Question: How has your post as dean of Harvard Business School evolved over the years?
Jay Light: There are many ways in which this school is totally different than it was 41 years ago when I started and there is some ways in which it is very much the same. For example, probably the most obvious difference is the diversity of the students, of the faculty, of the subject matter we teach, of the ideas, of the research we do, of what goes on in the classroom. It’s just a very, very different set of individuals who relate to each other in a much more complex way.
Back when I started in around 1969 most of the students and most of the faculty were white males often from the interior of this great country of ours. Today, in fact, it is an incredibly diverse student body in terms of national origin, in terms of race, in terms of gender, in terms of the kinds of ideas they like to work on, so the world has just become a more complex and global place and we have become a more diverse group of people in a way that reflects the evolution of the world and obviously as the world has become more complex, more technological, more global... the complexity of the ideas that we have to talk about in class, the complexity of the cases that we teach about has become greater and greater.
So if you go back and look at the ideas we talked about 41 years ago you’d find that they were fairly simple ideas. They were set in fairly simple settings, functionally organized firms in western Massachusetts manufacturing a rather simple kind of component. Today we teach about global firms integrated across national boundaries developing technological either equipment or ideas worked through not in a functional organization, but in a networked organization across cultural divides.
Also the technological basis of how we do it has gone up. When I started we used slide rules in class. Our students now don’t even know what a slide rule is of course. We’ve passed through slide rules and then hand calculators and then large PCs and small PCs and now they all do it on their handheld PDA a million times as fast as the slide rule was able to do it way back when. The whole audio-visual nature of the classroom has changed and the way we go about much of our teaching. On the other hand, if you went to a class today there are some things that are very much like what we did then. For example, you’d find the classroom to be equally engaged. What goes on in the classroom is all about students engaging with each other, learning from each other with the help and guidance and facilitation of a faculty member who is there to try to keep forcing the conversation towards more interesting and more controversial frankly, ideas and problems to solve.
And that has pretty much stayed the same. It’s the challenge of that engaged classroom, the intellectual challenge of one student to another, of a student to a faculty member and vice versa that marks what goes on in our classroom and in that sense it’s very much the same and also in the sense that what we’re really trying to do is develop leaders who make a difference in the world. That was the mission we started out with 100 years ago. That was the mission 41 years ago when I joined the faculty. That is still the mission. How do you take really bright, really engaging young men and women and develop them into people who are going to become the leaders of the world down the road, leaders both in the business sector and leaders in sectors beyond business frankly?
Question: Did HBS play any role in causing the financial crisis?
Jay Light: Now to be sure it was largely the government’s legislatures, the Fannie Mae, Freddie Mac in this country, the federal agencies and the financial institutions that were most directly involved, but also many of them showed a failure to really think broadly about risk and about how bad things could get and I think that reflects you know for the prior 25 years we hadn’t seen a lot of downside and frankly, all of us got out of the habit of thinking about the downside and at business schools we got out of the habit of teaching about the downside, so in fact, in the 1970s I used to teach a course called "Capital Markets: The Financial System" here, which was in fact, all about these ideas; all about the kinds of risks that could arise from changing financial markets and the mortgage markets and the consumer credit markets and the commercial loan markets. Those kinds of courses both here and at other business schools had largely atrophied. There was relatively little student demand for them. The faculty was more interested in teaching about other things too, so the curriculums got focused on the upside if you will, the how does one increase market share, how do you increase earnings per share, how do you think about how to grow a bigger and better institution.
And that’s great. That is what you should be thinking about except at the same time you have to keep an eye on "How could things go wrong? What kinds of data should I really be putting into my risk management model?" In a world where housing prices were in a bubble and where consumer lending organizations were in fact incenting consumers to borrow at very, very high loan to apparent value ratios the old data that one put into risk models was completely, completely out of touch with the changing reality as became so quickly apparent when the whole down leg started. So I think it was a failure of leadership in the sense that it was a failure to think in a broad and creative and responsive way about risk. There were also some ethical failures I think as there are when any bubble collapses, but the single most important lesson coming out of this crisis in my judgment was more about values and judgment and how you think about analyzing and keeping your eye on the downside in a complex interconnected world.
Question: Is the solution to minimize risk?
Jay Light: Well so I think there is the need for some structural change. A good example is we can’t ever again let true leverage in a financial system get up to the same levels it had gotten to, so we need to insist upon more robust measures of capital, financial capital in a financial institution. We need to insist upon lower leverage ratios. We need to insist upon more stringent liquidity criteria, so there is a regulatory response that I think is much needed and is in the process of being developed. There are also a set of related question about just how interconnected one wants the scope of financial institutions and whether large institutions ought to be forced to divest certain of the activities they’re in and if so just which activities. And that is a more complex question and but I think some real regulatory reform would be appropriate and is quite likely there also.
There is on the other hand, a real danger here because I think what our economy needs more than anything else as a nation is innovation and innovation means we need people to provide funds to different kinds of new companies doing different kinds of new and innovative things and one can go overboard with the vilification of financial institutions. One can go overboard with strenuous and hard to understand regulation that causes firms to become much more risk averse across the board even if the possible things that they could be… might be funding could turn out to be the very innovative kinds of things we need to do as a country, so I think one has to always have a balance here.
The pendulum for sure has swung back now towards managing risk, towards thinking about the downside both from a regulatory point of view and from the point of view of those people who manage financial institutions, but there is a danger that the latter could go too far. Indeed there is lots of evidence I think right now that it is going too far, so keeping a balance there between thinking about upon an entrepreneurial perspective on the evolving economy and the evolving financial system while at the same time worrying about risk is where we want to come out and it’s a complex every changing thing that requires enormous amounts of judgment and leadership.
Question: How do you think China’s innovative capabilities compare to those of the U.S.?
Jay Light: Well China has enormous strengths. They have a particularly a public governmental way of making decisions which is very effective. It allows them for example to marshal the efforts of millions, of hundreds of millions actually workers in building infrastructure projects for example. China on the other hand is not the world’s best model of the free flow of ideas, of people, of innovative new ways of thinking, nor are they maybe the best model of democracy in the sense that we in the west mean it, so I think in fact one of the absolute keys to innovation and to entrepreneurship is a sense of individuality, is a sense of being willing and able to be different, is a sense of thinking out of the box in ways that I think people in this country and in particular young people in this country can do more effectively than people in many other parts of the world including east Asia, so I think that I believe that we have an inherently more innovative society here and you can see it across all the creative and innovative industries and I think we can continue to let that innovative spirit lead us in ways that allow to develop economically. China is going to build bigger and better infrastructure than we are. China is going to be able to make better centralized decisions than we can. China is going to be able to build particularly heavy industrial things like the steel industry and others in ways that… in areas where we used to lead, but in the inherently more technological and creative industries I think we can have an advantage and I think that will service very well as the world moves forward.
Question: What advice do you have for your successor at HBS?
Jay Light: One is the need for focus. There is an enormous number of dimensions in which one could try to take an organization like this in the modern world and it is important to decide which of those are the most important and to really try to focus these organization on those rather than trying to do 42 different things at the same time, so I think focus is really key. Also, I think one has to really pay attention to what I might call the people realities of trying to get an organization like a university to move in new and different directions. I think our ability to attract outstanding students is assured. What is less assured is how do we build and maintain and develop and change a faculty and staff, a set of people who can provide the different ways of thinking about education and providing education? That is the people side of things that always turns out to be the hardest part of things in almost everything one does in life, but it’s particularly true in a university where in fact the faculty and staff are very independent and should be independent and we want them to be independent, but at the same time they’re all doing their own thing if you will. We have to figure out a way to make their own thing, what they really want to do with their lives correspond to the same strategic directions that the leader would like to lead. That is an enormous challenge and one that every dean and every university president has to take on.
Question: What have you learned in your role as dean?
Jay Light: what I have tried to do is develop this organization and to lead it through what has been frankly a somewhat difficult period with the financial and economic crisis and leave it positioned so that there are a number of decisions that can be made here to lead pretty strongly in new and different directions on issues like leadership, on issues like becoming a more global educational institution and I think we are in fact well equipped to do that. I think we’ve got a sound financial situation. I think we know what the alternatives are. I think we have in place some people management systems that will allow us to grow and build the faculty, so what I’ve tried to do is bring it through what has been frankly a difficult period into a period where we in fact have once again resumed thinking about this organization as a growth organization going forward.
Recorded May 19, 2010
Interviewed by Jessica Liebman