Later On

A blog written for those whose interests more or less match mine.

Maximizing shareholder value and the death of community

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Recently I read this review by Andrew Sorkin in the NY Times of Duff MacDonald’s book The Golden Passport. The idea is that business schools taught that the primary and overriding purpose of a corporation is to increase shareholder value. With that as the sole criterion, corporations in effect abandoned any pretext of social responsibility and focused solely on profit, throwing overboard anything that might impact profit (such as employee welfare and compensation, environmental protection and stewardship, community support, and so on). The review is worth reading. From it:

If you were to look for one ingredient that binds together the nation’s chief executives, top managers and boards of directors, you’d find a remarkably consistent commonality, now and in generations past: A disproportionate number of them are graduates of Harvard Business School.

An M.B.A. from H.B.S., as those in the know refer to it, has long been the ultimate Good Housekeeping stamp of approval on any résumé. Jamie Dimon of JPMorgan Chase, Jeffrey Immelt of General Electric, Sheryl Sandberg of Facebook — and the list goes on and on. The number of Fortune 500 chief executives who earned their business degrees at Harvard is three times the total from the next most popular business school, the Wharton School at the University of Pennsylvania.

It is hard to overstate the school’s influence on corporate America.

That’s why a new, exhaustive history of the school is causing a stir before it is even out. The book, “The Golden Passport,” by the veteran business journalist Duff McDonald, is a richly reported indictment of the school as a leading reason that corporate America is disdained by much of the country.

“The Harvard Business School became (and remains) so intoxicated with its own importance that it blithely assumed away one of the most important questions it could ask, which was whether the capitalist system it was uniquely positioned to help improve was designed properly for the long term,” Mr. McDonald writes in the book, to be released in two weeks.

His answer? “With economic inequality at a hundred-year high and meaningful progress on climate change and other social and environmental issues embarrassingly paltry, the answer to that question is obvious. It is not.”

Citing a report from the Aspen Institute, Mr. McDonald explains that “when students enter business school, they believe that the purpose of a corporation is to produce goods and services for the benefit of society.”

“When they graduate,” he continues, “they believe that it is to maximize shareholder value.”

Mr. McDonald brilliantly tells the story of the school’s creation in 1908, when its mission was to educate the next generation of business managers. Edwin Gay, its first dean, defined business as the “activity of making things to sell at a profit — decently.”

But, the author says, somewhere during the mid-1980s, something went very wrong: “The money got too good.”

The money he refers to is the tsunami of job offers that Harvard students received from Wall Street, and the funding the school raked in from its well-heeled alumni.

In fairness, Harvard Business School makes an easy punching bag, given its stature as the top feeder for big business. This is hardly the first time the institution has been criticized.

And it is too much to paint all 76,000-plus alumni as being ethically challenged, as Mr. McDonald appears to imply. Indeed, many of the school’s vaunted alumni are among the most talented executives in the country, and many are trying to think about stakeholders holistically.

Yet in example after example, Mr. McDonald sets out his thesis that money and influence have distorted both the school’s curriculum and the worldview espoused by its professors, who themselves are on the payroll of corporate America as part-time advisers and consultants.

“For a whole semester, for example, the school is basically bought and paid for by the consulting firms,” Mr. McDonald writes, quoting Casey Gerald, a member of the class of 2014 whose rousing speech at the school went viral on YouTube.

The moneyed interests of employers prompted Harvard, Mr. McDonald contends, to hire the economist Michael C. Jensen, a financial economics specialist, in 1985. Mr. Jensen is famous for advocating the “principal-agent theory” — the idea that investors, rather than corporate managers or the board of directors, should have the most influence.

Mr. McDonald describes Mr. Jensen’s arrival as “the moment of peak paradox for H.B.S.,” contending that Mr. Jensen’s “ideologically driven hijacking of the study of finance served as a cynical repudiation of everything that had come before him at the school.” . . .

But read the whole thing.

Now in fairness, you should also read Roy Smith’s rebuttal.

Still, it does seem that something happened that made corporations lose their moral bearings and human compass and focus solely on increasing profit, regardless of the cost to employees, communities, environment, and the like. Even the Harvard Business Review is looking at this. In the May-June 2017 issue, HBR has a package of articles under the general heading “Managing for the Long Term,” with this blurb:

In this package we examine how a focus on maximizing shareholder value can threaten companies’ health and financial performance.

The articles in the package are: “The Error at the Heart of Corporate Leadership,” “The CEO View: Defending a Good Company from Bad Investors,” “The Board View: Directors Must Balance All Interests,”and  “The Data: Where Long-Termism Pays Off.”

And from back in 2005 HBR How Business Schools Lost Their Way published an article by Warren Bennis and James O’Toole, “.” Although this does not directly address the issue of increasing shareholder value becoming the sole criterion of management success, it does suggest how business schools lost sight of their mission. From the article:

. . . The actual cause of today’s crisis in management education is far broader in scope and can be traced to a dramatic shift in the culture of business schools. During the past several decades, many leading B schools have quietly adopted an inappropriate—and ultimately self-defeating—model of academic excellence. Instead of measuring themselves in terms of the competence of their graduates, or by how well their faculties understand important drivers of business performance, they measure themselves almost solely by the rigor of their scientific research. They have adopted a model of science that uses abstract financial and economic analysis, statistical multiple regressions, and laboratory psychology. Some of the research produced is excellent, but because so little of it is grounded in actual business practices, the focus of graduate business education has become increasingly circumscribed—and less and less relevant to practitioners.

This scientific model, as we call it, is predicated on the faulty assumption that business is an academic discipline like chemistry or geology. In fact, business is a profession, akin to medicine and the law, and business schools are professional schools—or should be. Like other professions, business calls upon the work of many academic disciplines. For medicine, those disciplines include biology, chemistry, and psychology; for business, they include mathematics, economics, psychology, philosophy, and sociology. The distinction between a profession and an academic discipline is crucial. In our view, no curricular reforms will work until the scientific model is replaced by a more appropriate model rooted in the special requirements of a profession. . .

UPDATE: This post originated in an email rant. I had sent to some family members a link this article about Vancouver real estate. From the article:

. . . For wealthy Chinese, Vancouver has emerged as the perfect “hedge city”—scenic, cosmopolitan, with good schools, a long-standing Chinese community, and an undervalued (by global standards) real estate market where capital can be sheltered against mounting economic and political uncertainties back home. In 2015 alone, according to estimates by Canada’s National Bank Financial, Chinese purchases of real estate in the Vancouver metropolitan area amounted to nearly $10 billion, or a third of the total dollar amount spent on city real estate. (Figures are in US dollars unless otherwise noted.) So popular is Vancouver among hedgers that local real estate firms send Mandarin-speaking recruiters to Chinese cities to entice buyers to take bus tours of Vancouver’s upscale neighborhoods.

But for many longtime residents, Vancouver’s evolving role as a giant safety deposit box for China’s elite has been profoundly destabilizing. Thanks in part to foreign capital, home prices here have more than doubled since 2006. In one 12-month period (mid-2015 to mid-2016), the median price for a single-family house jumped nearly 40 percent, to $1.17 million, making Vancouver almost as expensive as San Francisco, but with a job market that is far less varied and robust. . .

My brother-in-law responded, and wrote, “It galls me how easy it is for the rich to get richer and how hard it is for the poor.”

That trigger my rant:

I agree about the growing distance between rich and poor and wondering what caused it. I read a recent reference that it was the malign influence of one particular business professor at Harvard who taught that the sole and only consideration a company should have was profit. Everything else was secondary—and we see the long-term result: companies that focus solely on profit without considering employee welfare, community support, and civic responsibilities in general probably will in some cases show more profit (because they are screwing their employees: Walmart), and that shows a “success” in share price, so others imitate and it all goes off the tracks from there: the gap appears and grows (because the only way to deliver the profits demanded turns out to be very hard on communities, the environment, their employees, and so on. In other words, money is being directly extracted from the lives of consumers, sucking out so much that middle-class wages are stagnant and are stagnant even now, which is superficially puzzling: where could the missing money be going? Oh, right.

This post came about because I wanted to find that reference (the Sorkin review of MacDonald’s book, as it turned out).

Written by LeisureGuy

11 May 2017 at 11:37 am

Posted in Business, Education

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