and out of touch with re ality. ” According t0 the n- HBS professor Debora Spar, corporations are not institutions set up tO be moral entities.... They are institutions which really only have one nusslon, and that is tO increase shareholder value. Just a small sample ofpeople wh0've actually "set up corporations would seem tO suggest that such a blanket statement is entirely without merit. Yvon Chouinard, the CEO 0f patagonia, certainly had a larger misslon in mind. J0hn Mackey, co-founder 0 ハ MhoIe Foods, wouldn't agree with that premise. lt also seems likely that the founders of Harvard, itself a corporation, wouldn't have either. What's trulyunfortunate is that ifone considers the TOO PIGGY TO FAIL: PubIic outrage over the rapacious practices that led t0 the 2008 financial crisis spurred the Occupy WaII Street movement but brought about few changes. BILL ーー物 IONAIRE 日 6 NEWSWEEK 37 APR 比 14. 2017

the fields of consulting or investment banking, by 1985 the two fields took in 41 percent of the school's graduating class. And many ofthem would play a S1g- nificant role ⅲ downslzing—that is to say, guttlng— the traditional manufacturing and product firms that previous HB S graduate s had helped build. The shift is indicative ofthe MBA'S nose for power. Before the 1970S , companies increasing cash piles had lessened their dependence on banks. But as those cash piles evaporated, the pendulum had swung back in finance's 信 vor. ln a capitalist econ- omy, power equals money, and between 1983 and 1992 , the proportion ofprofessional managers in the nation's top 1 percent 0f household wealth holders showed a marked decline, while that ofpeople work- ing in finance spiked. And SO that's where the MBAS went. "For most Of the 20th century, social orgam- zation in the United States orbited around the large corporation like moons around a planet,' wrote University Of Michigan busine S S administration professor Gerald Davis in Corporate Power in the 21St Century. ' But by the time Jensen was through, "any lingering doubt about the purpose 0f the cor- poration , or its commitme nt tO vanous stakehold- ers, had been resolved. The corporation eXISted tO create shareholder value; Other commitments were means to that end. ” Business educators legitimized the notion that good management might mean dissolving the firm tO improve shareholder return, wrote man- agement historian 第 C. Spender in BizEd magazine in 2016 , "without concern for the SOCial COStS tO employees whO lOSt their jObs or tO communities that lost employers. Ah, yes: all that nonsense about the social responsibility Of business. lt turned out that was all just posturing. Recent studies by the Aspen lnstitute show that when students enter business school, they believe that the purpose of a corpora- tion is tO produce goods and services for the benefit of society. When they graduate, they believe that it iS tO maximize shareholder value. Jensen provided intellectual underpinning for the leveraged buyout boom in two Ha 翔 4 Busi- れお犬ⅵビル articles during the 1980 s, argulng that the threat of being taken over—and fired—effec- tively created a market for corporate control, which helped executives stay focused. He also argued that the high indebtedness engendered by leveraged 十 WHY THIS MAN SMILING? 」 ensen's papers and teachings released CEOs, institutionalinvestors and WaII Streeters from the obligation Of consider- ing anything but their own narrow wants and needs. company's stock price. F0110wing Jensen s argu- ment, takeovers and LBOS would cure the nation's economlC woes. Twenty-two percent of the 150 largest public companies in the United states as 0f 1980 had merged or been acquired by 1988 , with another 5 percent taken private. The highly public spectacle ofthe takeover ofRJR Nabisco was an ObJect lesson for all CEOs who weren't used to looking over their shoulders. Downsizing became the hymn song 0f the managerial church. Thanks in large part to President Ronald Reagan s tax cuts and deficit spending, the U. S. economy found its f00ting agaln after 1982. However, as Walter Kiechel pointed out lll a 2012 article in } { 4 リ ar B リ豆れビ R どリル unlike in the 1950S , [thel rising tide didn't lift all boats. ln the name Of beating foreign competition, com- pleting ()r avoiding) takeovers, and serving the interests Of shareholders, it became acceptable tO sell 0 代 businesses that didn't fit the new corporate strategy and tO lay offbattalions ofworkers. Jensen was rolling at that point, spewing out blanket claims, such as "Corporate takeovers do not waste resources; they use assets productively, and "Shareholders gain when golden parachutes are adopted. ” And it all came with the good seal 0f approval 0fHarvard Business Sch001. Jensen, wh0 joined HBS full-time in 1989 , expanded his remit with a 1990 日 4 4 B リ豆 - 〃お R ビⅵビル article, "CEO lncentives: lt's NOt HOW Much You pay, but HOW. " Along with co-author Kevin Murphy, he opened the piece with one ofthe most absurd remarks in the history Of executive compensation.• "There are senous problems With CEO compensation, but 'excessive pay is not the biggest issue. The relentless focus on hOW much CEOs are paid diverts public attention from the real problem—how CEOs are paid. " Three years later, President Bill Clinton, who had campaigned on reimng in executive compensation, eliminated the tax deductibility 0f any portion 0f executlve compensation above $ 1 million, unless the compensation was performance-based. lt doesn't get much better in the annals ofunintended consequences than this: NOt only did the law buyouts forced executives tO be much more focused on their operatlons Of their compames. And finally, if and when exec- utives did participate in LBOS by amassing their ownership stake, their incentlves would then be directly linked to the HBS HAD NURTUREDTHE PROFESSIONAL MANAGER FR 〇 M HIS BIRTH,ANDTHEN HELPED KILLHIM NEWSWEEK 40 APR に 14. 2017 increase many pay packages— salaries converged around the $ 1 million mark—but the shift away from salary and toward stock options resulted in the greatest explosion ln execu- tive compensatlon in history. ln 1992 , CEOS 0f Fortune 500

ln the aftermath Ofthe 2008 financial crisis, much Ofthe country was enraged because not a single Wall Street hotshot—the guys who agent" 0fthe company's shareholders: "ln a free-en- He then de scribed the concept of the executive as and unadulterated socialism. anyone else t00k them seriously—preaching pure reformers. ln fact they are—or would be if they or may be the catchwords of the contemporary crop of crlmlnation, avoiding pollution and whatever else sibilities for providing employment, eliminating dis- a SOCial consclence' and takes senously itS respon- promoting desirable social' ends, that business has is not concerned merely' with profit but also with ing free enterprise when they declaim that business snide. 。 [Businessmen] believe that they are defend- subversive tO the capitalist system. His tone was Frie dman claime d that such exe cutive s we re 。 highly CEO was one with an enlightened social conscience, the Harvard Business School) that the best type of tury view (and that of the most influential faculty at ness ls tO lncrease lts profits. " Flouting the midcen- Maga titled "The social Responsibility 0f Busi- Friedman published an essay in The N ビル物液 Times ln 1970 , NOb el Prize-mnnmg e conomist Milton credibility. But that's getting ahead ofthe story. school a lot ofmoney and (for a few ye ars) intellectual making money. And ⅲ the 1980S , Jensen brought the a better place, it's Just posturing. What it's about is vard Business S chool talks about making the world ure, for starters, but the other reason is that when Har- ugly one. SO why does he still have a j0 He has ten- at HBS—but the damage is done, and his legacy is an message he SOld everyone on in the 1980S ーー not even spent the bulk 0f his career. Few still believe ⅲ the professor at Harvard Business SchOOl, where he has That brings us tO Michael Jensen, a tenured finance financialcrisis could happen in the first place. intelle ctual foundation up on which a market- driven to be made that the fault lies with those who laid the been made t0 take the perp walk, there's also a case While there are many financiers who could have Ot us intO the mess—was rosecuted. When Joel Bakan interviewed Friedman for his 2005 social goal—are, Friedman said, actmg immorally. moral—with an eye tO the envlronment or some Other Execufives WhO act in ways most Ofus would consider lt was a remarkable intellectual sleight of hand. nay, for capitalism itself.. such naive notions for the good Of the country— done, he was argulng, and it was time tO throw 0 伍 their good nature get in the way 0f getting the j0b erwise—to anyone but the shareholder. They d let people from their obligations—contractual or Oth- Friedman was suggesting the release of those also cheaper. by products from Japan that weren't just better but talists and public opinion, all while being besieged the 1970S , hectored by employees, environmen- the beleaguered CEO of a major American firm in was on the verge Of a nervous breakdown. lmagine argued (shareholders) but t0 a managerial class that argument not Just tO those in whose interests he the United States—Friedman made a compelling Of profit is "wicked" has never been prevalent" in well as its exaggerations—the idea that the pursuit Setting aside the hysterical tone Of the above, as the iron first Of Government bureaucrats. developed, 0fthe pontificating executives; it will be will not be the social consclences, however highly adopted, the external forces that curb the market and controlled by external forces. Once this view IS profits is wicked and immoral and must be curbed the already t00 prevalent view that the pursuit of kudos in the short run. But it helps tO strengthen responsibility, ” Friedman wrote, may gain them Krugman. [Speeches] by businessmen on social ics, you pretty much have tO dO so—just ask paul ist stances. If you want tO get noticed in econom- Friedman didn't shy away from taking alarm- forming t0 the basic rules ofthe society. will be to make as much money as possible while con- terprise, pnvate-property sys- tem, a corporate executlve IS an employee 0f the owners 0f the business. He has direct respon- sibility t0 his employers. That re sponsibility is tO conduct the business ln accordance With their desires, which generally IFYOU WANTTO GET NOT ℃ ED ECONOMICS, YOU PRETTYMUCH HAVET 〇 TAKEALARMISTSTANCES. NEWSWEEK 36 APR 比 14 , 2017 book, The Co ora な : The ル olog 記 Pu リな Pr 知れ d PO ル , the economist repe ate d the point he'd made nearly 40 years before, but with a twist. ln Friedman's V1ew, hypocnsy iS virtuous When it serves the bottom line, ” Bakan observed,

firms made an average of $ 2.7 million. By 2000 , it was up tO $ 14 million. StOCk options as a percentage ofcompensation rose from 19 percent in the 1980S tO nearly 50 percent in 2000. What alSO increased: short-termlsm and the tendency for executives tO manage earnings, aggressive accounting tO give Wall street analysts a smooth ” earnings tra- jectory on which tO base their forecasts. Jensen was right that CEO compensation would nse in the case ofoutperformance, but he was wrong about the fact that CEOs would suddenly be at risk of being fired for underperformance. The compe n- sation Of America S corporate execufives ShOt up in the 1990S , regardless of—and sometimes in spite Of— their performance. Jensen's finance-based theory Ofthe corporation lost significant credibility in the wake 0f the 200 た 2010 financial crisis. Specifically, observed Gerald Davis, the ideas that financial markets are "infor- mationally effcient" and that "it is appropriate for corporate governance mechanisms tO guide corpo- T H E 一霹朝一まま鶩弱朝ま罍 G 〇 L D E N N E W S W E E K HE flRM AUT H E N E Ⅳ Y 〇 R K TIM ES B E ST S E は 灯 E D 」 FMcDON)AA D ÅORAL FAILURE oftheMB ー = 2 一 M ほ S OF CA 円 TALISM HARVARD BUSINESS SCHOOL, PA S S P 〇 R T 42 rations toward share price as their North Star ” were revealed t0 be, well, extremely misguided. "The merits Of this view are debatable," wrote Davis; less SO are the hazards tO the economy when it is broadly accepted by executives, investors, and poli- cymakers. lndeed, some would go so far as t0 argue that the financial view of the corporation helped create the criSlS we are ln no 、 A.,T. There iS no doubt that finance and financial markets are central tO what public corporations dO. What is less clear is that an ownership society is a workable model for pro spe rity and se curity. Way back in 1951 , the chairman ofStandard Oil of New Jersey—the company founded by the ultimate robber baron, John D. Rockefeller—said: "The job of management iS tO maintain an equitable and work- ing balance among the claims Ofthe various directly affected interest groups... stockholder, employees, customers, and the public at large. ” During the Je n- sen era, many people forgot about that. But then we all sort ofremembered it again. Even shareholder-friendly Jack WeIch, the longtime CEO of GeneraI Electric, eventually came around. ln March 2009 , he told the F ⅲ 4 〃 Times, "On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strat- egy … . Your malll constituencies are your employ- ees, your customers and your products. Managers and investors should not set share pnce increases as their overarching goal ・・ Short-term profits should be allied with an increase in the long-term value 0f a company ・ Maybe, just maybe, we re not all whores. Rendering Business History 「 e 厄 a れ t EVEN WHEN people started to get a little nervous about the effects of shareholder capitalism on the American economy, Jensen wasn t apologetic. lndeed, he went in the other direction, ripping intO fellow members of the HBS faculty if they strayed t00 far from his orthodoxy. William Lazonick got an HBS faculty post in 1984 at the invitation of AIfred Chandler, followed by a stint as president of the school's Business History Conference. He made the mistake 0f challenging the new king of finance when in 1992 he presented his paper "Controlling the Market for Corporate Control: The Historical Significance ofManagerial Capitalism' ln a semmar centered on the work ofJensen. 十 CLASSES DISMISSED:In his book, McDonald argues that the Harvard Business SchooIturned its back 0 「 de 「 tO draw ⅲ more WaII Street money. on the philosophy it had espoused fo 「 75 years in A P R 比 14. 2 017

1 AP R I L 14 , 2 017 / v 0 L . 16 8 / N 0 . 15 ー N T E R N AT ー 0 N A L Afghanistan Bye-Bye, BIack Banners 20 EXECS EDU CEOs wait to t0 ま h 巨 media at-the N/hite Höuse after meeting お bout 鰤ザ で eo れ omy wi 市 p 引 detit BarachObama ーゞ Wa 恤 on 血 200 % ー , N E W W 〇 R L D 46 Skin TactiIe Advantage A New Leash on Life 50 Drugs Pick a Number, Any Number Space Meteors to Order 48 0 53 W E E K E N D 54 The PIace to Be CapiIIa San Bernardo, Argentina lnterview Karen Elson 58 The Taster Essenziale, Florence 59 The Buyer llse Cornelissens 60 Books Charlotte Perriand; lan Rickson; 」 ohn Waters Screening Room/Radar Neruda; Reneé FIeming 64 Parting Sh0t ・ Tallyof Failures' 56 D E P A R T M E N T S F E A T U R E S The BiIIionaires March 0 れ Washington Thefve been coaxed out oftheir mansions and 0 仕 their yachts by President Trump to make Amenca great again—for the very, very rich. ルか“お盟なん How Harvard FIunked Economics 引 G S H 〇 T S 24 Pohang, South Korea Pounding Sand Bentiu, South Sudan Hungryfor Help London Brexit Wounds 10 Mocoa, CoIombia Lethal Mud 4 6 34 8 62 lfyou want to know why the U. S. economy is a mess, look to the Harvard Business School and its army of craven MBAs. の〃 D07 -—¯P A G E¯O N E 12 China China Checkers Panama AII the President's Strongmen COVER CREDIT: ILLUSTRATION BY ALEX FINE Newsweek 0SSN2052-1081 ). is published weekly except one week in 」 anuary. 」 u ツ . August and October. Newsweek (EMEA) is published by Newsweek Ltd (part of the 旧 T Media Group Ltd), 25 Canada Square, Canary Wharf, London E14 5LQ, UK. Printed by Quad/Graphics Europe Sp z 0.0. , Wyszkow, poland FO 「 Article Reprints, Permissions and Licensing www.旧Treprints.com/Newsweek 16 FOR MORE HEADLINES, GO TO NEWSWEEK ℃ OM 1 N E W S W E E K A P R 比 14 , 2 017

LEHMAN just have tO see what happens. A course grounded in agency theory that Jensen developed at HBS—The Coordination and Contr01 of Markets and Organizations—was designed to make stude nts more 。 tougwmifidéd'"åiüshift them from the "stakeholder model" oforganizational pur- pose. lt became one Ofthe most popular electives at the school. Agency theory wasn't new, but Jensen s resurrected form Of it provided academic Justifica- tion for the takeover movement, and HBS provided its revolutionary soldiers. Ethics-Free MBAs IN A 1994 paper Jensen wrote with Meckling, "The Nature Of Man, ” he cited the story 0f George Ber- nard Shaw asking an actress if she would sleep with him for a million dollars. When she agreed, he changed his 0 飛 r t0 $ 10 , t0 which she responded with outrage, asking him what kind of woman he thought she was. His reply: we've already estab- lished that. Now we re just haggling about the price. " The authors then concluded that we re all whores. "Like it or not, individuals are willing tO sacrifice a little Of almost anything we care tO name, even reputation or morality, for a suffciently large quantity ofother desired things. The solution they offered was premised on this cynical view Of man and, having started from the assumption that we are all whores, they naturally ended up with prescriptions for making us well- behaved whores. "Unlike theories in the physical sciences, wrote Sumantra Ghoshal, a professor at the London Business Sch001, in his 2005 paper, "Bad Management Theories Are Destroying GOOd Man- agement Practice,' 0 theories in the SOCial sciences tend to be sel んⅲⅡ ing.... This is precisely what has happened over the last several decades, converting our collective pesslnusm about managers intO real- ized pathologies ln management behaviors. ln other words, if everybody assumes you re a whore, you might as well grab as much money as possible while you're still in demand. [By] prop- agating ideologically inspired amoral theories, business schools have actively freed their students from any sense ofmoral responsibility," concluded Ghoshal. Managers were not tO be trusted; share- holders were. lt was one Of the most remarkable about-faces in the history ofeducation. And by hir- ng JensenyHBS threw its 10t in with the cynics ・ Graduates 0f HBS had always been drawn to finance, but ⅲ the ・ 'HYPOCRISY IS 1980S they began heading t0 Wall VES=Stre etand privateequityfirms ・ VIRTUOUSW droves. Whereas ⅲ 1965 only 11 THE BOTTOM 凵 NE. " percent 0f HBS MBAs entered 十 NO, BRO: Lehman B 「 os. was one Of the few errant firms that were allowed tO go under during the 2008 crisis. Most of the other big money folks got some form Of bailout 0 「 dispensation. largest companies. But the unproductive diversifica- tion Of the conglomerate era had resulted in excess capacity, flat or declining profits, and stagnant share prices. As a result, the DOW Jones lndustrial Average was basically flat from the mid-1960s through the early 1980S. That excess capacity played a large part in what Jensen called the "capital market restructur- ing revolution Of the 1980S. ' ' Companies sitting on large piles 0f cash—and there were many, because executives back then were loath tO return money tO shareholders—suddenly became the target of hos- tile acquirers. The age Of investor capitalism began, and its heroes were not CEOS but corporate raiders like Carl lcahn and T. Boone Pickens. A wave Of deregulation then created the active market for corporate control, with the new beliefthat the shareholder was supreme , absolving managers 0f responsibility to any "stakeholder"—employees, communities, society itself—except shareholders. The bottom line was all that mattered. John McArthur, then dean 0f HBS, liked Jen- sen s message and invited him tO HBS as a visiting professor in 1984. ln a 1999 vanity project about McArthur's tenure, T ん加〃 al 〃 Capi / - なら HBS trotted out a rationale for hiring him: Jen- sen had been interested in testing his unorthodox ideas against the experiences Of practitioners and had agreed t0 come t0 HBS on a temporary basis tO get increased access tO high-level decision mak- ers in business. ' Hogwash3ßTheory Of the Firm" ー was testable only in thesensethat Keynesian eco nomics IS testable, or a theory Of whether a hurricane might sweep beachfront houses out tO sea is testable—you can debate the issues until you're blue in the face, but at some point, you NEWSWEEK 39 APR に 14. 2017

3 十 MARKET LAID BARE: Two tenets espoused by HBS, the primacy Of shareholder value and unrestricted compensation Of CEOS, set up a frenzied market that almost crashed the world economy in 2008. Lazonick was known tO be a critic Of Jensen S ideas on shareholder value, but a critic in the aca- demic sense—you sat across from each Other on a podium during a seminar, or you traded barbs in the gentlemanly forum 0f academic Journals. N0t this time. S ome sp arks flew during the s eminar, Lazonick recalls. Jensen was king 0f the hill, and he objected t0 me … daring t0 question him. He was livid that he had been set up in front of all his colleagues t0 be critiqued by an outsider. He t01d [HBS professor Thomas] McCraw not to invite me back, and I wasn't … for another 17 years. And keep in mind that the year before that, I had been president of the Busmess History Confer- IFEVERYB 〇 DYASSUMES e nc e.A-å avemoQoub Üab out YOU'REAWHORE,YOU MIGHT it, the most powerful man at HBS in the early 1990S was ASWELLGRABAS MUCH Michael ensen.... He was much mo re e ngage d with stu- dents, those students were all Y 〇 U'RESTIL 凵 N DEMAND. going t0 Wall Street, and Wall Street firms were all sending money back to HBS. The net effect of it all was that agency theory ren- dered business history irrelevant. Lazonick thinks his experience shows intellectual cowardice. "Almost immediately after they hired [Jensen] , shareholder value ideology quickly t00k a dominant position at HBS, even though, from their own experience, the vast maJority Of faculty mem- bers did not believe it. But there was absolutely zero critique. Even from those wh0 should have known better... there wasn t a peep. lt's quite sad. "B0th [Harvard President] Derek B0k and [HBS D e an] John McArthur should have known b etter, but they went out Of their way to recruit Jensen, says Lazonick. "I asked a member ofthe faculty wh0 is actually still there about it, and he said that McAr- thur thought th at's where th e money was, and hiring Jensen would bring in donations 仕 om Wall street. ” Lazonick saves hiS greater condemnatiorvTorAhos HBS who should have stopped the rise 0fJensen. "They had a NEWSWEEK 43 APR 比 14 , 2017

A ID A IFYOU WANTTO BY DUFF MCDO A ー 0 CRAVEN MBAS AND ITSARMYOF BUSINESS SCHO 〇 L LOOKTOTHE ECON 〇 MYISAMESS, KNOWWHYTHE U. S.

merits Of shareholder capitalism. And it continued tO deliver pseudo-intellectual capital that practi- tioners could use tO justify their decisions. ln the 1980S , HBS had abandoned its mission of trying t0 educate an enlightened managerial class. lnstead, it threw its 10t in with Wall Street as it was dismantling the edifice of American industry HBS had helped build. HBS had nurtured the professional manager from his birth and then helped to kill him. The malll way it did so was by endorsing the innocuously named principal-agent theory pop- ularized by Friedman. While much ofthe faculty of HBS was still trying to figure out how to help Amer- 1Can management resurrect itS reputation and itS fortunes as the 1980S began, MichaelJensen, then a professor at the University Of Rochester's business school steeped in the University of Chicago's free market tradition, was making sure the good name of managers stayed buried. Along with William Meckling, the dean of Rochester's business school (and a graduate student 0f Friedman's), Jensen wrote a 1976 paper that would change everything. ln "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure," he laid the groundwork for the most radical change in the hierarchy Of power ln corporate America since the robber barons gave way tO professional managers. Arguing that managers had become t00 entrenched and lacked discipline and accountability, Jensen and Meckling posited that investors were more trust- worthy than managers as custodians Of the Amencan corporation. Managers weren t going tO voluntarily reform, they said, so the system had to be adjusted so that they would be forced to do so. No longer would they be their own judge, or be judged by a jury they had picked, that is, their board. The market was henceforth to be judge, ] ury and executioner. Until Jensen came along, executive paywas largely tied t0 company size—the highest-paid CEOs ran the THE TROUGH SHALL SETYOU FREE: MiIton Friedman was the godfather Of a new kind Of business leader- ship, one that deemed mo 「 virtue immoral when it doesn't serve the bottom line. NEWSWEEK 38 APR 比 14 , 2017