April 21, 2011
Dean Nitin Nohria
Harvard Business School
Dear Dean Nohria:
In three prior letters I have presented my views of the obligation of HBS to lead in a radical change in MBA education. Managers must know how to manage in the democratic culture, but they will also need to know how to neutralize the domination by finance capitalism. These two forms of capitalism are mutually exclusive. This letter presents what others have said on the same subject.
Michael Jacobs, “How Business Schools Have Failed Business,” Wall Street Journal, April 24, 2009. At the time, a professor at the University of North Carolina’s Kenan-Flagler Business School and previously director of corporate finance policy at the U. S. Treasury, 1989-1991, Jacobs advises:
Trying to understand why our economy is so troubled, fingers are increasingly pointed at the academic institutions that educated those who got us into this mess.
What have business schools failed to teach our business leaders? There are three profound errors, none adequately addressed: 1) Misaligned incentive systems that reward short-term gains over those designed for long-term value. 2) Corporate Boards failed. A core curriculum in every business school should be devoted to board structure, composition, and processes. 3) MBA’s should learn how shareholders should exercise their rights and obligations. As the gulf between the provider and user of capital widens, the risks go up. Lacking control, financial institutions amassed a diversified portfolio of deadbeats. B-School graduates have matured into executives and investment bankers who have failed American workers and retirees who have witnessed their jobs and savings vanish.
David Gergen: “How Business Can Stand Tall Again. Unless corporate leaders take charge of their fate, government will become more and more a master,” Fortune, May 11, 2009. A professor of Public Service at Harvard’s Kennedy School and a CNN senior analyst, Gergen wrote:
“Americans are tired of companies playing short-term quarterly games at the expense of long-term achievement.”
“Management must, as proposed by Khurana and Nohria of HBS, become a true profession like law or medicine, with a code of conduct, commitment to social responsibility, and professional boards of enforcement.”
This should be “the beginning of what must become a longer, deeper conversation about a new social compact between corporations and society.”
“Now it is apparent that our best business leaders, and there are many out there, must step up and forge a path forward.”
Rana Foroohar: “The Great Wall Street Sucking Sound, What have we gotten from the fact that finance monopolizes talent? Not Much,” Time, April 4, 2011. Foroohar has been deputy editor for international and economic coverage for different weekly magazines.
“Wall Street hires more engineering and science graduates than the semiconductor industry, Big Pharma, and the telecommunications business. MIT graduates who went to Wall Street increased from18% in 2003 to 25% in 2006. Why should they work on new high-tech products when they can make five times as much crafting models on Wall Street?”
“The growth of the financial sector has run in tandem with lower not higher rates of new business formation. Basically the facts show the opposite of what Wall Street would have us believe. The financial sector is sucking talent and entrepreneurial energy from more socially beneficial sectors of the economy.”
"It’s new companies, not old, that grow the economy. The financialization of the economy has dampened entrepreneurship and caused the slowdown in productivity. The political emphasis should be on helping new companies take root.”
Schumpeter: “The pedagogy of the privileged. Business schools have done too little to reform themselves in light of the credit crunch.” The Economist, Sept 26, 2009.TheSchumpeter columnists on business, finance and management wrote:
“This has been a year of sackcloth and ashes for the world’s business schools. Critics have accused them of churning out jargon-spewing economic vandals. Many professors have accepted at least some of the blame for the global catastrophe. Deans have drawn up blueprints for reform.”
“The result? Precious little. Business schools have introduced a few new courses. Students at Harvard Business School (HBS) have introduced a voluntary pledge ‘to serve the greater good’ among other worthy goals, which about half of this year’s graduates embraced. But for the most part, it is business schooling as usual. The giants of management education have laboured mightily to bring forth a molehill.”
“You cannot both claim that your mission is ‘to educate leaders who make a difference in the world,’ as HBS does, and then wash your hands of your alumni when the difference they make is malign.”
“Management education needs to start again from scratch. More history classes would help.”
Philip Slater & Warren G. Bennis: “Democracy Is Inevitable,” Harvard Business Review, September-October 1990, reprint from HBR March-April 1964. Philip Slater was artistic director of the Santa Cruz County Actors’ Theater; Warren G. Bennis was the Distinguished Professor of Business Administration at the University of Southern California.
This article is important in that an agency of Harvard was presenting democratic capitalism as inevitable because it works better. It explores how groups can find truths not available to the individual when the group is organized for truth-seeking. The principles are the same as those presented in Democratic Capitalism: the worth and potential of each in an environment of trust and cooperation and with these principles in place the whole will be bigger than the sum of the parts, it works better.
“What we have in mind when we use the term ‘democracy’ is not ‘permissiveness’ or ‘laissez-faire’ but a system of values-a climate of beliefs governing behavior. These values include: 1) Full and free communication regardless of rank and power 2) A reliance on consensus rather than coercion or compromise. 3) Influence based on technical competence and knowledge. Organizations, lacking in creativity, were gradually moved towards democratization.
When the system components are studied, the superior performance seems obvious. The question then is why has it has not become the universal system. There are two main reasons: For many centuries, the establishment was predatory in both colonization and commerce. The mode of production evolved slowly from slavery, to serfdom, to the wage slaves of the Industrial Revolution. The Information Age revolution, however, forced recognition that their prime resource, the cognitive power of their people, could be released only in the democratic work culture.
The second reason is that the domination by finance capitalism has maintained the predatory culture through downsizing and sacrifice of long-term building for short-term earnings. Finance capitalism must be reformed before democratic capitalism can flourish.
Ralph Stayer: “How I Learned to Let My Workers Lead. Put yourself out of a job-you’ll teach your employees to lead themselves.” Harvard Business Review, November-December, 1990 Stayer at that time was CEO of Johnsonville Foods Inc., and managing partner of Leadership Dynamics.
Stayer began with an analysis of his business of making sausage. The goals were the usual high quality, low costs, but he expressed his concerns this way: “What worried me, however, was the gap between potential and performance. Our people didn’t seem to care. Every day I came to work and saw people so bored by their jobs that they made thoughtless, dumb mistakes.”
Stayer discovered that he was the source of the problem with his top-down, command-and-control style of management in which he made all decisions. As the title says, he then learned to let his workers lead. A couple of examples are given below but first let’s reflect on the words of Robert Owen who also discovered the same opportunity in his spinning mill near Glasgow early in the 19th century. He claimed huge gains from investing in his people: “What may not be expected if you devote equal attention to your vital machines, which are far more wonderfully constructed? From experience which cannot deceive me, I venture that your time and money would return you not five, ten, or fifteen percent for your capital so expended, but often fifty and in many cases a hundred percent.”
For managers striving for a few percentage points of improvement these seem like wild numbers, but let us look at a couple of the particulars at Johnsonville Sausage once Stayer made the employees responsible. One team studied a problem from suppliers’ quality to customers’ handling. They found that the vacuum packed plastic packages had leaked air and shortened shelf life in the stores. They applied their solutions and the results were amazing: rejects fell from 5% to less than 0.5%”.
“Stayer communicated his vision and then got people to see their own behavior, harness their own frustrations, and own their own problems. Workers in one plant disliked working weekends and were given the responsibility to study the problem and find solutions. They found that machine downtime ‘hovered’ between 30% and 40% because of lateness, absence, sloppy maintenance, and slow shift start ups. Once the workers saw that they were the problem, they cut downtime to less than 10% and had Saturdays and Sundays off.”
These are examples of “continuous process,” that is, a democratic capitalist culture that releases the creativity and energy of everyone in the operation.
Besides the right culture democratic capitalism needs a way to share in the improvement. In Stayer’s case, every six months the employees evaluated performance and divided a profit pool based on this evaluation.
Brook Manville & Josiah Ober: “Beyond Empowerment: Building a Company of Citizens. We’re in a knowledge economy, but our managerial and governance systems are stuck in the industrial era. It’s time for a whole new model,” Harvard Business Review January 2003. Brook Manville was the chief learning officer of Saba Software, Redwood Shores, California; Josiah Ober was the David Magic Professor of Classics and the acting director of the University Center for Human Values at Princeton University.
In my book and materials on the Carey Center web site www.democratic-capitalism.com I emphasize the choice between mercantilist capitalism in which profits are maximized by suppressing wages and benefits and democratic capitalism in which profits are maximized by investing in the people. In the Information Age, however, there is no longer a choice because the democratic work culture is necessary to release the cognitive power of their people.
Manville and Ober expressed it this way: “The core assets of the modern business enterprise lie not in buildings, machinery, and real estate, but in the intelligence, understanding, skills, and experience of employees. Harnessing the capabilities and commitment of knowledge workers is the central managerial challenge of our time. Unfortunately, it is a challenge that has not yet been met.”
They acknowledge that organizations have reduced bureaucracy but “that ‘empowerment,’ as it’s commonly called, is limited with little voice in decisions about the direction of the company.”
Marx’s evolutionary progression of the mode of production moved from slavery to serfdom, to the wage slaves of the industrial revolution and now the participating and contributing “associates” of the Information Age. It is this last group whose leadership by self-taught democratic managers has evolved through economic and social logic. It is management in this democratic system that needs integration by HBS to make it the universal system with additional wealth built and distributed broadly.
I’m sure you will be pleased to know that I have two more letters on MBA education to write to you. One will provide a bibliography on the history and application of democratic capitalism, the other a bibliography on the confusion of purpose and lack of a unifying value system in academia. Once HBS understands Democratic Capitalism it can lead the rest of the university towards the economic alternative that not only maximizes broadly distributed wealth but does it in a moral environment.
Ray Carey ‘50