Harvard Business School's Role in Widening Inequality

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No 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 30 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 30 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?