Michael C. Jensen, Harvard business professor helped reshape capitalism, 84
Michael C. Jensen, an economist and Harvard Business School professor whose evangelizing for stock options, golden parachutes, and leveraged buyouts helped reshape modern capitalism and empower Wall Street’s greed-is-good era, died on April 2 at his home in Sarasota, Florida. He was 84.
The death was confirmed by his daughter Natalie Jensen-Noll. She did not specify a cause.
Even before he embarked on a peculiar late-career intellectual partnership with Werner Erhard, the controversial self-help guru who created est, Mr. Jensen’s colleagues considered him among the most freethinking and divisive economists of his generation.
“Mike was a kind of born proselytizer,” Eugene F. Fama, a University of Chicago professor and Nobel laureate in economics who collaborated with Mr. Jensen, said in an interview. “He was very sure of himself in terms of his ideas being correct and, you know, pathbreaking.” They were also incendiary. In his book “The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite” (2017), journalist Duff McDonald called Mr. Jensen an “instrument of intellectual violence” who “created a Frankenstein that no one knows how to kill.”
Mr. Jensen began his academic career in the late 1960s, when a seismic shift in economic theory was underway. For decades, students studying management — especially at Harvard Business School — were taught that executives (and their companies) should have a social conscience.
Then, in 1970, economist and free-market theorist Milton Friedman published his groundbreaking essay “A Friedman Doctrine — The Social Responsibility of Business Is to Increase Its Profits,” in The New York Times Magazine.
A business that “takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution,” Friedman wrote, is “preaching pure and unadulterated socialism.”
Mr. Jensen, a free-market adherent himself, endorsed Friedman’s essay. But he detected a hole in the argument, which he explored in a seminal paper, “Theory of Firm: Managerial Behavior, Agency Costs and Ownership Structure,” written in 1976 with William H. Meckling while they were both professors at the University of Rochester.
The paper explored the misalignment of interests between managers and the companies’ owners, the stockholders, which they said made it impossible for firms to exist solely for increasing profits.
To align the interests of both parties, Mr. Jensen encouraged the use of stock options and equity as primary forms of compensation. He endorsed taking on debt to buy other companies because loan payments and reduced free cash flow would force executives to better manage costs. And he blessed golden parachutes — the large payments executives receive if they are forced to leave after a merger or the outright sale of a company.
“Think about the problem in the following way: Top-level managers and the board of directors act as stockholders’ agents in deals involving hundreds of millions of dollars,” he wrote in Harvard Business Review. “If the alternative providing the highest value to stockholders is sale to another company and the retirement of the current management team, stockholders do not want the managers to block a bid in fear of losing their own jobs.”
Executives walk away with their pockets comfortably lined with cash, the theory goes, but so do investors.
“He was clearly some kind of genius,” said Nicholas Lemann, the former dean of the Graduate School of Journalism at Columbia University, who interviewed Mr. Jensen for his book “Transaction Man: The Rise of the Deal and the Decline of the American Dream” (2019). “I think he’s much more important in shaping the America we live in now than most people recognize.”
That shaping largely transpired at Harvard Business School, which Mr. Jensen joined in 1985, at the height of President Ronald Reagan’s pro-business economic policies. Two years later, in Oliver Stone’s movie “Wall Street,” Michael Douglas portrayed a fictional corporate raider, Gordon Gekko, who declared: “Greed, for lack of a better word, is good. Greed is right. Greed works.”
Later in life, after Wall Street had been besieged by corporate stock option scandals and politicians derided excessive compensation packages, Mr. Jensen acknowledged that his ideas had spiraled out of control.
He told The New Yorker in 2002 that basing compensation so heavily on options incentivized executives to lie about financial results. Stock options had become “managerial heroin,” he said; what the business world lacked was integrity.
Around 2012, with Erhard, he founded the Erhard-Jensen Ontological/Phenomenological Initiative. They offered weeklong seminars on leadership, which they taught in far-flung places, typically near beaches. The cost: $3,000 per person. Lemann attended one in Bermuda.
“I was involved in reorganizing the financial industry,” Mr. Jensen said onstage, according to Lemann’s book. But by then, he said, the world of finance was “staggeringly bad,” adding “I’m sickened by it.”