Harvard Business School's Role in Widening Inequality

By Robert Reich, Robert Reich's Blog

13 September 14

o institution is more responsible for educating the CEOs of American corporations than Harvard Business School – inculcating in them a set of ideas and principles that have resulted in a pay gap between CEOs and ordinary workers that’s gone from 20-to-1 fifty years ago to almost 300-to-1 today.

A survey, released on September 6, of 1,947 Harvard Business School alumni showed them far more hopeful about the future competitiveness of American firms than about the future of American workers.

As the authors of the survey conclude, such a divergence is unsustainable. Without a large and growing middle class, Americans won’t have the purchasing power to keep U.S. corporations profitable, and global demand won’t fill the gap. Moreover, the widening gap eventually will lead to political and social instability. As the authors put it, “any leader with a long view understands that business has a profound stake in the prosperity of the average American.”

Unfortunately, the authors neglected to include a discussion about how Harvard Business School should change what it teaches future CEOs with regard to this “profound stake.” HBS has made some changes over the years in response to earlier crises, but has not gone nearly far enough with courses that critically examine the goals of the modern corporation and the role that top executives play in achieving them.

A half-century ago, CEOs typically managed companies for the benefit of all their stakeholders – not just shareholders, but also their employees, communities, and the nation as a whole.

“The job of management,” proclaimed Frank Abrams, chairman of Standard Oil of New Jersey, in a 1951 address, “is to maintain an equitable and working balance among the claims of the various directly affected interest groups … stockholders, employees, customers, and the public at large. Business managers are gaining professional status partly because they see in their work the basic responsibilities [to the public] that other professional men have long recognized as theirs.”

This view was a common view among chief executives of the time. Fortune magazine urged CEOs to become “industrial statesmen.” And to a large extent, that’s what they became.

For thirty years after World War II, as American corporations prospered, so did the American middle class. Wages rose and benefits increased. American companies and American citizens achieved a virtuous cycle of higher profits accompanied by more and better jobs.

But starting in the late 1970s, a new vision of the corporation and the role of CEOs emerged – prodded by corporate “raiders,” hostile takeovers, junk bonds, and leveraged buyouts. Shareholders began to predominate over other stakeholders. And CEOs began to view their primary role as driving up share prices. To do this, they had to cut costs – especially payrolls, which constituted their largest expense.

Corporate statesmen were replaced by something more like corporate butchers, with their nearly exclusive focus being to “cut out the fat” and “cut to the bone.”

In consequence, the compensation packages of CEOs and other top executives soared, as did share prices. But ordinary workers lost jobs and wages, and many communities were abandoned. Almost all the gains from growth went to the top.

The results were touted as being “efficient,” because resources were theoretically shifted to “higher and better uses,” to use the dry language of economics.

But the human costs of this transformation have been substantial, and the efficiency benefits have not been widely shared. Most workers today are no better off than they were thirty years ago, adjusted for inflation. Most are less economically secure.

So it would seem worthwhile for the faculty and students of Harvard Business School, as well as those at every other major business school in America, to assess this transformation, and ask whether maximizing shareholder value – a convenient goal now that so many CEOs are paid with stock options – continues to be the proper goal for the modern corporation.

Can an enterprise be truly successful in a society becoming ever more divided between a few highly successful people at the top and a far larger number who are not thriving?

For years, some of the nation’s most talented young people have flocked to Harvard Business School and other elite graduate schools of business in order to take up positions at the top rungs of American corporations, or on Wall Street, or management consulting.

Their educations represent a substantial social investment; and their intellectual and creative capacities, a precious national and global resource.

But given that so few in our society – or even in other advanced nations – have shared in the benefits of what our largest corporations and Wall Street entities have achieved, it must be asked whether the social return on such an investment has been worth it, and whether these graduates are making the most of their capacities in terms of their potential for improving human well-being.

These questions also merit careful examination at Harvard and other elite universities. If the answer is not a resounding yes, perhaps we should ask whether these investments and talents should be directed toward “higher and better” uses.

Scotland Should Declare Its Independence From Alex Salmond

By Greg Palast, Reader Supported News

12 September 14

[Dear American reader: This is about Scotland, whose capital is not "Brigadoon," It is a country but not a nation, voting next week on whether to dis-unite from The United Kingdom, though it wishes to keep the King (or Queen as may be). Alex Salmond, First Minister of the not-a-nation, wants to unhook from Britain but keep British coinage—and keep Scotland in the European Union. So, I ask…]

mean, what's the bloody point? Why pretend to declare your independence only to chain yourself to a coin with a British snout on it and simultaneously beg to become a colony of Angela Merkel's Fifth Reich, aka the European Union?

I realize that, as an American and an economist, I carry into this debate a double dollop of disrespect from Scottish readers. But, with thousands of miles of salt water separating me equally from London and Edinburgh, I think I can see clearly what you miss from having your head inside the fish bowl.

There are two overwhelming and undeniable advantages for Scotland to declare its sovereign independence: to end both Scotland's damaging enchainment to the British pound and the debilitating tyranny of European Union membership.

Yet, weirdly, inexplicably and inexcusably, Alex Salmond promises to throw away the two most valuable benefits of national self-determination.

First, the pound. In all the hoo-hah over whether Scotland can keep the coin with the Queen's schnozzola on it, no one seems to have asked, Why in the world would Scotland want this foreign coinage?

The Bank of England's singular task at this moment is to figure out how to counteract the disastrous macroeconomic consequences of George Osborne's austerity fixations and the bleating demands of City bankers. The only time when the Bank of England gives any consideration to Scotland's economy is when a BOE governor checks the little gauge which tells them how much of Scotland's oil they have left to spend.

Why should the interest rates, exchange rates and monetary supply of a resource nation like Scotland be subject to the needs and whimsies of the rusting realm to your south? According the the well-accepted theory of Optimum Currency Areas, Scotland would be best off adopting the Canadian dollar, also a damp, salmon-choked oil exporter or, better yet, the Vietnamese dong.

No nation controls its economic destiny until it controls its currency--a concept easier to understand if you read it in Greek.

And Scotland's own coin, backed by taxing power over its oil extractors, would undoubtedly be stronger than sterling and more flexible alone. Control over its own currency will enable Scotland to cut interest rates when local manufacturing falters while the Bank of England is raising rates to fight a speculative bubble in The City.

Second, why this pathological need to remain subjugated by the European Union? Is there some extraordinarily wise legislation crafted by the solons of the European Parliament? Does Scotland need the guiding hand of Angela Merkel, Marie LePen and the Italian premier du jour? Does Scotland fear a sudden shortage of Bulgarian plumbers?

The USA trades with Europe without giving Lithuania veto power over trade terms. And as Swiss nationals will tell you, a lack of an EU passport will not cause you to be strip-searched on your way to the Costa del Sol. Disadvantages of EU membership: loss of control over terms of trade, and policies of industrial regulation, immigration and environmental control. And sorry, Mr. Salmond, you will indeed have to join the euro, at which point, Germany's finance minister will draft your budgets.

So that is my question to my friends north of Hadrian's wall. Why demand your independence from Britain only to insist on keeping your shackles? If you too find attachment to your chains nonsensical, then shouldn't your first referendum be a vote to declare Scottish independence from Alex Salmond?

Greg Palast is a forensic economist and investigative reporter.