The Economist May 6th 2017
Schumpeter From great to good
A condential memorandum to the senior faculty of Harvard Business School
Y OU will all be aware that a book has just been published
about our institution, Harvard Business School (HBS). Entitled
The Golden Passport, by Du McDonald, it makes a number of
unattering claims about the schools ethics and its purpose.
While often unbalanced, it is likely to galvanise hostility to HBS
both inside Harvard University, of which we are a part, and
among the public. This memorandum, circulated only to the
most senior faculty members, assesses HBSs strategic position.
Our school has been among the countrys most inuential in-
stitutions since its foundation in 1908. Our forebears helped build
Americas economy in the early 20th century and helped win the
second world war. HBS educates less than 1% of American MBA
students but case studies written by our faculty are used at busi-
ness schools around the world. Our alumni ll the corridors of
elite rms such as McKinsey. Many bosses of big American com-
panies studied here. Even in Silicon Valley, where we are relative-
ly weak, about a tenth of unicornsprivate startups worth over
$1bnhave one of our tribe as a founder.
We have a business model that monetises the Harvard brand
through four revenue streams. About $127m, or17%, of sales come
from MBA tuition fees. Our case-study method, in which students
learn from real business situations, is popular. But it is only one
reason why they are willing to pay headline fees of $71,635 a year.
Like parents of pupils at Britains elite private schools, they are
buying social standing as well as access to an alumni network
that will dramatically raise their odds of getting high-paying jobs.
A further 23% of sales comes from our executive-education op-
eration, which sells short courses to mid-career executives. They
get a modest amount of mental stimulation and the right to call
themselves Harvard alumni. We get $176m a year in return. Our
publishing arm sells case studies to other universities and pub-
lishes books and a magazine; that brings in 29% of our revenues.
The remaining 31% comes chiey from wealthy businessmen in
the form of donations. Some of them may well be under the im-
pression that they gain inuence over what we teach.
We have had a fantastic run of it, with sales growing at a com-
pound annual rate of 8% in the past decade, above the universi-
tys rate of 5% and outperforming the median rm in the S&P 500
index. Our balance-sheet is strong, with $3.2bn of endowment
Business 63
funds (run by the universitys management company) and $1.6bn
of other assets, including our campus. You have all beneted
handsomely; we pay out a higher share of our income in com-
pensation than Goldman Sachs does. It may look like poor cost
control, with expenses rising at a 7% annual rate, but it also means
we live up to our legal status as a non-prot organisation. After
deducting capital expenditure, the school makes a modest loss.
However, we face three strategic problems. First, conicts of
interestlets be honest herethat have become glaring. We grant
companies a veto over case studies written about them. We per-
mit our faculty to be paid, for example, through consulting gigs,
by rms they teach about. We do case studies on some of our big
donors. It is likely that this compromises our objectivity.
Second, we face ever more competition to our claim to intel-
lectual leadership. Important business thinkers such as Michael
Porter and Clayton Christensen are still on sta, but a new gener-
ation of superstars has not yet caught re. The authors of the most
inuential recent business book, The Second Machine Age,
work across the Charles river at the Massachusetts Institute of
Technology. As the tech industry expands, its chief alma mater,
Stanford University, is growing ever more powerful.
Last, we may perpetuate inequality, a relevant subject at the
moment. We have worked to make our intake of students more
diverse. But even after the nancial aid that we give to some, we
have ramped up our eective MBA fees by 31% over the past ve
years. Relative to the median salary our graduates earn in their
rst year at work, our fees are twice as costly as they were in 1986.
It doesnt take much to see our network as a form of cronyism.
Left unaddressed these weaknesses could compromise our
business model. If HBS is more about cash and contacts than
ideas, bright people may eventually go elsewhere. Other schools
may stop buying our case studies if they doubt their objectivity.
We are part of Harvard University, but our already uneasy rela-
tionship with it could deteriorate. We benet from an implicit
subsidy because we can use the Harvard brand while operating
at arms length. In return they benet from our alumni, who often
donate to the university as well as to HBS. But the university has,
at least notionally, the power to overhaul our management.
The Boston Business School Inc
Our school, led by Nitin Nohria, dean since 2010, has made im-
portant reforms. We have tightened disclosure rules on conicts
of interest. Students must spend time in emerging markets. We
have tried to signal that our interests go beyond shareholder val-
ue by publishing essays criticising it. Yet deeper changes are need-
ed if we are to maintain our competitive position. One course is
to reduce the inuence of big money and fully eliminate conicts.
Our dependence on big donors generosity would have to fall
and, by implication, we would have to be less extravagant.
If you have a good thing going, though, why stop? An alterna-
tive is to follow the advice of Alfred Chandler, a theorist at HBS
between 1970-89, who taught that structure must reect strategy.
HBS would cut loose from Harvard and acknowledge its tacit
commercial status. If we trimmed costs to their level ve years
ago and were valued on the S&P 500s price-earnings multiple,
HBS would be worth $5bn. The university would get a huge spe-
cial dividend with which to pay for more scholarships for under-
privileged applicants. We would be subject to the forces of ac-
countability and transparency that we have always argued
maximise performance. We look forward to your feedback. 7