Ahead of the Curve (23 page)

After a few months at HBS, I was torn between the conviction that business had become its own freak show and my deepening understanding of and sympathy for what businesspeople did, stimulated by the cases. HBS endured the same struggle. Its reputation meant it would always shoulder some of the blame for the very worst in business, the jargon and aspects of the culture. But no one who spent any time there could doubt the serious approach the school took to very real problems. When the school sought to regiment and quantify, to create frameworks and equations for subjects that might better be dealt with by a good novel or film, it could look ridiculous. But occasionally the approach yielded powerful results. However trivial it might seem to grade employees’ leadership talents on a scale of one to five, businesses did so because it helped them to build a better business. I realized that before lambasting any attempts to quantify the unquantifiable, I needed to reassess what I considered “unquantifiable.”

My friend Gregor, who taught at a business school in Europe, explained to me that MBAs are rather like scientists. They learn things about the world that they are not expected to abuse. Biologists are taught biology with the expectation that they will not assist in germ warfare. Likewise, MBAs are taught accounting on the condition that they do not then manipulate their company’s earnings or minimize taxes to such an extent that it amounts to evasion. “But the hallmark of ethically bad businesspeople,” Gregor said, “is that generally they don’t break the law, because more often than not they had a hand in drafting the law. They write laws, through their lobbyists, so they don’t have to break them. But you still wouldn’t want them as godparents to your children.” He mentioned an ethical failure I had not really considered: lavish executive compensation. It was one thing for a good CEO to pay himself well for a job well done. But increasingly, in the United States and Europe, mediocre CEOs paid themselves as if they were sports superstars or technology entrepreneurs, essentially robbing shareholders to do so. His remark made me think about the range of subjects that could be considered under the heading “business ethics.”

We grappled with this in another rambunctious LCA discussion of the limits of a business’s responsibilities, reading a piece by the economist Milton Friedman in which he argued that the only social responsibility of a business is to increase its profits. If it did that, it would pay taxes and reward its employees, and it was then up to the government and individuals to fulfill their responsibilities to society as they saw fit. Friedman loathed the idea of companies donating to museums or sending employees out to work in homeless shelters. To him that was robbing shareholders. A counterargument to this was presented by the British business writer Charles Handy. He wrote that companies were, in a crucial way, the sum of the people who worked for them. This meant that they had all the responsibilities of responsible people. It was not enough for them to make a profit. It was also vital that they served their communities, provided decent salaries and benefits. Companies had a moral as well as an economic purpose. The best employees wanted to work for good companies with good cultures, not just those that maximized profits. And given the interplay between business and government, it was disingenuous for business leaders to suggest that government set the rules and business just obeyed. Business had a duty to help government develop the best laws, not just those that benefited one company or sector.

We went back and forth in the section, with half the class championing the interests of shareholders and the duties of individuals over companies, and the other half advocating the importance of corporate social responsibility in a capitalist system where companies are social as well as economic actors. Badaracco seemed to love it, and when he wrapped up, he said of course the answer lay somewhere in between.

Right in the middle of our ethics course, the school found itself in its own ethical bind. When you apply to HBS, most of your communication with the school is electronic. You are summoned to interview via e-mail. You are accepted via e-mail. Consequently, the wait to find out where you are in the process involves a lot of nervous e-mail checking. This year, someone had figured out how to get inside the website that stored the application information and peek at his status—presumably so he could then get on with his life knowing whether he was going to HBS, and whether a financial aid BMW lay in his future. But rather than keeping this to himself, the hacker posted the simple four-step process for penetrating the site on the MBA message board hosted by
BusinessWeek
magazine. Unsurprisingly, scores of applicants followed the instructions, but as they came and went, they left an electronic trail. Once they were discovered, HBS had to decide what to do with them. For those not admitted, nothing changed. But those who had been admitted, a small handful, were told that their admission offers had been retracted.

Badaracco took a poll in class to see where we stood. Around three quarters of the class thought the school’s decision was wrong. Only the ethical jihadists stood foursquare behind the administration. Everywhere, discussion of the matter raged until, on March 14, Dean Clark issued a proclamation in
The Harbus.

In the next issue of the newspaper Aaron Bigbee, one of the class of ’06, fired back, expressing what most people I knew felt. Was it really “hacking,” as Clark had called it, to cut and paste a few instructions from a public message board into a URL? No one had been harmed by the applicants’ actions. They had not violated any specific prohibition, certainly none specified by HBS. And how could the dean call this “intuitively” wrong when so many of those currently at the school did not share his intuition?

“To claim that a relatively minor ethical misstep disqualifies someone from a Harvard education is to indict me, along with most people I know here,” Bigbee wrote. “I realize that HBS needs to prove its commitment to promoting ethical behavior. Punishing rather harmless behavior using arbitrary standards is not the way to do this. We should apologize for our mistake, set a clear standard for the future, and cease to blame people who act in the same way many of us would have. That would be setting an admirable ethical example to follow.” Nothing came of Bigbee’s letter. Future applicants were warned to await their results rather than trying to obtain them in any way that might be interpreted as hacking. But as the vote in our LCA class showed, the MBA students thought the school’s reaction excessive and self-righteous.

Negotiations, despite their importance in business life, were the subject of a short course shoehorned into the second semester. Our professor, James Sebenius, had been part of the founding team at the Blackstone private equity group, a fact he frequently brought up. He would feed our curiosity with asides like “back then, the Concorde was my bus and the Four Seasons my canteen.” Unlike other professors, he loved to dominate the class. His justification was that since the course was so short, he had a lot to cram in and there was less time for rambling discussion. He needed to be directive.

The course was broken up into two parts. The first, negotiation fundamentals, began with a discussion of ethics followed by the basic analytical tools of negotiation. The negotiator’s role was often to mislead his opponent, passively at least, while remaining ethical. The risk of unethical negotiation was a bad reputation, which would hurt you in future negotiations. Under U.S. law, negotiators had no duty of good faith, but fraud carried heavy consequences. Bluffing was fine. Knowingly misrepresenting facts to damage another party was not. The sophistication of the parties was also relevant. Selling a complicated financial product to an economic illiterate and then blaming the illiterate for not understanding the contract would hurt you in court.

There were basically three schools of negotiators: the poker player, who regards it all as a game; the idealist, who insists on doing the right thing every time; and the pragmatist, who knows that what goes around comes around. We were introduced to two concepts every good negotiator should know (whether or not they use these terms): BATNA and ZOPA. BATNA is the “best alternative to a negotiated agreement.” Knowing your BATNA prevents you from making a bad deal. If the negotiation is going poorly, you know what your options are if it collapses or you decide to walk away. ZOPA is the “zone of possible agreement,” the range of scenarios you and your opponent are likely to agree upon. You should have a pretty clear idea of both your BATNA and ZOPA even before your negotiation begins.

In every class, Sebenius emphasized the importance of mapping the interests of all parties in a negotiation and trying to figure out their BATNAs and ZOPAs. All too often, he said, people went into negotiations having labored to craft their own position but having ignored the other side’s. The gifted negotiator adopts a three-dimensional perspective, working both at the table and away from it, understanding the personalities involved, investigating relentlessly to grasp the complete range of interests, and then crafting a strategy, including everything from the venue and the timing all the way through to the financial calculations. If the negotiations stall, the negotiator should “go to the balcony” to gain perspective and then try to reframe the issues, moving from defensive positions to shared interests, from hostility to problem-solving. Then he can set about “building a golden bridge” from his position to his goal. Power, we were told, was a tool to be used to educate the other party rather than to escalate the intensity.

All these phrases were incorporated into our swelling lexicon. As I stood before the noodle bar one day, trying to decide between the stir-fry and the ramen soup, I felt a long arm flopping onto my shoulder.

“Mon ami,” said Cedric. “Let us go to the balcony to see the full range of choices. Then perhaps we can cross the golden bridge to reach your nutritional goals.”

Anybody who thinks money will make you happy hasn’t got money.

—DAVID GEFFEN

Private equity and hedge funds were the hottest topic on campus, for the simple reason that they were awash in cash. New MBAs joining a top private equity firm such as Blackstone, KKR, Texas Pacific Group, or Bain Capital, could expect to earn $400,000 in their first year. First-year investment bankers, by contrast, could expect maybe half of that, provided everything went well. To exacerbate the bankers’ inferiority, they knew they would probably have to spend most of their time raising money and pitching ideas for their friends in private equity. Investment banking was considered a second-tier career. You could earn $200,000 a year straight out of school, and your peers would still think you had failed.

But what exactly was the magic of private equity? Students would talk about how much more interesting it was to acquire and run companies than simply to provide banking services. Private equity gave you an ownership stake that investment banking did not. The principle/agent problem of how to align the interests of managers and employees with shareholders to maximize performance came closer to being solved by the private equity model in which managers and owners were more tightly linked. But, as usual, the money was the main attraction, and the money came courtesy of debt. It took me several months at HBS to disabuse myself of the notion that debt was a bad thing. Hasan shared my problem. “I come from a culture where borrowing is shameful. You want to die debt-free,” he told me. “But here I keep learning about the power of leverage, how to raise money and structure your financing deal. Suddenly everything is possible.” Debt, we found, is the fuel of modern finance. It provides the opportunity of astonishing returns. It allows you to seize control of assets you could otherwise not afford and then slap them around for cash. Debt focuses the mind and forces people to concentrate on the only thing that matters: the cash flowing out of the business. If Gordon Gekko were speaking today, he might have to reword his classic boast about greed. These days debt, for want of a better word, is good. Debt works. It had become a running joke in our section that if we ever discussed a company struggling to increase its value, members of the skydeck would start pumping their arms up and down as if jacking up a car. It was the sign to “lever up,” to load up the balance sheet with debt.

Whereas ordinary mortals talk about debt as a burden that requires relief, bankers talk about the discipline of debt and the wonder of “juicing the returns” through borrowing. The idea of debt as discipline is straightforward enough. Anyone with a student loan or mortgage payment knows how it hangs over them each month, forcing them to cut back on other expenses. Obligations to others in the form of debt create a kind of strait-jacketed, focused behavior in which the ability to generate enough cash to meet one’s payments becomes paramount.

But “juicing the returns”? Take two different companies. Each one has assets worth $1,000. The first has funded its assets with $800 in borrowed money and $200 in equity from investors. Let’s say the interest rate on the borrowed money is 10 percent and the tax rate is 50 percent. Each year the $1,000 worth of assets produce $200 in operating profits. Eighty dollars goes to pay interest on the debt, which the government allows you to charge as an expense. Of the remaining $120, $60 goes to pay taxes and the remaining $60 goes to the equity holders. For their investment of $200, the equity holders receive an annual return of 30 percent. Now imagine the same company in which all the assets were funded with equity. They produce the same $200 in operating profits. There is no interest payment. A hundred dollars goes to pay taxes, leaving the equity holders with $100, a 10 percent return. Which would you rather have? A 30 percent return or a 10 percent return? Juiced or not juiced?