The Golden Passport: Misunderstanding HBS

the golden passport reviewDuff McDonald’s new book, The Golden Passport, is receiving much publicity for its blaming of Harvard Business School for most of the wrongs of American capitalism. I commend McDonald on his detailed history of HBS, much of which I recognize. But I criticize him for drawing mostly wrong conclusions. Before I explain why McDonald errs in many ways, I need to declare that I am a product of Harvard Business School—MBA and DBA (supervised by Michael Porter), then Assistant Professor of Marketing, and a regular reader of Harvard Business Review for the last 40 years. On the other hand, my view of MBAs and HBS is informed by my long career on the faculties of seven other top business schools on four continents, as well as my 12 years of business experience. I will not attempt a point by point review of this book but will focus on correcting five errors made by the book about both business schools in general and Harvard Business School in particular.

Correction 1: MBAs did not cause the financial crisis of 2008, PhD’s did.

The recent financial crisis was not caused primarily by the greed of Harvard and other MBAs running banks. The root cause was the unrealistic financial models created by PhDs in economics, finance and statistics, almost none of whom were graduates of HBS. Yes, these PhDs reported to MBAs who had ultimate responsibility, but the free market capitalism of the USA pretty much forced the top managers of banks to use these risky instruments once the “rocket scientists” had created them. As Citigroup CEO, Chuck Prince (a Georgetown University law graduate, not an MBA) put it in 2007 just before the collapse, “…as long as the music is playing, you’ve got to get up and dance.”

Correction 2: Michael Jensen and his agency theory of management are not products of HBS, but of the University of Chicago.

Michael Jensen obtained his PhD in economics at the University of Chicago and then worked at the University of Rochester before he joined HBS at the age of 49, long after he’d done his most influential work. It is primarily the University of Chicago, and Milton Friedman and other Chicago faculty, such as Nobel Prize winner Merton Miller, who should get the credit or blame for developing the theory that only shareholder value matters. And it was a University of Illinois PhD in chemical engineering, Jack Welch, CEO of General Electric, who did the most to lead the corporate charge on shareholder value. He also became the first to apologize after the financial crisis: “on the face of it shareholder value is the dumbest idea in the world” (interview with Financial Times, 12 March 2009).

Correction 3: Harvard MBAs did not cause the short termism of most American companies —the U.S stock market did.

U.S. Senator Mark Warner said last year that the average holding period of American stocks has fallen from eight years in the 1960s to four months now. The ideology of free markets created this system. MBAs are simply very good at winning in whatever system in which they compete. Creating slower equity markets is not the job of business schools, but of governments and politicians, and almost none of the latter have MBAs. By the way, if you want a more constrained form of capitalism, look to France where many jobs are for life, often literally the same job for decades, and where young people find it very hard to get a start in these cushioned, permanent careers.

Correction 4: An MBA education is not a waste of effort, but adds more value than nearly any other type of education.

Top consulting companies, such as McKinsey, who can hire almost anyone they want, hire predominantly MBAs plus a few PhDs in economics, nuclear physics and other scientific subjects. These PhD holders almost certainly have higher IQs than MBA holders but the MBA education more than compensates for the difference in IQ. The author denigrates Amazon relative to exciting high-tech companies such as Google and Facebook, implying that the reason is because Amazon has many more MBAs on its staff. He got his logic the wrong way round. Amazon does not have the technological advantages of Google and Facebook. Therefore it needs MBAs to make up for this lack. The MBA was probably the greatest educational innovation of the 20th century. I found my MBA studies far more stimulating than my undergraduate degree in economics at the University of Cambridge. With the creation of online and blended MBAs, innovation in business education is continuing in the 21st century.

Correction 5: Harvard and other business schools do not ignore their social responsibility, but place high priority on that.

Even if they did not want to, business schools are required by the accreditation bodies to care about social responsibility. AACSB states: “The school must demonstrate a commitment to address, engage, and respond to current and emerging corporate social responsibility issues.” EQUIS states: “The School should have a clear understanding of its role as a ‘globally responsible citizen’ and its contribution to ethics and sustainability.” When I was a dean I served on accreditation panels for both AACSB and EQUIS, and can attest that schools take seriously the teaching of social responsibility. And over the last four decades I have seen increasing proportions of both faculty and students who take social responsibility very seriously. The group pressure of MBA programs that McDonald criticizes now turn their graduates into more rounded and responsible citizens.

To conclude, the world is a better place because of Harvard and other business schools.

George Yip of Imperial College Business School in London

George S. Yip is Professor of Marketing and Strategy, and Associate Dean for Executive MBA at Imperial College Business School in London. The Imperial EMBA is a blended program combining on-campus and online study.


  • C. Taylor

    McDonald dealt in conjured nonsense, but Yip isn’t batting 100% here.

    MBAs did not cause the financial crisis of 2008, PhD’s did.

    It was primarily the government. The government incentivized high proportions of mortgages for high risk borrowers. A lack of transparency regarding who lent those borrowers money led to a liquidity crisis. The government failed to have a system in place to support liquidity. Additionally, the government incentivizes debt funding.

    More importantly in the long run, the government failed to invest more effectively in US human capital.

    the credit or blame for developing the theory that only shareholder value matters.

    Risk and return come in many forms.

    – Some are important to your regulators so you get laws.
    – Some are important to your customers or your customers’ customers so you get demand.
    – Some are important to your investors, so you get capitalized.
    – Finally, some are important to the people running the company.

    Claiming a rigorous approach to valuation is limited to shareholder returns is an outright distortion of the fantastic work on return and utility done by Bernoulli, among others. Michael Jensen’s work specifically mentions tradeoffs between shareholder return and utility.

    To conclude, the world is a better place because of Harvard and other business schools.


  • Tapiwa Craig Mashingaidze

    You should have posted this with your real profile.

  • Duff McDonald

    This is a silly and superficial review, John. For one, he is the latest reviewer to erroneously attribute the idea that HBS MBAs “caused” the financial crisis to me. I said no such thing. I simply pointed out that their insistence for a seat at the table for preventing such crises in the future lacked merit, given that they were running a ridiculous number of major institutions of importance at the time of the crisis (Presidency, Treasury, SEC, Merrill Lynch, etc.) As for the part about Jensen, to suggest that I am wrong about HBS’s influence regarding agency theory because Jensen was somewhere else before he was at HBS is yet another attempt, at HBS is prone to do, to claim a lack of influence when it’s convenient to do so. Perhaps the reviewer should read the recent paper about Jensen co-written by one of HBS’s most honest faculty members from the last two decades, Rakesh Khurana, The Social Trajectory of a Finance Professor and the Common Sense of Capital. In it, he and co-author Marion Fourcade say the following about Jensen:

    “Harvard Business School was a real consecration vis-à-vis the practical world of business. It offered something new, an influential public platform from which to broadcast one’s ideas toward finance practitioners, to purge them of their unscientific beliefs and practices. The classroom, once again, was the pivotal institution. During Jensen’s tenure at Harvard Business School (1985–2000), the CCMO course went from enrolling a few hundred students to over six hundred, or more than two-thirds of each year’s MBA cohort. Harvard, furthermore, provided closer connections to the corporate world through the weight given to case studies (Jensen started writing cases in the early 1990s), their worldwide diffusion through the Harvard publishing machine, and through executive education programs with prominent companies. The press was the other vehicle. Harvard, again, was at the core of the diffusion process, as agency theorists marshaled their ideas in the influential Harvard Business Review (HBR). It is in the pages of the review that Jensen, for instance, came out forcefully in favor of takeovers (Jensen 1984), stock options for CEOs (Jensen and Murphy 1990; also see Murphy 1986); and private equity (Jensen 1989). Meanwhile, the Harvard position gave agency theorists more authority in national newspapers, such as the New York Times, the Washington Post and the Wall Street Journal.”

    That’s called influence, and if Mr. Yip thinks pointing out that Jensen got his start elsewhere negates that influence, he’s just as much in denial as the rest of his colleagues who argued that I was being unfair by writing about Jensen, because HBS had “moved on” from the topic. Well, the culture hasn’t moved on. And HBS is as much at fault as anyone else when it comes to Jensen — save perhaps Jensen himself.

    The rest of his “mistaken conclusions” don’t even merit a reply. Except to laugh at the one that an MBA education adds more value than any other type of education. I’d love to see the proof of that one. Maybe Jensen proved it in one of his silly theories. Duff McDonald

  • Nazgul

    Author seems a bit scalded by the book. Esp. in correction one where the managers were “forced” to behave in a certain way that contrasts quite well with correction five’s social responsibility spiel. There’s a pursuit of excellence that’s nurtured at b-schools that sometimes goes awry but ultimately creates a lot of value.

  • Fajor

    Those damn PhDs! They were “the root cause” of nuking Japan and killing and poisoning all those people as well. (sarcasm)