Is Wharton Ruining American Business?

The sun had just begun to set on the verdant acres of the Iroquois Springs Camp in Rock Hill, New York, and the air had filled with the smoky aroma of barbecue dinner for 500 of the top business minds in the universe, when the staff started acting funny. A gray-haired woman was running to and fro in a panic, crying out sporadically in anguish. Walkie-talkies static-beep, static-beeped with alarming frequency. Finally a camp supervisor charged through on a golf cart at what seemed an unusually high speed. Then, sirens.

The prospect of danger seemed nearly impossible after the jubilation of the day's events, which had commenced with an “assembly” of sorts at which members of the 2006 Wharton MBA class were called by their second-year “Leadership Fellows” to rise, amidst deafening applause, if they spoke more than two languages, had worked outside the country, had completed a marathon, etc. (almost two dozen marathoners rose), and continued on to include a complex water-balloon fight, a kayak obstacle course, the composition of special cohort songs, and a marshmallow roast.

“There's a fire,” a khaki-clad Leadership Fellow finally announced, underwhelmed. Most of the participants in the 2004 Learning Team retreat seemed as oblivious as if the sirens had been blaring back in West Philadelphia. “We need everyone back in the auditorium.”

Dutifully, the future MBAs, dressed in their green, red, yellow, and pink team t-shirts, returned to the auditorium's folding chairs. The goal of this whole thing, they had been told eight hours ago by a Leadership Fellow standing on this very stage, was to pluck them out of their “comfort zones.” This was not what he meant.

True to form, though, the future MBAs were good-natured; they even seemed comfortable. The fire – which had ravaged a laundry room a few hundred yards down the campsite and would, later that night, seize some bathrooms – ceased, for the moment, to smell. After a quick head count – no one really disappears at Wharton – the class of 2006 of the world's oldest and most esteemed school of business quickly resumed its yammering.

Okay, okay, you get it. MBAs do not put out fires. MBAs often do not seem to notice fires, even when they are raging mere yards away. Hence the scandals Enron, WorldCom, Global Crossing, Adelphia, HealthSouth, AIG. Hence the billions of dollars in hidden debt, the billions more in made-up profits, that could persist on paper quarter after quarter even as their failure to exist in reality emitted an ever fouler smell.

That is, anyway, the assertion of an increasingly influential batch of business-school professors, including noted iconoclasts like McGill University management guru Henry Mintzberg and Yale economist Robert Schiller (who wrote that MBA curriculums are “so devoid of moral content that the discussions of ethics must seem like a side order of some overcooked vegetable”). More reasoned types like the late Sumantra Ghoshal of the London Business School, whose posthumously published Bad Management Theories Are Destroying Good Management Practices has roiled the business education world, agree. “Business schools do not need to do a great deal more to help prevent future Enrons,” Ghoshal wrote. “They need only to stop doing a lot they currently do.”

The attacks come at an already trying time for MBAs, especially those in training west of the Schuylkill. Wharton has only seen a couple of high-profile grads convicted in the current crackdown on corporate greed – IPO king and justice-obstructor Frank Quattrone, and Adelphia's Timothy Rigas. They're hardly the zeitgeisty bunch of Greed Generation MVPs Wharton became famous in the '80s for schooling – junk-bond king and ex-con Mike Milken, corporate raiders Ron Perelman and Saul Steinberg, The Donald Trump himself. Still, lesser embarrassments have stung – like '98 dropout Mark Yagalla, who started a $50 million “hedge fund” that turned out to invest mostly in the young stock-picker's harem of Playboy models, or 1998 grad Jeremy Kraus, whose much-hyped ice-cream company, Jeremy's MicroBatch, lost millions in investment money before he shut it down to found a “business development” firm the SEC alleges used boiler-room tactics to pump its stock.

But the more serious problems at the world's oldest business school, which turns out about 1,000 MBAs a year, are the signs of crumbling in the B-school industrial complex it worked so hard to build. For years the MBA's importance has been perpetuated by a triumvirate of conjoining interests – 20-somethings who want to jump-start careers, companies that want to groom them, and schools that want to reap the fees and create wealthy alumni. Now the first two are shrinking away: Wharton applications fell 21 percent in 2004 (and fell again this year), and since 2000, the percent of MBAs landing full-time job offers has fallen to 83 percent from near 100 percent.

Then, in October, Wharton was singled out for ridicule by one of its own when the Wall Street Journal printed an embarrassing letter, “Are MBAs Really Learning How to Do Things?” The missive, written by Wharton marketing professor J. Scott Armstrong, essentially charged that the MBA is a worthless degree. Relating the pathetic responses he'd gotten when he asked students to anonymously write down what they'd learned in previous classes (“I learned to think out of the box” was a popular answer), he wrote that MBAs “resist learning about useful management techniques. On the other hand, they love jargon. Can you say 'strategic thinking' or 'scenario'?” Business schools, he concluded, “have convinced students that they have no responsibility for their learning.” Armstrong, it turned out, so hated MBAs that he hadn't taught any in years, but other members of the faculty began to step up and concur, to the point that Anjani Jain, the vice dean charged with overseeing Wharton's MBA program, wrote an e-mail to MBAs reporting that their academic performance was falling precipitously. Little wonder: They had admitted in a semiannual “stakeholder survey” that they were spending 22 percent less time on classwork than students four years ago. Alumni began to fear for the Wharton “brand,” and wondered aloud whether the school's precious grade nondisclosure policy – a sacred cow that, in the interest of giving MBAs time to work on their “people skills,” since 1994 has prohibited students from telling prospective employers their GPAs – might have to be abolished.

But the most humiliating blow to the MBAs came in an episode earlier this year dubbed the “Pub Controversy.” For decades, Whartonites had gathered on Thursday afternoons (there are no Friday classes) for a prolonged on-campus happy hour “Pub” attended and staffed by MBAs; in February, however, an MBA imbibed so much that he passed out and had to be hospitalized. The ensuing investigation by the school's risk management department yielded some sobering findings – namely, that Pub managers were paying themselves $31.25 an hour. “In the era of Dick Grasso, the one lesson we should all learn is that executives should not set their own compensation,” Dean Jain drily opined in the Wharton Journal. The reference to Grasso, the notorious former New York Stock Exchange chief who, with the assistance of an oblivious board of directors, set his own pay to the tune of more than $188 million, was so over-the-top as to almost seem joking. But after hanging around Wharton for most of the 2004-'05 school year, I had heard enough from and about Jain to know he wasn't. He'd simply had enough.

Tellingly, in the same Wharton Journal, Jain revealed to the MBAs that the “achievement gap” between their grades and those of the (notoriously intense) undergrads who took the same courses was widening. It seems that as the MBAs while away their years chatting and schmoozing and drinking to excess, a younger, shrewder, more competitive group of B-schoolers is toiling into the night, plotting world domination. The MBAs, as a group, have the temperament of Dick Grasso's clueless board members, whereas the undergrads want to be the $188 million man.

Ask any Whartonite today what business school is supposed to do, and the answer you'll get is likely some variation on “Find people jobs.” There is, after all, no bar exam for business, no pool of basic knowledge required to succeed in it. Steel baron Joseph Wharton gave Penn the $100,000 that founded the school in 1881 in large part to advance a curious agenda: protectionism. To Wharton, who'd made his millions aided by steel tariffs, founding the first school of economics and finance was a way of preempting the spread of a dangerous new philosophy known as “free trade.” And while Wharton has long since embraced free trade as an economic concept, the MBA degree it invented has become its own sort of tariff, levied by universities on the aspirations of the would-be leadership class. The MBAs I met were all bright, young (average age 28), and undecided about which industries they wanted to land in. The appeal of Wharton was that this did not seem to matter. As the website advertises, getting an MBA is a fiscally prudent thing to do:

You'll develop lifelong connections and leadership skills to engage the world … and transform your career in ways that extend far beyond your return on investment.

Excepting the preambulatory niceties, what Wharton is really telling prospective students is that they'll get a return on investment, ROI for short, on their degrees. The term “ROI” has been so co-opted by the B-school industrial complex that many websites post Java-based ROI calculators with which students can compare Wharton to Carnegie Mellon on their most basic numerical levels. But it's imprecise: ROI is more accurately a metric used by corporations to measure the profitability of a capital expenditure, like the purchase of a server or the construction of a new plant. The MBA is not a machine, though. Generating a decent ROI in an era when tuition and room and board for two years amounts to more than $125,000 requires the commitment of years, sweat and tears to a job in an 80-hour-a-week field like investment banking or consulting; otherwise, the degree is often worthless.

More than 60 percent of MBAs become bankers and consultants, jobs for which the recruitment period can be as exhausting as the work itself. So most MBAs, aware of this and free from most GPA concerns, seem to spend the rest of their two years developing “people skills” at Pub, pubs, and the 100 MBA clubs. Class, meanwhile, is largely devoid of meaningful discussion. A typical example: During a finance lecture with market demigod Jeremy Siegel, Wharton's most popular professor, I watched a girl enter words in the columns of an Excel spreadsheet that turned out to be the steps to a choreographed dance set to a Beyoncé Knowles song. Conversely, students appeared rapt at a pre-term career counseling seminar called “Succeeding in Business Today,” developed by Gail Madison, a Hermés-scarved Huntingdon Valley woman with shoulder-length hair who despite a lack of business degrees has built a successful business, the Madison School of Etiquette and Protocol, training businesspersons in the manners of success.

Madison began by distributing an etiquette quiz with 38 true-false questions. No. 33, “It is acceptable to drink alcohol at company receptions that usually follow the EIS (employment information session),” was an emphatic false.

“Test, test, test!” she cried. “It loosens us up, and we make mistakes!” (It may also be a test, Madison had warned earlier, if a senior executive lights up and offers us a cigarette when we happen to smoke. “It's not corporate.“)

Then Madison lapsed into a series of rhetorical questions. What's the most powerful color suit you can wear? Navy blue, followed by black, for both sexes. (Brooks Brothers may be boring, but it works!) What do people look at first after a handshake? The feet! (Ladies, always wear heels between one-and-a-half and two inches. There may be industries in which you can go higher, but play it safe.) And hair should be short! Shoulder or above! If your religion prevents that, put it up! Dress for the person you would like to be! Name card on the right shoulder! Perception is reality!

In Madison's eyes, the world of the post-MBA held no room for relativism, for human imperfection, for minor displays of distinctiveness. It seemed a grim way of seeing things, until I experienced its inverse, at another optional seminar, “Identity Is Destiny,” given by a consultant named Laurence Ackerman, who had written a book advising corporations to think of themselves as human organisms.

“It has been inside me to be who I am since the day I was born, and who I am creates value in the world,” Ackerman told the MBAs. “I get rewards in return. Both monetary. And psychic. … When you're in alignment with that, Life … Becomes … Magnificent.”

The student next to me flipped through his cell phone's instruction manual.

Ackerman introduced an eight-part PowerPoint tutorial on finding an identity, from the Law of Being to the Law of the Cycle. All was calm until He started posing questions. When a slide flashed onto the screen asking “What is my gift?,” a long silence followed. Ackerman elaborated: “How, to use MBA lingo, do you differentiate yourselves?”

A slight, curly-haired girl raised her hand:

“I think this question makes a lot of people really nervous. That's why there's no response to this question. There are a lot of motivated, organized people here. I mean, I'm in the business world. My gifts are gifts that a lot of people have. I have quantitative skills.”

A guy in a gray t-shirt and Teva sandals he'd spent much of the morning slipping on and off was now moved to step in:

“I'm talented in math and quantitative stuff, but what I really derive value from is teaching, not doing all that quant stuff for clients. … ”

All the way back in 1977, a Citibank recruiter explained to Forbes why the company recruited MBAs and paid them so generously: “To hire 300 people, we'll give over 7,000 interviews – so the efficiency and accuracy of the interviewing process becomes very important to us. … The chances are the MBA will know the jargon a little better and will have sorted out the question: 'Do I want to write the Great American Novel? Or be a banker?' “

The thing is, a lot of MBAs are still, like the Teva guy, sorting out that question. It did not require advanced quantitative skills to determine that teaching would not deliver a suitable ROI on this man's MBA, but his fate still had not settled in. All over Wharton, I found similar small bursts of dissent.

A telling moment from an ethics class, Merck case edition: In the '70s, Merck learned that a veterinary drug it had developed could potentially treat African river blindness, a disease in which worms embedded in people's skin and eyes, rendering entire swaths of the continent blind. Treating the illness would require Merck to spend millions testing and distributing the drug, with no hope of ROI. Should it do so? Most students raised their hands “yes” – perhaps realizing that “yes” had been Merck's decision – while a healthy plurality, looking flummoxed, tried to explain to the class that Merck had no responsibility to save the world, that maybe if the company had received grant money, it would make sense. A male student raised his hand:

“I don't think shareholder opinion should matter at all, for any reason,” he said, in the sort of idiotic tone with which you would have expected him to say something like “Women should go barefoot and pregnant.”

God bless him, I thought. If any single factor has corrupted American business, it's the warped concept of shareholder “value,” which has justified everything from accounting shams to the awarding of hundred-million-dollar bonuses to merging AOL and Time Warner. Most of these actions are not, of course, in the interest of shareholders who hold their shares for more than a few months, but they, of course, are not the shareholders on whose behalf Wall Street analysts are usually lobbying. That “shareholder value” is not a phrase uttered with the sarcasm afforded to, say, the phrase “vertically challenged” is a depressing statement on the reflective capacity found in corporate America.

No one, though, took the guy's bait. A noisy debate on the concept of shareholder value would have been interesting, entertaining, and maybe even memorable enough to stick with students into their careers, but no such debate ensued. Merck treated the disease; students exited the room. “Pharmaceutical companies aren't really relevant to what a lot of us end up doing,” one student explained to me.

It was little wonder, I thought, that corporations needed dudes like Ackerman to get them to act like “humans.” The MBA above all teaches people to act like corporations, to follow the path of highest ROI. Humans don't know how to act like humans anymore. Instead they are drones, vassals to their massive debt loads for whom reflection and critical thinking are not useful offsetting assets.

If Wharton MBAs think of their lives a little too much like CFOs, undergrads are a bit more like the custodians of a start-up firm that just landed a big investment from “angel investors” – their parents. Thus capitalized, they are freer to pursue their goals and “find themselves.” However, because their GPAs are available to prospective employers, they mostly find themselves in Huntsman Hall study rooms, running spreadsheets. And they love it. “It's a constant back-and-forth, whether it's good that these kids are so driven or bad that they're sacrificing their 20s,” opines Nicole Ridgway, who covered the job searches of seven Wharton undergrads (average job offers awarded to a Wharton undergrad: 2.6) for an upcoming book, The Running of the Bulls. “But some of them are just really enamored with finance … I've had quite a few spirited intellectual debates with them.” This confuses the MBAs no end. “I just don't know what it is that drives a 17-year-old to go to an undergraduate institution like Wharton,” an MBA columnist mused in the Wharton Journal in October. But there was something attractive in the undergrads' determination, an honesty of purpose that was lacking in the MBAs. I watched the eyes of a Wharton sophomore named Allison Strouse visibly light up, for instance, when she talked about her first finance class.

“I just really liked it, like the concept of net present value. Every dollar I get, I think about it differently now.”

Slim and tan, with silky dark hair and status jeans, Allison looked like she'd stepped off the set of The O.C. (A tip-off, I learned later from one of her sorority sisters, should have been her one-and-a-half-inch mules: “Allison never wears flat shoes anywhere but the gym. It's, like, her policy.”)
Allison bought her first stock (Coke) at 11. It's a precociousness that has been shared by many Wharton undergrads over the ages, from Warren Buffett, who dropped out after a year in the '40s after concluding he knew more than the professors, to the now-imprisoned Mark Yagalla, to most of the Wharton undergrads I met as an undergrad at Penn in the late '90s. If Milken had been born in 1980, I thought, he'd have gone to Wharton undergrad, and not bothered with an MBA. The undergrads are for the most part nimbler, harder-working, harder to relate to, and – and I don't mean this in an entirely bad way – greedier. One undergrad, back when I was a student, invited me to participate in an insider trading scheme with the memorable line, “It's called insider trading, and you can make a lot of money.” Undergrads seem riper for spectacular humiliation, or at least SEC inquiries.

Of course, context is everything. Yagalla and Quattrone both acted within the unique and absurd context of the Internet bubble, irrational exuberance, IPO madness, stock options, the worship of all things young and ambitious. The supposed “New Economy.” The creeping fear that it would pass one by. The Internet bubble fueled the idea that the skyrocketing stock prices of telecom giants like WorldCom, Global Crossing and Adelphia were the result of some legitimate creation of “shareholder value” that gave executives license to buy planes. And companies like Enron – corporate slogan: “Ask Why” – profited from their encouragement of employees to buck trends and ask questions, when in actuality they were profiting only because no one had the curiosity to ask where their profits came from.

Money was all around, and money somehow became legitimacy. Frank Quattrone was raising billions for companies like Beyond.com and E.piphany that never stood a chance of turning profits, Jeremy Kraus went public, Yagalla raised $50 million. Then, of course, the market crashed, investors got angry, and prosecutors started finally asking why.

“There are two reasons for the scandals” to which the business world has fallen prey, Wharton professor Armstrong says. “The first, and the less important one, though it's still important, is that CEOs steal. The second, more important one is 'workers following orders,' to make the numbers and so forth.”

But a lot of people learn to stop asking “why” the day they set foot at Wharton – because if they didn't, they'd face the Teva guy's paradox. Students who come for vague, restless reasons – a former Yahoo marketer, for instance, told me he wanted “confidence to make decisions” – quickly realize the MBA is about ROI. What starts as a quarter-life crisis ends with a signing bonus and a job running spreadsheets; and most of them don't enjoy it.

And that is why MBAs – and the business community comprised of them – are to blame for the scandals, the bear market, the layoffs. WorldCom, Enron and Beyond.com were staffed and sold to investors by MBAs, grown-ups; people who should have known better.

Not that knowing better always helps, as a Wharton MBA blogger explained in a recent post about a flight he'd just taken:

Everyone's baggage [emerges] soaked with fuel … Being a former Navy pilot, this is a smell with which I am quite familiar. I told them they needed to call someone in charge of maintenance because there may be an internal fuel leak. They basically replied, 'Whatever dude. Get out of here.'

Later, the blogger talks to an airline pilot friend, who confirms that nothing short of a leak could have doused luggage.

All it would have taken is one static electricity spark and that plane would have gone down in a fiery blaze.

On a good note, I have been doing some trading in [the airline's] volatile stock. I was able to buy at about 3.70 and flip it at 7 in less than a month. So I can't get too mad at them right?

At least one reader, posting anonymously, found this a bit callous. I don't mean to judge, but you've got your priorities upside down – don'cha think? someone wrote the blogger.

I couldn't get too mad at the MBAs, though. They didn't create the system. Had the blogger been back in the Navy, where putting out fires is serious business, he'd surely have pressed more. But he was at Wharton now, where perception is reality, return on investment is all that counts, and the only fires worth putting out are the sparks inside ourselves. b