Ahead of the Curve Read online

  Financial Reporting and Control (FRC) came next. Accounting did not convey the course’s scope. That was merely the financial reporting part, record-keeping to calculate profits and limit tax liabilities. Control was the use of internally gathered data to improve company performance. It was about using accounts to measure efficiency and make company-wide decisions. Eddie Riedl, our professor, was a live-wire accountant from New York who spoke quickly and strutted round the classroom with one hand tucked into his tight gray pants, the other gesticulating with a piece of yellow chalk. After the very briefest introduction, he looked one way and then pointed to me, like a basketball player tossing a no-look pass. First accounting class, first cold call. I could scarcely believe it. I stared down at the six-by-four-inch card on which I had written my notes. Eddie moved to the blackboard, chalk poised, waiting for me to speak.

  “So this is a case about a baseball club, the Kansas City Zephyrs, in which the owners and players cannot agree about how profitable the club is,” I began. Looking around the classroom, I could see looks of curiosity mixed with sympathy.

  “Very good, carry on,” Riedl said, drawing up two columns, one marked “Owners,” the other marked “Players.”

  “The players think that the owners are using accounting tricks to reduce their profits and then using these numbers to justify not paying the players more.”

  “I didn’t realize you could play tricks with accounting,” Riedl said. “I thought accounting was an accurate reflection of what went on in a company.”

  There was a ripple of laughter.

  “It’s a question of perception, I guess,” I said. “If you take a look at the way the value of players is depreciated under the tax laws, it doesn’t seem to make much sense.”

  “Great, let’s take a look at this depreciation rule.”

  “So it seems that when you buy a team, you can capitalize the value of your players.”

  “And what does it mean to capitalize something?”

  “I think it means you treat it as an asset, which appears on your balance sheet, rather than an expense, which appears only on your income statement.”

  “Okay. And what then?”

  “So if you buy a team for a hundred million and capitalize the value of players at, say fifty million, you can then charge a depreciation expense over six years.”

  “And how is that expense different from the salaries you pay your players?”

  “It means you’re incurring a double expense. There’s the depreciation expense, which doesn’t make any sense anyway, because, say the team you bought was stacked with talented young players, they’re probably going to go up in value over six years as they gain experience, not down. And then there’s the annual salary expense as well. The players argue that the only real expense is salary and that the owners are abusing the depreciation allowance to minimize their profits so they can justify lower salaries.”

  “Philip here clearly sympathizes with the baseball players. Anyone disagree?”

  Several hands went up, and I was off the hook. Bob scribbled a note to me. It read, “Well done.” It was a relief to have it over, and even more of a relief that Riedl had not pressed me for numbers. I had slaved over the case for three hours the night before and come up short. My calculations, even after the study group, were an incoherent scribble.

  Toward the end of the class, Riedl asked us to answer a poll using the red and green buttons embedded in our desks. “If you think accounting is generally useful, press red. If you think it is generally useless, press green.” Useful won by a slender margin. Each side then had to make its case. The useful camp said accounting created consistent standards across different companies and businesses and allowed one to compare their performances. It also helped in managing a company to know how money flowed through it and how efficiently it was being used.

  The useless camp said accounting was merely the art of manipulating numbers to fit whatever goal you had in mind. It was confusing and deceptive, and described events long after they had happened. There were far more effective ways of examining a company’s health and performance than trying to decipher its accounts.

  Accounting, Riedl explained, told the story of a company through numbers. But there was book accounting, which management used to manage its internal processes, and tax accounting, which was the preserve of tax specialists focused on exploiting the tax code to reduce tax liabilities. In the case of the Kansas City Zephyrs, the book and tax accounting were blurred, creating this mistrust between the players and owners. The purpose of FRC was not to make accountants of us but to help us look at accounts in a critical way, to search constantly for truth and to sniff out evidence of error or bias.

  “There are two mantras in accounting, which we will come back to again and again during this course,” said Riedl. He wrote them up and asked us to memorize them. The first was the foundation of accounting:

  Assets = Liabilities + Equity.

  The second mantra was:

  Accounting = Economic truth + Measurement error + Bias.

  During this course, Riedl promised, we would spend our time pursuing economic truth and discovering the reasons why it could be so hard to find. We would see inventory fiddles, the premature booking of unearned income, the accounting benefits of leasing versus owning.

  I had imagined accounting would be much drier than it was turning out to be.

  Lunch followed in our classroom. Carl Kester, the chair of the MBA course, came in to talk to us about community standards, or rather the house rules. It was the fourth or fifth time we had had these stressed to us. Basically, they told us to be respectful of one another and not to cheat. One of the standards, “no cheering guests,” prompted someone to ask why. Kester, a large blond man with the quiet manner of a midwestern loan officer, told us that at some point in the mid-nineties, cheering in class got out of hand. It was perfectly normal for visitors to class, friends or families of students, to receive a welcome round of applause. But it had gotten to the point where sections would coordinate special cheers, waves, and dance routines. One section even had people back-flipping down the rows in class. Faculty hated it, half the students hated it, and the guests hated it. Most of Kester’s talk, though, was a warning against forming virtual, online study groups that would be considered a kind of cheating. The school felt that the educational experience of HBS would be undermined if large groups of students traded notes online. Instead of thinking through problems themselves and working with study groups and the section to grapple with the messy problems presented in the cases, students would develop cheat sheets and formulaic answers. Virtual study groups would jeopardize the entire process of repeated decision-making, discussing, and dealing with uncertainty that we were there to learn. It was the human interaction that made HBS so unique and the administration’s relentless focus on this process that gave the education its heft.

  Over breakfast one day, Ben, the New York City Parks official who had been my neighbor during Analytics, asked me what I thought of the school’s mission statement, “to educate leaders who make a difference in the world.”

  “It seems a bit vague,” I told him. “Perhaps it could use the word business. And I don’t really like the phrase ‘make a difference.’ It supposes the person making the difference knows better, which isn’t always the case. There is a thin line between making a difference and just imposing your will.”

  “I wonder why the school can’t just admit that its job is teaching people how to run profitable businesses?” Ben said. He was quite cross. “Why does it even think that leadership is best taught through courses on business? I mean, if it is really leadership they want to teach, why don’t they have us taking history or religion courses or spending the weekends with the Marine Corps?”

  LEAD was the course in which some of this would be unraveled. It dealt with the role of human behavior in business. It was about understanding people’s motives and psychological needs as well as one’s own role in a compan
y and the way to get ahead. The business big shots who came to the school to speak always said this was the most vital stuff we would study, and yet students always held it in the lowest regard. Jeff Immelt, the CEO of General Electric, said in a speech on campus, “I hated organizational behavior at business school. But OB just turns out to be the most important class you can take here. Because the ability to attract people, to pay them the right way, to create culture and values and reinforce them, that’s what makes companies great.” Yet the perception was that the course was soft, touchy-feely, unteachable. Misty, a former soldier, huffed before the first class that she had learned all she needed to know about leadership from the military.

  This general suspicion about LEAD was reinforced by our professor, Joel Podolny, who wore a salt-and-pepper beard and spoke in the whispering, confidential tones of a late-night DJ. The course began with an analysis of Erik Peterson, a recent MBA graduate who had gone on to run a small cell-phone operation based in Hanover, New Hampshire. He had wanted to be a general manager and was thrilled to have the opportunity so early in his career.

  But from the moment Peterson arrived at work, he realized he was in deep trouble. He was working like a dog, had no idea who was reporting to whom, and had to deal with an idle, duplicitous subcontractor and an impatient ownership team in Los Angeles. His chief engineer was lazy and a misogynist. The staff were envious of each other’s salaries. There were zoning problems and a nitpicking supervisor to deal with. When the president of the company visited, Peterson screwed up, meeting him in a noisy restaurant and letting him roam around the company offices to discover the lousy situation for himself. By the end of the day, Peterson “felt stunned and humiliated.” Peterson was a classic malfunctioning MBA and a warning that MBAs could be losers, too.

  For some in the section, the discussion of Erik Peterson’s problems seemed like a liberation from the tyranny of numbers. Real problems at last! Others recoiled into their seats at the frivolity of the subject matter. Had we really come to business school for low-brow personal development sessions? Podolny sketched out our discussion on the blackboard, creating a spider’s web of circles and linking arrows. Did Erik Peterson create his own lack of empowerment? How can one be both a leader and a manager, both inspiring and structured? What could Peterson have done differently? Should he have deluged upper management with information in order to cover his back? Should he have clarified his own powers before accepting the job so he could have taken more drastic action against those who sought to undermine him? What were the critical “choice points”? When everything started to turn sour, should he have turned to his bosses and “opened the kimono”?

  LEAD prompted two basic questions: the first was whether leadership could be taught, and the second, whether business was a proper medium through which to teach it. These were questions that applied not just to Podolny’s course but to HBS more broadly, given its mission. Some, like Misty, never seemed to get over the idea that a man with a beard and fifteen advanced degrees, who had spent no time leading a tank division, was trying to teach us leadership. Others, like me, found the idea of treating human behavior as a process to be managed, like cash flow or machine operations, flat out disturbing. But I realized that my initial reaction to the course was like that of an earlier generation’s toward the idea of seeing a shrink. What do you need all that for? Can’t you just talk it out with friends? Sort it out for yourself? Take a long walk and think about it? As the course wore on, I became more open to the idea that while the mysterious qualities of a Napoleon or an Alexander the Great could never be taught, there was still plenty one could learn about managing and motivating others.

  LEAD allowed us to take an anthropological approach to companies. Instead of focusing on numbers and financing, we examined the causes and effects of those curious behaviors that occur in business settings. In one case we studied the importance of psychological contracts between employees and employers. On the one hand there are formal contracts, which detail hours, salary, and job requirements. But just as important are the psychological contracts, the unwritten understandings that employees often regard as rights, a set of expectations about one’s status and treatment. Companies that underestimate the importance of these often find themselves in deep trouble. We studied a plating company that rewarded its high-productivity employees with extra time off and turned a blind eye to their intimidating and casually racist behavior. This allowed the company to keep wages lower and secure the loyalty of workers who might otherwise have left. Rather than trying to apply some noble set of principles, the manager had looked at what he was trying to achieve, the context in which he was working, and let develop a culture and a way of doing things that worked. But it was a short-term solution. He had let in a slow-working disease which would eventually hurt the company’s reputation and ability to function.

  Stuart, a chiseled former Wall Street trader sitting in the back row, said that the case reminded him of the investment bankers he knew who earned hundreds of thousands of dollars a year but fussed over whether or not they received a free dinner and a cab ride home if they worked past 9:00 P.M. People who could well afford the meal and the cab would hover around to get the perk, simply to feel they were getting everything the firm owed them. And those who didn’t take the perk, or who didn’t like eating after nine or didn’t need to get a cab home, felt they were losing out. To resolve the issue, his firm tried giving everyone a flat sum of money to use however they liked. Then, of course, those who lived a long way from the office or who had enjoyed wolfing down an enormous Chinese takeout at 11:00 P.M. said they were now losing out. After countless adjustments, Stuart said, the firm still had not figured out a way of keeping everyone psychologically satisfied.

  The fourth of the five courses we would be taking this first semester was Technology and Operations Management, taught by a young woman professor from Turkey. Zeynep Ton had recently graduated from the HBS doctoral program and was an improbably chic and energetic guide to the world of factory design, manufacturing schedules, supply chains, and process management. Our first case was about Benihana, the Japanese-inspired restaurant chain. We saw how its founder had deconstructed the mechanics of restaurants to create something unique and highly profitable. By having chefs prepare food at the tables, he could cut back on kitchen space. Customers were rotated in and out of the restaurant at speed. A limited menu meant far less waste. And all of this was packaged and offered up as entertainment, with chefs spinning their knives as they sliced up vegetables and meat and cooked them right in front of the diners. It gave one a strange feeling of power to be able to peel back a business as elemental as a restaurant and see where in the process of serving food one could make and lose money. Later in the semester, I learned a term for that delusional sense of authority, the sense that after a few TOM classes I could reengineer the operations of any business put before me. It was called Beginnihana.

  In no time, I was swamped by the work. As much as I enjoyed the class discussions, there was barely time to get everything done. Any case involving numbers seemed to take me twice the suggested two hours, as I toiled away with pencil and paper, loath to fire up Excel. Several professors told us that the flood of learning was like “drinking from a fire hose.” And then there was FOMO, fear of missing out. The trick to HBS, the administration kept telling us, was not succumbing to FOMO. You had to choose exactly what you wanted to do and do it without fretting about what else was going on. I quelled my own FOMO by going to the library each day and reading the newspapers, trying to get my head as far away from the bubble as possible. But FOMO was a persistent stalker on campus, sowing poison in every mind.

  To celebrate the end of the first week, my section hosted a party. Everyone was invited to dress up as hip-hop stars, and we poured into a small on-campus apartment sporting fake jewelry, velour leisure suits, baseball caps skewed off to the side, and pimp hats and canes. The centerpiece of the party was a booze luge, a large block of ice with a narrow cha
nnel cut through it. You had to stand at the bottom while vodka was poured into the channel and wait for it to come slithering down into your mouth. The music was absolutely deafening, precluding the need for anything approaching a conversation. All we could do was smile awkwardly in the half-light and cheer on whichever sucker had his lips frozen to the luge. “Greg!” we cheered. “You are the man! The man! Go Greg! Suck it down baby! Drink, drink, drink!” On Monday morning, a very befuddled Scottish doctor who sat in front of me told me the whole scene reminded him “of that movie American Pie.”