Are Harvard Business School and Silicon Valley Immoral?

Thinking about Greed, Ethics, and Power

This Week’s 7 Recommended Readings

1. Why Harvard Business School is Under Fire
in The Economist (3 min)

A new book argues that HBS has “become a breeding ground for toxic behaviour.” HBS’s influence is undeniable. Its alumni are a force on Wall Street and in Silicon Valley, where 10% of “Unicorns” — private startups worth over $1bn — have at least one HBS MBA as a founder. But, the author Duff McDonald argues, HBS alumni have also been behind some of the worst examples of corporate greed and fraud.

This article doesn’t really answer the question in its title, but it offers some interesting solutions to HBS’s “problem.”

2. Harvard Business School and the Propagation of Immoral Profit Strategies
by Duff McDonald in Newsweek (24 min)

This article is an adaptation from Duff McDonald’s new book on HBS, The Golden Passport. Years ago McDonald contacted me for the book. It argues that HBS professor Michael Jensen had a singular influence on the school’s shift away from educating managers toward educating investors and financiers. Personally, I’m not a buyer of all that McDonald is selling (more in the postscript below) but he makes a good case about the historical development of management education.

Selection:
In a 1994 paper Jensen wrote with Meckling, “The Nature of Man,” he cited the story of George Bernard Shaw asking an actress if she would sleep with him for a million dollars. When she agreed, he changed his offer to $10, to which she responded with outrage, asking him what kind of woman he thought she was. His reply: “We’ve already established that. Now we’re just haggling about the price.” The authors then concluded that we’re all whores. “Like it or not, individuals are willing to sacrifice a little of almost anything we care to name, even reputation or morality, for a sufficiently large quantity of other desired things…

…In other words, if everybody assumes you’re a whore, you might as well grab as much money as possible while you’re still in demand. “[By] propagating ideologically inspired amoral theories, business schools have actively freed their students from any sense of moral responsibility,” concluded Ghoshal. Managers were not to be trusted; shareholders were. It was one of the most remarkable about-faces in the history of education. And by hiring Jensen, HBS threw its lot in with the cynics.

3.How Elizabeth Holmes’s House of Cards Came Tumbling Down
by Nick Bilton in Vanity Fair (23 min)

You probably know something of the story of Theranos — a Silicon Valley “unicorn” company, worth $9B at its peak, founded by at Stanford dropout (at age 19!) who happened to be a woman! Theranos promised to do hundreds of health tests with a single drop of blood. The technology was game-changing and Forbes said Theranos’ founder, Elizabeth Holmes, was the world’s youngest self-made female billionaire.

Then the Wall Street Journal reported that Theranos’ technology was unverifiable at best, and possibly fraudulent. The company went into a tailspin, lost billions of dollars and Holmes is being sued by everyone and their mother.

How does this happen? Bilton’s article gives a clue — a shocking lack of transparency. There’s more to know — there’s sa book in here somewhere. Apparently, a movie is already in the works — Bad Blood — and Adam McKay (The Big Short) signed on to direct.

Selection from the article:
It generally works like this: the venture capitalists (who are mostly white men) don’t really know what they’re doing with anycertainty — it’s impossible, after all, to truly predict the next bigthing — so they bet a little bit on every company that they can with the hope that one of them hits it big.

The entrepreneurs (also mostly white men) often work on a lot of meaningless stuff, like using code to deliver frozen yogurt more expeditiously or apps that let you say“Yo!” (and only “Yo!”) to your friends. The entrepreneurs generally glorify their efforts by saying that their innovation could change the world, which tends to appease the venture capitalists, because they can also pretend they’re not there only to make money.

And this also helps seduce the tech press (also largely comprised of white men), which is often ready to play a game of access in exchange for a few more pageviews of their story about the company that is trying to change the world by getting frozen yogurt to customers more expeditiously. The financial rewards speak for themselves.

Silicon Valley, which is 50 square miles, has created more wealth than any place in human history. In the end, it isn’t in anyone’s interest to call bullshit.

4.The Ugly Unethical Underside of Silicon Valley
by Erin Griffith in Fortune (10 min)

You could look at the story of Theranos as a one-off. A single bad apple that doesn’t ruin the barrel. But Erin Griffiths connects the dots of fraud revelations across a number of tech startups and sees a trend. Is there something in the culture of Silicon Valley that winks at unethical behavior? If you have to fake it til you make it, what happens when you make it?

Selection:
No industry is immune to fraud, and the hotter the business, the more hucksters flock to it. But Silicon Valley has always seen itself as the virtuous outlier, a place where altruistic nerds tolerate capitalism in order to make the world a better place. Suddenly the Valley looks as crooked and greedy as the rest of the business world. And the growing roster of scandal-tainted startups share a theme. Faking it, from marketing exaggerations to outright fraud, feels more prevalent than ever — so much so that it’s time to ask whether startup culture itself is becoming a problem…

By definition, entrepreneurship requires promoting the heck out of things that don’t exist yet. Even a founder with a strong moral compass and a heart full of good intentions has to persuade investors, engineers, and customers to believe ina future where their totally made-up idea will be real. “That’s not ‘My cola tastes better than yours.’ That’s ‘Let me explain to you how the world’s going to be.’ ” says Chris Bulger, managing director at Bulger Partners, an investment bank that advises technology companies on acquisitions. “Is that person lying when they turn out to be wrong?”

5.Can Morality be Taught?
by Ashley Lamb-Sinclair in The Atlantic (8 min)

Ashley Lamb-Sinclair is a high-school English teacher. She is the 2016 Kentucky Teacher of the Year and the founder and CEO of Curio Learning. In this essay, she argues The key to molding well-adjusted students is experiential learning. She believes the most important decision educators make is not the content they choose to share but how they teach the content they choose.

Selection:
How can it be a surprise that a number of Americans lean toward authoritarian ideals when, according to Marzano Learning Sciences Center, an educational consulting and research group located in West Palm Beach, Florida, 58 percent of class time in K-12 schools is used for lecture with the teacher delivering content?

Or that a number of Americans choose to ignore facts and reason when only 6 percent of class time is used for cognitively complex tasks? In a 2012 Center for American Progress student survey, one-third of American 12th-graders said they engaged in class discussions only two times a month or less, suggesting that the majority of 17- and 18-year-old American public-school students (young adults coming upon voting age) rarely spend time engaging in dialogue during the school day.

6. How To Restore Trust In An Industry Notorious For Greed
by Ron Carucci in Forbes (8 min)

Okay, enough bad news. Here’s a story that cuts the other way — about a financial firm that is out to restore trust in the financial services industry. The business is Chatham Financial, and its leader is Mike Bontrager. The story of their business is a beautiful example of what business can be when the firm’s values are clear and the leadership are unwilling to bend or break them.

Selection:
Bontrager, one of 2015’s EY Entrepreneurs of the Year, and his top-flight team at Chatham have bet their entire existence on a simple, yet radical philosophy. “We aim to maximize trust vs. profit.” Because of their significant focus on long-term thinking, which research has recently proven to outperform short-termism, Chatham believes they take on a very different mindset when they view what their clients are buying as trust, not products…

…Bontrager views the intensity of regulations that have descended on banks and businesses, especially in the financial sector, as a byproduct of the distrust between society and finance. He says, “It’s a costly, burdensome manifestation of that distrust. Business, finance especially, has not elevated trust to something inviolable. Therefore society is demanding change , and will continue to demand change until they get it. We believe the real solution is having more companies with insider understanding of these issues who are willing to use their knowledge and position to drive more equitable outcomes for everyone.”

7. The Banker-Turned-Seminarian Trying to Save Citigroup’s Soul
by Christina Rexrode in The Wall Street Journal (8 min)

David Miller runs the Faith & Work Initiative at Princeton University. He started his career as a Wall Street Banker, then went to seminary. Now he has taught about the integration of faith and work at Yale and Princeton. He is one of the highest-profile examples of the growing trend of corporate chaplains — essentially pastors for individual businesses.

Selection:
Can a big bank have a conscience? Citigroup hired one.

David Miller is an on-call ethicist the bank consults on weighty questions of right and wrong, supplementing its armies of lawyers and compliance officers. A Princeton University professor by day, Dr. Miller has worked with Citigroup intermittently for the last three years to tackle abstract issues about banking and morality.

Bonus:
Jimmy Fallon Was On Top of the World. Then Came Trump.
by David Itzkoff in The New York Times (18 min)

This is unrelated to this week’s topic, but a few weeks ago I wrote a Weekend Reader edition on politics and late night comedy. I asked the question “Should Jimmy Fallon Be a Political Commentator.” So I was interested this morning that David Itzkoff did a big piece in the NYT about the same topic and on Fallon’s famous light-weight interview of then-candidate Trump. Good read.

Selection:
Mr. Colbert usually surpasses Mr. Fallon in overall nightly audience; in a recent week, Mr. Colbert drew more than three million viewers, while Mr. Fallon had just under 2.7 million. “The Tonight Show” has continued to win the coveted 18-to-49 demographic that is specially valued by advertisers.

Mr. Fallon claims he pays no attention to these metrics. “We’re winning in something,” he said. “People in the height requirement between 5–7 and 5–11, we’re №1, from 11:50 to 11:55.” More emphatically, he added: “I never, ever care. I’ll know when someone fires me.”

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postscript

Let’s do a morality thought experiment.

Suppose you are a junior in college and just got a job as an investment banker in New York City. You’re excited because the job was hard to get and pays a lot of money.

It comes with all these perks — free dinner, free car service home instead of the subway, etc. (Only later do you realize these perks are to pay you off for staying in the office past 9 pm every night).

The dinner budget is $30 — big enough that you could order a decent steak every night. Initially, you spend it all on yourself, ordering an app and dessert every night. Then you realize you’re getting fat because you never have time to workout. So you change strategies.

On your way home one night, as you step out of your Town Car, you see a homeless man, the same one you’ve seen in your neighborhood several times before. You get an idea. You decide to spend less of your dinner budget on yourself, but still max out the expense and buy food for the homeless guy in your neighborhood.

Is that immoral?

There are at least three ways to look at this.

1. It’s stealing. The bank didn’t intend to become a social service agency. It gave the money to feed you. If you don’t want to use the whole budget on food, you should save the bank money, reduce its costs, and help make it more profitable. You’re stealing from the managing directors and from all the shareholders without their consent.

2. It’s part of the deal. Someone else would say that the bank has already budgeted for the maximum expense, so it is yours to use. The $30 is basically a daily bonus for working long hours -paid in food, not cash. They are just glad to have kept you in the office fixing fonts in pitch decks. You earned that $30 budget in overtime so you can use it as you like. Whose to say that it’s more moral for you to eat a slice of chocolate cake yourself than to share a sandwich with someone else?

3. There’s a higher law at work. A third perspective is that it doesn’t matter what the bank thinks; it is a good and noble thing to share food with the hungry. You are a modern day Robin Hood, stealing from the rich and giving to the poor. Even if the food budget was intended for your personal use only, some rules aren’t just and there is a higher moral order to obey.

What do you think?

And what would you think if the situation were altered? What if you spent your extra food budget to buy dinner for your roommate who isn’t poor, but doesn’t get a dinner allowance from his internship? Or what if you max out the budget to buy your dinner for that night and your lunch for the next day?

Or what if you used the dinner allowance to practice arbitrage? You order the food for free then re-sell it at a steep discount to your roommate, or to others. They get cheap food, you get cash, the restaurant gets business. All thanks to the generosity/bureaucracy of the bank.

Clearly, this isn’t the most important problem to solve in the world. But it’s a not uncommon issue faced by young professionals just starting their careers. Many of them never think about it — they are too bleary-eyed after 14 hours staring at a screen they just order the food, eat it and collapse into bed.

But these are the kinds of small daily decisions that form habits that inform bigger decisions later. I have an Aristotelian belief that virtue is formed by habit, and sometimes you aren’t even aware of it. Ethical questions are more often gray than they are black-and-white and, just like the dinner allowance question, the way you frame the question leads you to very different answers. And by the way, the smarter you are, the better you are at generating rationalizations for whatever choice you make.

Is Harvard Business School Immoral?

A new book has been in the news: The Golden Passport by Duff McDonald. The book’s subtitle gives you a sense of what it is about: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite.

It is a tome well over 600 pages long. McDonald argues that HBS is the most influential business school in the world, producing the largest number of Fortune 500 CEOs and captains of Wall Street. And he argues that HBS has systematically failed to train its graduates to lead responsibly and ethically.

My one sentence belief about is his critique of HBS: The more you tip toward overstatment, the more books you are likely to sell. Even in a media atmosphere fixated on President Trump’s every tweet, McDonald has managed to generate a lot of press attention. That is to be expected when you promise to pull back the curtain on one of the world’s most influential institutions and reveal it as a shady, corner-cutting, self-interested profit factory.

The trouble with this simplistic notion is that it ignores or downplays the facts that don’t corroborate the thesis. I can say this from experience. The Dean of HBS, Nitin Nohria, is a man committed to professional ethics. The role of the leader and stakeholder theory have been among his central concerns throughout his academic life. The vast majority of the professors I had at HBS were similarly committed to educating students not just in how to make a buck, but in how to lead well in the interests of their shareholders, employees, customers, and communities. The students at HBS ranged the entire spectrum from selfish profit seekers to altruistic do-gooders, but by far the majority earnestly wanted to have a successful career and give more value than they received.

I don’t want to white-wash the truth about business education at HBS or anywhere else. Although I broadly support the leadership of the school, I am not a strict apologist for HBS. I think it can and should do more to prepare students for the harder challenges of leadership because many of them will end up in positions of enormous power. As McDonald points out, the shareholder theory pushed by some professors at HBS and other schools has no doubt given many students the justification they needed to make awful decisions in the name of maximizing earnings per share.

McDonald is wrong about HBS simply producing greedy financial engineers. He is right that the school can and should do more to elevate the ethics and praxis of it’s alumni. More on that later.

Is Silicon Valley Immoral?

Second verse, same as the first.

If you think Harvard is an immoral place you probably think Silicon Valley is too, given the preponderance of HBS alumni in positions of leadership. The valley’s self-image is the nerdy coder, the valley is full of MBAs. Alex Taussig of Lightspeed Venture Partners points to a study that finds MBAs are very regularly founders of “unicorn” companies and that HBS has more unicorn founders than any other school.

Recent years have provided plenty of examples to back up the view that Silicon Valley is rife with fraud. Erin Griffith’s reporting on the “ugly, unethical underside” Silicon Valley, from Zenefits to Hampton Creek to Lending Club to Skully is compelling. And the story of Theranos, as told by Nick Bilton in Vanity Fair is a fascinating case study in the cycle of hype. Bilton describes it like this:

In Silicon Valley, every company has an origin story — a fable, often slightly embellished, that humanizes its mission for the purpose of winning over investors, the press, and, if it ever gets to that point, customers, too. These origin stories can provide a unique, and uniquely powerful, lubricant in the Valley.

After all, while Silicon Valley is responsible for some truly astounding companies, its business dealings can also replicate one big confidence game in which entrepreneurs, venture capitalists, and the tech media pretend to vet one another while, in reality, functioning as cogs in a machine that is designed to not question anything — and buoy one another all along the way.

I reached out to a friend whose been a long-time VC investor in the valley to ask what he thought. Does the start-up game of pitching and embellishing corrupt founders and lead to a disproportionately unethical culture in tech? He wrote back that these dramatic snippets make for good stories in the tech press but when considered against the overall landscape of the valley, they are few and far between. I’ve not seen evidence to show that the tech sector is any more unethical than any other industry. Like with HBS, Silicon Valley is a powerful cultural force. Any narrative that promises to knock it off the pedestal is going to attract attention.

But I’m not an apologist for Silicon Valley either. The leaders of some of these startups do have enormous influence and power — leading hundreds of employees and spending tens of millions of dollars — sometimes before they are 25 years old. How wise were you at 25? How responsibly would you have spent a check for $10 million? Might you have slipped into having a little too much fun at the companies expense, like Rothenberg Ventures did? This system is designed to enable ego-building and incentives hype. It’s worth thinking about a better way.

Is it possible to teach ethics?

We expect business schools to educate students to lead effectively and ethically. But is this a reasonable expectation? Can ethics be taught? And what about all those entrepreneurs in Silicon Valley, like Elizabeth Holmes of Theranos, who dropped out of Stanford at age 19 before getting much of an education at all?

First of all, if we are waiting until business school to teach ethics, we are waiting too long. Students aged 25–30 have had their values and habits well-formed before matriculating. Virtue begins at home and families will always have the greatest role in forming the character of children.

And yet there are important lessons every young man or women must learn on their own, apart from their families. Enlightened educators, like Kentucky’s teacher of the year, Ashley Lamb-Sinclair, make it their business to educate their students holistically — not just imparting information, but giving them experiences that influence how they view the world and treat other people.

The opportunity for character formation exists for every educator in every classroom. The question is whether they (are willing to) recognize it. At HBS, I remember discussing a case about the strategy and operations of a company that sourced its textile products from India. I brought up the idea that the company might want to investigate its supply chain to ensure there was not child labor involved. The professor told me that was a concern for our Leadership and Corporate Accountability (ethics) class, not for strategy and operations. That kind of narrow compartmentalizing of ethics misses the whole point. Ethics isn’t something you schedule time for — it is what underlies every strategic and operational decision.

I had another professor, David Garvin, who took a more holistic approach. The most popular definition of business ethics is may be Warren Buffet’s counsel to never do anything you wouldn’t want to see published on the cover of The Wall Street Journal. That’s not a bad rule of thumb but it’s not bulletproof. In situations where the rewards for unethical behavior are high and the chances of being caught are low, it’s awfully tempting to compromise.

Professor Garvin used his semester with our class to force us to confront our inner values when put to the test. He often had us role play CEOs caught in difficult circumstances and would force us to make a choice. He wouldn’t let us off the hook easy if we made the “right” decision. He’d press us, question us, grill us, really, to make us see that in the real world, it would never be so easy to just do the right thing.

One day he made me play the role Niels L. Hoyvald the day we studied the Beech-Nut baby apple juice case. The story is crazy — Beech-Nut switched apple juice suppliers when they were offered a 25% discount by a new producer. Then they looked the other way when some began questioning whether the product wasn’t pure apple juice. When the product was finally tested, they found that it was nothing more than water and corn syrup. At that point, Hoyvald didn’t come clean but tried to sell through the inventory as quickly as possible.

If the baby food business is an unexpected source for corporate fraud, it just goes to show how easy it is to slip into behavior you’d never condone in the light of day. Instead of letting us neatly label Hoyvald and his associates “the bad guys,” Professor Garvin made me and my classmates put ourselves in their shoes and imagine our way through their rationalizations to see how they could have ended up making the choices they did. Even today, years later, I still remember that case. I am grateful that Professor Garvin didn’t just go through the motions, but took the time to make an important lesson stick. It is that kind of teaching that elevated him to lead the school’s Christensen Center for Teaching and Learning, where faculty at HBS learn how to teach.

David Garvin passed away this month, after a long battle with cancer. He was not only a great teacher. He became a mentor and a friend. And I miss him.

…

THE MBA OATH

When I graduated from Harvard Business School in 2009, the school was under the microscope. It was the school’s 100th anniversary, and it was also the trough of the global financial crisis. The press was pointing the figure at business schools like Harvard for educating bankers who created the complicated mortgage derivative business that led the crisis.

As we were preparing to graduate, I worked with a team of classmates to create a graduation pledge about how we wanted to lead differently, by promising to “create value responsibly.” Professor Garvin encouraged me to talk with Nitin Nohria and Rakesh Khurana, who were then HBS professors and are now the dean of HBS and the dean of Harvard college, respectively. They had been advocating a “Hippocratic oath for managers” and supported our initiative.

We came to call our pledge The MBA Oath and we were surprised by how popular it became. I built a simple website where MBAs could take the oath online. Our goal was to get 10% of our class to sign the pledge. We had well north of 50% sign it. Students at other MBA programs heard about it and asked if they could use it at their schools. Eventually, more than 100 schools took some form of the MBA Oath that year.

The press picked up on the news and we had stories about our little effort in every publication from The New York Times to The Economist. We knew the idea had entered the zeitgeist when John Oliver did a Daily Show report on the MBA Oath. Eventually, a publisher contacted me about writing a book about the idea. The next year Peter Escher and I published The MBA Oath: Setting a Higher Standard for Business Leaders with Penguin Portfolio.

The MBA Oath is no cure-all for the variety of ways business leaders deceive themselves or others. But neither is it simply empty words. Taking the oath provides a touchstone moment in someone’s early career where they are asked to pause, to think, and to make a public promise to lead in a way defined by integrity and service. Later, when faced with a moment of ethical choice, the manager who took the MBA Oath has to answer to the demands of their conscience. At the moment they made their promise, those internal demands were given specific language and clarity. Over the last eight years, that promise has sprung to my mind countless times, and forced me to think harder about whether I would choose “the harder right over the easier wrong.”

In a few days, a new class of MBAs will graduate from Harvard Business School. If they follow the pattern of the last few classes, 20% will end up in tech, another 30% will be in financial services. Many will end up in positions of tremendous influence and power. The question is how will they steward those privileges. So I was very happy to receive a call the other week from HBS student Xavier Azcue, saying he was working with a team to organize his class to take the MBA Oath this year.

If there is one thing I believe about ethics, it is that acting ethically doesn’t happen by accident. Acting unethically often comes by accident, by acting without thinking. Acting ethically, on the other hand only comes from living the examined life, deciding what you stand for and cultivating daily habits of practice that reinforce those values. When you hear about a company doing it right, like Mike Bontrager’s Chatham Financial (profiled in the article above), one thing is clear: the culture of trust he has built is not accidental. It is not accidental because it is not incidental to his business. He has made “maximizing trust” the core motive of their business and is working out the implications of motive in every part of the company.

We are living in a time where it is possible, and probable, that we fill every minute of the day with distraction.When an email, tweet, insta post, game, text, or photo is only a thumb-swipe away, we are never at a loss for filling our time. What we lose in the process of getting lost in a world of digital content is the white space we need to consider, to examine ourselves, to think for ourselves about what we value and what we stand for.

The default mode of the human heart is to follow the path of least resistance wherever it leads. The MBA Oath ceremony and moments like it offer a chance to step back, to think for yourself, and to commit to a better path. That’s why I am excited for the graduates making the pledge this year.

Good luck graduates. I pray you lead well.

Read widely. Read wisely.
Max

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