The Money Chase

By Otto Friedrich

COVER STORY

Business school solutions may be part of the U.S. problem

"The '70s and '80s are the decades of management," beams Donald Jacobs, dean of Northwestern University's Graduate School of Management. "At other times, the cream of American youth went into science, became law professors or went into government to reform the system. Now they are going to the grandes ecoles of the M.B.A."

"A lot of what is preached at business schools today is absolute rot," says Michael Thomas, a New York financial consultant and former partner in the investment banking firm of Lehman Bros. "It is paper management. It is not the management of hard resources and people. Business schools teach that business is nothing but the numbers--and the numbers only for the next quarter."

"Business education reflects exactly what people in the business world want," says Jerry Harvey, professor of management science at George Washington University. "We've designed organizations that reward people who think very narrowly and behave very narrowly. Why aren't management textbooks funny? It's because they don't have much realism to them. If they had much realism to them, they'd be funny as hell."

M.B.A. Master of Business Administration. The piece of paper certifies that the holder knows things that other people do not know about how to make money, a lot of money. As recently as 1960, they were a rarity: only 4,643 such diplomas were granted. By 1970, the figure had leaped to 21,599, and this year it will top 54,000. The number of institutions granting graduate degrees in business and management has soared from 303 in 1970 to nearly 500 today. All told, there are now slightly more than half a million M.B.A. holders--also known as just plain M.B.A.s--working their way up through the ranks, and those who are not already running their corporations plan to be doing so shortly.

They are, in other words, a professional managerial caste that considers itself trained--and therefore destined--to take command of the nation's corporate life. This might prove a misfortune of some magnitude. For although the M.B.A.s generally see themselves as the best and the brightest, and the most energetic and ambitious as well, a growing number of corporate managers look on them as arrogant amateurs, trained only in figures and lacking experience in both the manufacture of goods and the handling of people. Worse, the flaws in the polished surface of the M.B.A. now appear to reflect flaws in the whole system of American business management, in its concepts, its techniques, its values and priorities. The M.B.A., then, is both a cause and a symptom of some fundamental problems afflicting the U.S. economy.

Despite such misgivings, though, the M.B.A.s come marching on. Of the chief executive officers of FORTUNE'S 500 largest industrial companies, the number of M.B.A.s totals only 15%, but that is rapidly changing. A team of University of Michigan professors has done a study of more than 12,000 top executives, questioned just after they became presidents or vice presidents, and found that the percentage of M.B.A.s has increased from 10% in 1967 to 30% in 1980. Harvard boasts that 3,500 of its M.B.A.s head U.S. corporations, and they include 19% of the top three officers of the FORTUNE 500.

The figures of mere growth are somewhat misleading, since they are based largely on the proliferation of M.B.A. programs at institutions like Los Angeles' Woodbury University or the Millsaps College School of Business in Jackson, Miss. Many schools have also started abbreviated M.B.A. programs for experienced executives. Already there is some talk of an M.B.A. glut and of what Dean Jack Steele, of the University of Southern California, calls "the debased coin of the realm." But at the top level--a position widely attributed to Harvard, Stanford, the University of Chicago and Pennsylvania's Wharton School, followed by not more than half a dozen others--enrollment remains fairly steady, while the competition to get in becomes increasingly fierce. Stanford Dean of Admissions Lawrence Lieberman gleefully rubs his hands together as he reports more than 5,100 applicants for 300 places, which is twice the rate for 1975. At Harvard, 7,000 applied last year (compared with 4,300 in 1975) for 785 spots. Says Chicago's director of admissions, Dennis Metcalfe: "There will never be a glut of M.B.A.s from the best schools. Exxon told us they would like to recruit our whole graduating class."

The M.B.A. degree is not cheap. Annual tuition for the two-year program runs to $6,300 at Chicago, for example, and living expenses can nearly double that figure. Since many M.B.A. students leave jobs to attend classes, they also lose their regular salary for two years. But the financial rewards begin almost immediately after graduation. Though job offers have leveled off at some institutions in this economically ambiguous year, the good M.B.A. schools have little difficulty placing their alumni--including the ambitious young women who now make up nearly one-third of the class--at starting salaries approaching $30,000. At Stanford, the 1980 median starting salary was $31,998, up 16% over the previous year. One Stanford graduate got a bid of $52,000. A Harvard graduate was offered $59,000. The students are correspondingly euphoric. Says Chicago's Geoffrey Faux, 26: "By going to an elite business school, I'm giving a signal of my potential for success."

"Such signals begin pulsating even before graduation. At Wharton 611 recruiting firms turned up this year to court the graduating class of 619, and students averaged 27 interviews each. At Harvard, where the typical student now gets 15 interviews and four job offers, there has been a rule since 1978 that no recruiters may talk to students before the spring of the second year. The rule is not always obeyed. Among the offers to first-year students: a $5,000 open account for clothes at Brooks Bros, as an "image bonus" if a student signs up early; a $5,000 increase in starting salary if the student signs up within two weeks, but $1,000 less for each week of delay. Bain & Co., a management consulting firm, was cited for violations last year but had no regrets. Said a Bain official: "We don't feel we have done anything unjustified."

Yet even as the corporate recruiters scramble to sign up these young paragons, there is increasingly widespread criticism of M.B.A.s, their training and their functions. The indictment reads like this:

M.B.A.s are simply too expensive. "My God, they come high-priced!" says Susan McGovern, vice president of personnel at the Wells Fargo Bank in San Francisco, who has begun a review of her firm's hiring of M.B.A.s. Concedes Arjay Miller, who left Ford to head Stanford's business school from 1969 to 1979: "I've never said this before, but I do think some firms are paying M.B.A.s too much money."

They are too aggressive. "They are often inexperienced, arrogant, highly individualistic operators with no patience for team effort," says Nelson Cornelius, manager of the Merrill Lynch commodities office in Chicago. Admits Dean Donald Carroll of Wharton: "Our system has a built-in tendency to reward the aggressive loner, so we get a higher number of relatively antisocial types who display a tendency not to suffer fools."

They, lack loyalty. "I do often hear that M.B.A.s are impatient, and because of that impatience there's quite a bit of turnover in the early years," says Carl Hartnack, board chairman of the Security Pacific National Bank. "Some think they can go to Xerox and become president overnight, but without training this is ridiculous." Adds Thomas B. Hubbard, founder and chairman of THinc., a New York consulting firm: "They tend to be more loyal to their personal careers than to any company. So although they have made some companies better, they have also made them more vulnerable."

But the most fundamental criticism is that the misjudgments and mistakes characteristic of U.S. management as a whole can be blamed at least in part on the managerial methods and ideas of the up-and-coming M.B.A.s. There has been, these critics say, too much emphasis on short-term profit, not enough on long-range planning; too much on financial maneuvering, not enough on the technology of producing goods; too much on readily available markets, not enough on international development. Admits Lee J. Seidler, a Wall Street securities analyst and professor at the New York University Graduate School of Business Administration: "It may be that some of the basic tools we've been teaching in business schools for 20 years are inordinately biased toward the short term, the sure payoff."

C. Jackson Grayson, chairman of the American Productivity Center, sees the roots of the problem reaching back even further. Says he: "American management has for 20 years coasted off the great research and development gains made during World War II, and constantly rewarded executives from marketing, financial and legal sides of the business while it ignored the production men." Robert Hayes and William Abernathy, two Harvard professors of production and operations management, quoted Grayson's strictures in the Harvard Business Review and added: "Our managers still earn generally high marks for their skill in improving short-term efficiency, but their counterparts in Europe and Japan have started to question America's entrepreneurial imagination and willingness to make risky, long-term investments."

European executives used to be somewhat awestruck by the American "professional manager," and they considered it prestigious to hire someone who had earned the mysterious letters M.B.A. Comparable programs, with some courses taught by Americans, were started at the universities of London and Manchester, at Milan and at the European Institute of Business Administration outside Paris. But the awe is fading. Says Bernard Courtaud, head of an executive recruiting firm in Paris: "French companies that wanted to hire many American- trained M.B.A.s were often disappointed because the M.B.A.s turned out to be very expensive and after a few years, they generally left."

That M.B.A. restlessness, particularly dismaying in societies where security and tradition still dominate business, is helping confirm an increasing foreign skepticism about American management itself. Why is it, for example, that so much of U.S. plant and equipment has become considerably older than that of Japan? To newly assertive foreign experts, the misguided emphasis on short-term profit seems to blind U.S. managers to the need for more research and development; moreover, they appear unable to develop long-range problems of chronic inflation and soaring energy costs. And why has quality been declining? Partly because U.S. professional managers have cared less about what they produce than about selling it --and less about selling than about bookkeeping and tax-law legerdemain and building conglomerates that sometimes fall in ruins. "For much of the trouble of the American economy," says Akio Morita, chairman of Sony, "American management has to take the responsibility."

Are such critics justified in seeing a general failure of business management in the U.S.? Wharton's Dean Carroll, who used to run a computer information systerns firm in Cambridge, Mass., looks stern as he reflects on the question posed by TIME'S Denise Worrell:

"I think there has been a slow adaptation to changing times," he says.

"Is that a criticism?"

"Yes."

"Is that an indictment of this country's business education methods?"

"Certainly not the way we are teaching it today."

But what about the way it has been taught for 20 years? That is, of course, the question. Hindsight clarifies all dilemmas, and there are some who wonder whether the essentials of management, particularly the quintessential mystery of dealing with people, can be taught at all. "If I could choose one degree for the people I hire, it would be English," says a senior vice president of the First Atlanta Corp. "I want people who can read and speak in the language we're dealing with.

You can teach a group of Cub Scouts to do portfolio analysis."

Geoffrey C. Hazard, a law professor who has been acting as dean of Yale's School of Organization and Management, shares some of the skepticism about the way management is being taught. Says he: "Every C.E.O. I've ever talked to, once pushed into a corner with two martinis, will tell you that though the myth is that he stands with the reins of power in his hands, his big question is not 'How shall I drive this marvelous chariot?' but 'How the hell can I get these goddam horses to move their asses at all?' "

"That's the kind of problem that really faces an organization," adds Hazard. "What's astonishing to me is to encounter the profound lack of self-confidence and self-worth in people who, according to their own criteria, have achieved success. Why are these people so nervous? These are people who really are unconvinced of the worth of what they are doing. Harvard University points with pride to the fact that one of eight of its graduates is a C.E.O., and I take a deep breath and say, 'Does that mean that seven out of eight are failures?' "

Harvard regards such criticisms as testimony to its eminence. Across the Charles River, the business school's handsome Georgian brick buildings stand in splendid isolation from the rest of the university. The B school even has its own barbershop. Founded in 1908, the school prides itself on being the oldest such institution in the nation* as well as probably the richest (its endowment: about $100 million), the best equipped (its 500,000 volumes form the world's largest business library) and the most prestigious. Dean W. Currie, the associate dean for administration and policy planning, scorns false modesty: "What we do is much too expensive for any other school to do --spend $10 million a year on field research, for example. Just to do what we do in the classroom we have to fly our faculty around the world all the time."

The 785 students in the class of 1982 come from 250 colleges and universities in 46 states and 42 foreign countries. In a typical class, about 75 of them are corralled into a windowless amphitheater, and each takes a swivel chair and puts his name card on his section of a long curving desk. Then comes the work, endless work. The first-year student stays at his desk for three hours in the morning and 1 1/2 hours in the afternoon while the different professors come and go. They teach all the required basic courses--finance, marketing, production and operations management--by the case method that Harvard pioneered in 1924 and still considers fundamental (see box). These real-life cases are complex: 20 to 30 pages each, requiring two or three hours of preliminary study. The students usually have to analyze three a day in class--more than 800 in all during the two-year course. Some times the professor asks sharp questions; sometimes he eggs the students into battle against each other; sometimes he deliberately places misleading emphasis on certain statistics. Harvard President Derek Bok describes these cases as "a basis for Socratic discussion."

The case method forces the student to think like a chief executive --this is its strength but also its weakness. It forces him to argue his views like an executive, and to bear up under executive pressure. "When I saw the first 'decision tree' they drew in my managerial economics class, the only thing I could think of was that it looked like lightning going across the chalk board," says Deborah Widener, 28, now an associate for the Wall Street investment firm of Salomon Bros." I had no idea what was going on for at least a week because we didn't ever step back."

Training students to take command and turn an ever bigger profit fulfills a venerable tradition, but as President Bok declared in a report on the business school in 1979, the corporation has become more complex and difficult to manage in recent years. Its executives must learn to deal with fractious minorities, imperious bureaucrats, foreign coups, angry environmentalists, OPEC maneuvers and, most perplexing of all, an increasingly widespread sense of uncertainty about the corporation's role in the nation's life. Said Bok: "Most classroom discussions still proceed on the unexamined assumption that growth and profits are the only concerns of the corporate manager. The study of ethics has fared no better. By remaining silent, business schools not only fail to awaken their students to a larger sense of their calling, they neglect their responsibility to their profession."

Bok took pains to offer public praises to the institution he was implicitly scolding, and the school's new dean, John H. McArthur, took equal pains to demonstrate that Bok's criticisms were already being resolved. "Bear in mind that the economic world changed drastically and irrevocably in the 1970s," says McArthur, who enjoys a fireplace in his office by the Charles. "Business schools are now in transition, struggling to respond to the changes. I think the shift is under way." A course in human resources is now a mandatory part of the first-year curriculum, and self-assessment is a popular second-year subject. Various aspects of ethics receive considerable attention. A class in interpersonal behavior may be assigned to see and analyze the film version of D.H. Lawrence's Women in Love.

If Harvard is the temple of the case method, the Gothic towers at the University of Chicago form the shrine of pure theory. "The case-study method is only a concoction that looks realistic," scoffs Eugene Fama, who teaches a notoriously tough lecture course in finance. "It's like an electronic hockey game that can never produce real hockey players." Chicago's first-year core courses cover statistics, managerial accounting, microeconomics and macroeconomics. The second-year electives put the theories to work: applied econometrics, financial instruments, application of finance theory. Though the emphasis on theory is heavy, Chicago officials insist that they produce generalists. Says Metcalfe: "They have learned selective analysis, how to make decisions. They are not trained to do computer programming. They are trained to do the unexpected."

Most M.B.A. programs, of course, consist of a varying mixture of lectures, case studies and improvised debate. At Stanford, where the curriculum ranges over the exotica of high finance, the class on power and politics in organizations devoted a session to the case of Mary Cunningham, the celebrated alumna of Harvard and Bendix who is now a vice president at Seagram. Perhaps because of former Dean Arjay Miller's long experience at Ford, Stanford tries particularly hard to blend the academic and the commercial. After learning that its students' writing ability was, as Business School Dean Rene McPherson said, "shockingly bad," it began to evaluate students' papers for prose style and to have oral presentations taped and judged for coherence. Miller also insisted on broadening Stanford's curriculum to include courses on government regulation and other aspects of public management.

As part of the new emphasis on ethics, Professor Kirk Hanson focuses on notable cases like that of Carl Kotchian, the former vice chairman of Lockheed, who was accused of bribing Japanese officials and forced to resign. Says Hanson: "We debate where responsibility lies in a corporation. To your employees, whose jobs might be lost if the company loses the contract? To the Japanese people, whose government is involved in corruption? To competitors who lose out on the contract? The students tend to divide, with a significant number feeling that the main responsibility is to one's own employees. But the majority usually seems to feel that the influence of bribery on the Japanese is the greater factor here."

But how can ethics really be taught in a business school? Is it as simple as not paying bribes, or is it a tangled problem of trade-offs between lost jobs and foul air? Or does it go still further? At the University of Virginia's Darden Graduate School of Business Administration, which has perhaps the best M.B.A. program in the South, such questions can arise unexpectedly in one of Associate Professor William Zierden's classes on organizational behavior. The problem: a conflict between an aggressive supervisor and a truculent employee. Should the supervisor be fired, or the employee? Or what should be done?

Student: I'd fire the employee. Supervisors are hard to come by, but the hourly employee is expendable. You can get them all the time.

Professor: That's the dumbest comment I've ever heard. It's absolutely unacceptable. I don't want you in my section any more. Pick up your books and get out.

The student sits stunned. The professor goes to the student's desk, picks up his books and dumps them in his lap.

Student: Hey, can't we talk it over?

Professor: Get out! I don't want you in here!

The embarrassed student leaves, then decides to return to class and quietly goes to his seat.

Professor: Now tell us what it's like to be fired.

A considerable part of what business schools teach is not directly connected to the techniques of business at all. "The most important thing was simply being exposed to the state of the art--plus gaining confidence," says Cathleen Costello, 28, who got her M.B.A. from Columbia in 1979 and now works as a marketing manager at American Express. "M.B.A. schools don't necessarily teach you anything you can use," agrees Marcia Berss, 29, who graduated from Chicago last June to a job at more than $30,000 with the investment firm of A.G. Becker. "It's just that companies assume that if you have an M.B.A. you can think, conceptualize and pick up material quickly. The M.B.A. really is the ticket to paradise."

"Business schools are like bottling plants," says Richard West, dean of Dartmouth's Amos Tuck School. "The product is about 90% done before we ever get it. We put it in a bottle and we label it. The price is a function of what the market will pay."

Corporate executives agree that an M.B.A. degree from a major business school seems a convenient warranty of brains, energy and ambition. "If you are looking for the best people, one way to be sure of finding them is to let someone else do the screening for you," says International Harvester's chief recruiter, Kent Tool. Once the M.B.A. has been certified and hired, though, he bears a heavy burden of proof. One of the chief criticisms of M.B.A.s is that they are trained to think of themselves as bosses, and since they have a reputation for impatience and arrogance, they are closely watched to see if they earn their pay. One survey of top executives of 288 large corporations, by the accounting firm of Arthur Young & Co., found that only 58% believed the "contributions of employees with M.B.A.s superior" to those without M.B.A.s; 40% believed them roughly equal; and 2% found the M.B.A.s inferior.

Opinions varied, however, in different industries. Because M.B.A.s learn relatively little about production, some manufacturers find little use for them. "I was shocked at my fifth reunion," says Richard Fisher, who got his M.B.A. at Stanford and now works for the investment banker Brown Bros. Harriman & Co., "that very few of my classmates were making a product, running a plant or drilling a hole into the ground. Almost everyone was on the finance side." That is because what M.B.A.s have learned best is financial analysis and problem solving, and the organizations that most value such skills are likely to be investment firms, management consultants and banks.

In such areas the rewards can be spectacular. Diana Temple, 35, who got her M.B.A. at Chicago in 1970, went to work at a small investment research firm for $13,000, but she saw opportunities. Says she: "Security analysis is a very entrepreneurial business calling for initiative and creativity. The M.B.A. provides an overview framework, but we have to keep up with new techniques in investment decision making." Temple has kept up. She moved to Salomon Bros, last February for a salary and bonuses well into six figures.

Howard Deichen has even brighter prospects. A '77 M.B.A. from Northwestern, he joined Northwest Industries at $25,000, was assigned to a planning and acquisitions group, helped arrange the purchase of a $200 million Coca-Cola bottling operation in Los Angeles, then became a special assistant to Northwest President Ben W. Heineman. When Northwest organized NWT Natural Resources Co. earlier this month to drill for oil and gas, Deichen was made president. Now, at 28, he is getting a salary and bonuses that may hit $75,000, plus handsome stock options. He still skips off occasionally for long weekends in Florida, where he keeps his 30-ft. speedboat.

Frederick Hammer, executive vice president in charge of consumer banking at Chase Manhattan, recalls a less happy case: "I brought in a very bright M.B.A. from a highly regarded business school in the Northeast not too long ago, and after a superb performance in a staff position, I was so impressed that I gave him complete responsibility for a small business. He had his own sales force, accounting people, processing group--everything. For about six months I was very pleased with the reports I was getting about how rapidly the business was expanding. As we started to do some more careful investigating, it turned out that though the business was growing fast, it was not profitable. This fellow had adopted the philosophy that once you hook up with a customer--even if you do not charge him enough at first--you will eventually be able to make money on him. We started to put a little pressure on this M.B.A., and just when we were about to rein him in, one of our major competitors hired him with a huge increase in salary. M.B.A.s build up impressive resumes, but it takes a little while to determine whether they are good at what they do. I think 'glittery' is a nice word to describe them."

"There have got to be some people who go to the Harvard Business School and aren't ruined by the experience," says James Glanville, a partner at Lazard Freres. "But I have been watching M.B.A.s in this business for over 20 years, and I have found a great majority of them immature in their judgments. They are inclined to make strong judgments without a background of experience and humility. You don't really learn anything until you've been wrong a few times. If we shut down the business schools for ten years, we would not suffer a very great loss."

Back in the groves of academe, the business schools deny all charges of omniscience and any claim to perfection. The average dean or professor, in fact, is only too aware of the frailties of the ambitious students he sees charging forth to conquer the world. He is ready to acknowlege many of the criticisms of even the best M.B.A. programs. Granted that there should be more emphasis on long-range planning, more sophistication about the international marketplace, more emphasis on production technology. Granted that the students should be made more aware that none of them will become a corporation president overnight, and some may not become one ever.

But along with any plea of guilty comes a plea of extenuating circumstances. One is that the schools are continually changing, putting more emphasis on production and entrepreneurship, adapting to the new problems facing corporate managers. Another is that much of the personal criticism of M.B.A.s is simply a criticism of the young, whose eagerness to test new methods often strikes the established elders in any field as arrogant impatience. The most important extenuating circumstance, however, is that M.B.A.s were created to fill a need in business, that they are only too willing to do what business asks of them, and that business executives may have conflicting views about what they are really asking for.

"If I told my students that their grades were going to be based on their ability to run up and down the stairs of Tuck Hall as fast as they could, a lot of them would be doing it," muses Dartmouth's Dean West. "They would be saying to each other, 'This is asinine, but if that is the way the game is played, I'll play the game.' I don't know of any business school professor in the country who has ever taught anybody that a short-term profit horizon is the right thing. Business schools are the places that teach value analysis. The short-term outlook reflects the business environment. And I don't pay our graduates $35,000 a year; Wall Street does. I can keep them reasonably humble when I grade their papers, but when Wall Street tells them they are God's gift to investment banking, then I have a real problem. They begin to believe it."

Many corporations do not really know how to make good use of bright and ambitious young newcomers. "M.B.A.s may want too much too soon, but employers in the courtship process contribute to that," says Edmund Littlefield, retired chairman of Utah International Inc., a large mining and land development company. He devised an ingenious use for them. Says he: "I was very careful not to hire more M.B.A.s than I could give an interesting career path to. Our deal was that they would come in as my administrative assistant for two years. They had no authority, but an excellent view of how this company worked. And they liked that. I'll tell you, I got some of the very best people without paying them a lot of money. And at the end of two years, if some department wasn't just begging for them, I'd say, 'Look, we both made a mistake, and you'd better be on your way now.' But that seldom happened."

Generalizing about M.B.A.s is ultimately a little like generalizing about Bulgarians or trumpeters. In many cases, the differences between them and everyone else (including the salary differential) tend to fade, like the colors of a chameleon, after a few years in the corporate world. Others, however, seem permanently tinted, chameleons that have mysteriously evolved into some slightly more agile species of lizard. Robert Almon, for example, wears the predictable colors: pink Oxfordcloth shirt, blue-and maroon-striped necktie, gray suit, black loafers as polished as medieval armor. One of six children of a Rhode Island family (his younger brother plays shortstop for the Chicago White Sox), Almon majored in psychology and literature at Brown University, then got an M.B.A. from Harvard in 1977. At 29, he now earns more than $40,000 as a manager of financial analysts in the treasurer's office of General Motors. Predictably, he should talk entirely of victories, profits and upward leaps, but instead he has learned a marked sense of checks and balances. "I want to be at least a vice president in my 40s," he admits, "but I may want to stop there. I'm not sure I want to be chairman.

"At Harvard, you have two or three hours to spend on a case that might deal with the bankruptcy of a corporation," Almon recalls, "so you get into the habit of thinking that you can deal with any problem quickly. In real life you don't have the luxury of skipping over details. That can result in horrible mistakes.

"I've been working on a financing deal to buy a piece of equipment for one of our divisions. On the first day we got a super rate, it was a great idea, sounded easy. Let's do it. Class is over. But the seller had never decided what the payment terms would be. It is very frustrating to have a deal go bad. Either you didn't protect yourself adequately, or you didn't think things through. You think very highly of yourself, and you don't want to spend time worrying about boring details. But that is the way the world is. It does teach you a lot."

It has been said taht the best thing any school can teach anyone is how to learn and how to think. The principle applies very well to schools of business administration.

-- By Otto Friedrich. Reported by D.L. Coutu/Los Angeles and Fredrick Ungeheuer/New York with other U.S. bureaus

*Wrongly so. Wharton was founded as an undergraduate school in 1881. Dartmouth's graduate program at its Amos Tuck School dates from 1900.

With reporting by D.L Coutu, Frederick Ungeheuer

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