How Will You Measure Your Life?

by Clayton M. Christensen

Editor’s Note: When the members of the class of 2010 entered business school, the economy was strong and their post-graduation ambitions could be limitless. Just a few weeks later, the economy went into a tailspin. They’ve spent the past two years recalibrating their worldview and their definition of success.

The students seem highly aware of how the world has changed (as the sampling of views in this article shows). In the spring, Harvard Business School’s graduating class asked HBS professor Clay Christensen to address them—but not on how to apply his principles and thinking to their post-HBS careers. The students wanted to know how to apply them to their personal lives. He shared with them a set of guidelines that have helped him find meaning in his own life. Though Christensen’s thinking comes from his deep religious faith, we believe that these are strategies anyone can use. And so we asked him to share them with the readers of HBR. To learn more about Christensen’s work, visit his HBR Author Page.

Before I published The Innovator’s Dilemma, I got a call from Andrew Grove, then the chairman of Intel. He had read one of my early papers about disruptive technology, and he asked if I could talk to his direct reports and explain my research and what it implied for Intel. Excited, I flew to Silicon Valley and showed up at the appointed time, only to have Grove say, “Look, stuff has happened. We have only 10 minutes for you. Tell us what your model of disruption means for Intel.” I said that I couldn’t—that I needed a full 30 minutes to explain the model, because only with it as context would any comments about Intel make sense. Ten minutes into my explanation, Grove interrupted: “Look, I’ve got your model. Just tell us what it means for Intel.”

I insisted that I needed 10 more minutes to describe how the process of disruption had worked its way through a very different industry, steel, so that he and his team could understand how disruption worked. I told the story of how Nucor and other steel minimills had begun by attacking the lowest end of the market—steel reinforcing bars, or rebar—and later moved up toward the high end, undercutting the traditional steel mills.

When I finished the minimill story, Grove said, “OK, I get it. What it means for Intel is...,” and then went on to articulate what would become the company’s strategy for going to the bottom of the market to launch the Celeron processor.

I’ve thought about that a million times since. If I had been suckered into telling Andy Grove what he should think about the microprocessor business, I’d have been killed. But instead of telling him what to think, I taught him how to think—and then he reached what I felt was the correct decision on his own.

That experience had a profound influence on me. When people ask what I think they should do, I rarely answer their question directly. Instead, I run the question aloud through one of my models. I’ll describe how the process in the model worked its way through an industry quite different from their own. And then, more often than not, they’ll say, “OK, I get it.” And they’ll answer their own question more insightfully than I could have.

My class at HBS is structured to help my students understand what good management theory is and how it is built. To that backbone I attach different models or theories that help students think about the various dimensions of a general manager’s job in stimulating innovation and growth. In each session we look at one company through the lenses of those theories—using them to explain how the company got into its situation and to examine what managerial actions will yield the needed results.

On the last day of class, I ask my students to turn those theoretical lenses on themselves, to find cogent answers to three questions: First, how can I be sure that I’ll be happy in my career? Second, how can I be sure that my relationships with my spouse and my family become an enduring source of happiness? Third, how can I be sure I’ll stay out of jail? Though the last question sounds lighthearted, it’s not. Two of the 32 people in my Rhodes scholar class spent time in jail. Jeff Skilling of Enron fame was a classmate of mine at HBS. These were good guys—but something in their lives sent them off in the wrong direction.

The Age of Customer Capitalism

by Roger Martin

Modern capitalism can be broken down into two major eras. The first, managerial capitalism, began in 1932 and was defined by the then radical notion that firms ought to have professional management. The second, shareholder value capitalism, began in 1976. Its governing premise is that the purpose of every corporation should be to maximize shareholders’ wealth. If firms pursue this goal, the thinking goes, both shareholders and society will benefit. This is a tragically flawed premise, and it is time we abandoned it and made the shift to a third era: customer-driven capitalism.

Two Milestones in Management

The first two eras were both heralded by an influential academic work. In 1932, Adolf A. Berle and Gardiner C. Means published their legendary treatise, The Modern Corporation and Private Property, which asserted that management should be divorced from ownership. After that, the business world would no longer be dominated by CEO owners like the Rockefellers, Mellons, Carnegies, and Morgans. Firms would be run by the hired help, a new class of professional CEO. This movement, said Berle and Means, was not to be feared; it was part of a brave new era of economic expansion (which would actually take a few years to get going, as it turned out, owing to the Great Depression).

While there certainly continued to be owner-CEOs, professional managers came to dominate the corner office. Entrepreneurs were welcome to start up new firms but would be wise to hand them over to professional managers, who were more dependable and less volatile, once the business reached a significant size.

Then in 1976 managerial capitalism received a stinging rebuke: Michael C. Jensen and William H. Meckling’s “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” published in the Journal of Financial Economics. The paper, which has gone on to become the most-cited academic business article of all time, argued that owners were getting short shrift from professional managers, who enhanced their own financial well-being rather than that of the shareholders. This was bad for shareholders and wasteful for the economy, Jensen and Meckling argued; the managers were squandering corporate and societal resources to feather their own nests.

Their critique ushered in the current era of capitalism, as CEOs quickly saw the need to swear allegiance to “maximizing shareholder value.” Boards of directors soon came to view their job as aligning the interests of senior management with those of shareholders through the use of stock-based compensation. No longer would the shareholder be abused—the shareholder would be king.

The two most critical figures of the shareholder movement were perhaps Roberto Goizueta, the CEO of Coca-Cola from 1981 until his death in 1997, and Jack Welch, the CEO of General Electric from 1981 to 2001. A speech that Welch gave at the Pierre Hotel in New York several months after his appointment is seen by many as the true dawn of the era of shareholder value. Though he didn’t use that term explicitly, the speech marked a clear shift to a profits-first focus. Both men were outspoken advocates of focusing companies on shareholder value, and both received unprecedented amounts of stock-based compensation. Goizueta was the first American manager to become a billionaire on the basis of stock holdings in a company that he’d neither founded nor taken public. And it was estimated that Welch owned as much as $900 million worth of GE stock at the time he left the company.

A Flawed Logic

Have shareholders actually been better off since they displaced managers as the center of the business universe? The simple answer is no. From 1933 to the end of 1976, when they were allegedly playing second fiddle to professional managers, shareholders of the S&P 500 earned compound annual real returns of 7.6%. From 1977 to the end of 2008, they did considerably worse—earning real returns of 5.9% a year. If you modify the start and end dates of the two periods, you can produce performance numbers that are at parity, but there’s no sign that shareholders benefited more when their interests were put first and foremost. On this basis, it’s hard to argue that Jensen and Meckling did shareholders a huge favor.

That counterintuitive answer begs a provocative follow-up question: If the shareholders were all you cared about, would focusing on increasing shareholder value be the best way to make sure they benefited?