Economist and Harvard Business School professor Michael C. Jensen reimagines modern capitalism with his evangelism of stock options, golden parachutes, and leveraged buyouts, bringing us back to an era when Wall Street greed is benevolent. An empowering man died on April 2 at his home in Sarasota, Florida. He was 84 years old.
The death was confirmed by his daughter Natalie Jensen Knoll. She did not reveal the cause.
Even before Professor Jensen formed a strange intellectual partnership late in life with Werner Erhard, the controversial self-help guru who founded EST, Professor Jensen's colleagues regarded him as one of his contemporaries. He was considered one of the most free-thinking and polarizing economists in the world.
“Mike was kind of a natural convert,” Eugene F. Fama, a University of Chicago professor and Nobel laureate in economics who collaborated with Professor Jensen, said in an interview. “He was very confident in himself that his ideas were correct and groundbreaking.”
They were also inflammatory.
Journalist Duff McDonald, in his book Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite (2017), calls Professor Jensen an “instrument of intellectual violence.” “I created Frankenstein,'' he said. No one knows how to kill. ”
Professor Jensen began his academic career in the late 1960s, at a time when major changes in economic theory were underway. For decades, management students, especially at Harvard Business School, have been taught that managers (and their companies) must have a social conscience.
Then, in 1970, economist and free market theorist Milton Friedman published his groundbreaking essay in The New York Times Magazine, “The Friedman Doctrine: The social responsibility of corporations is to increase profits.'' .
Freedman said companies that “take seriously their responsibilities to provide jobs, eliminate discrimination, and avoid pollution” are “preaching pure, unadulterated socialism.”
Professor Jensen himself was a supporter of free markets and supported Friedman's thesis. However, he found holes in this argument and wrote a seminal paper written by William H. Meckling in 1976, when he was a professor at the University of Rochester, titled Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership. The hole was investigated using “Structure”. .
The paper investigated the mismatch of interests between managers and the shareholders who own companies, which they said made it impossible for companies to exist solely to increase profits.
For example, a chief executive may value hiring a driver to make the commute easier rather than cutting costs that eat into profits, or a CEO may value hiring a driver to make the commute easier, or may hire employees to improve the status of running a larger company. They may hire more people or reinvest profits into short-term, reliable projects rather than investments. Take on riskier, long-term ideas.
“This was the beginning of breaking out of the corporate black box,” Professor Jensen said in an interview published in the Journal of Applied Finance. “Obviously, companies do not act, only individuals act, but companies do act, and this action is based on the whole system.”
Professor Jensen encouraged the use of stock options and equity as the primary form of compensation to align the interests of both parties. He favored borrowing money to buy other companies because declining loan payments and free cash flow would force management to better manage costs. And he celebrated golden parachutes, big payouts to executives after a merger or outright sale of a company.
“Think of the problem this way: Top-level executives and boards of directors act as shareholders' agents in transactions involving hundreds of millions of dollars,” he wrote in Harvard Business Review. “If the option that provides the best value to shareholders is a sale to another company and the resignation of current management, shareholders do not want management to block the bid for fear of losing their jobs. ”
The conventional wisdom is that business owners walk away with their pockets full of cash, and the same goes for investors.
“He was clearly some kind of genius,” said Nicholas Lehman, former dean of Columbia University's Graduate School of Journalism, who interviewed Professor Jensen for his book “Transaction Man: The Rise of the Deal and the Decline of the American Dream.'' said. (2019). “I think he was much more important than most people realize in shaping the America that we live in today.”
Its formation occurred primarily at Harvard Business School, where Professor Jensen enrolled in 1985, at the height of President Ronald Reagan's pro-business economic policies. Two years later, in Oliver Stone's film Wall Street, Michael Douglas played fictional corporate raider Gordon Gekko and declared: Greed is right. Greed works. ”
Professor Jensen taught theory in a class he called “Coordination and Control of Markets and Organizations,” one of the most popular electives in business schools.
“There is no question: the most powerful person at HBS in the early 1990s was Michael Jensen,” MacDonald wrote. “He was always involved with students, and all the students were going to Wall Street, and all the Wall Street companies were sending money to HBS.”
Michael Cole Jensen was born on November 30, 1939 in Rochester, Minnesota. His father Harold was his operator for the newspaper Linotype and a taxi driver. His mother, Gertrude (Cole) Jensen, managed the home. The Jensen family struggled financially. Michael's father drank and gambled.
“The idea that there might be another way of life for any member of the family seemed fanciful,” Lehman writes. “Mike Jensen thought he too would become a linotype operator.”
A teacher at Michael's vocational high school recommended him to a recruiter at Macalester College in St. Paul. Although he had no plans to attend college, he asked the recruiter if his school offered a class on the stock market.
“Yes, that's right, said the recruiter,” Lehman wrote. “It's called economics.”
he registered. After graduating in 1962, he worked nights in the press room of the Chicago Tribune to pay for graduate school at the University of Chicago, an intellectual home for Mr. Friedman and other free-market theorists. He earned his MBA in Finance and PhD in Economics in 1968 and then enrolled at the University of Rochester.
Dolores Dvorak's marriage to Toni Walcott ended in divorce. In addition to his daughter Natalie, he has another daughter, Stephanie Jensen. sister Gail Marie Jensen; and four grandchildren. He had homes in both Sharon and Sarasota, Vermont.
In later years, after Wall Street was mired in corporate stock option scandals and politicians scoffed at excessive compensation, Professor Jensen admitted that his thoughts had spun out of control.
He told The New Yorker in 2002 that making compensation so dependent on options led executives to lie about financial results. Stock options had become “executive's heroin,” he said. What was missing in the business world was honesty.
Around 2012, I co-founded the Erhard Jensen Ontological/Phenomenological Initiative with Mr. Erhard. They offered his week-long seminars on leadership, usually taught in far-flung locations, such as near the beach. Cost: $3,000 per person. Mr Lehmann attended a rally in Bermuda.
“I was involved in the restructuring of the financial industry,” Professor Jensen said on stage, according to Lehmann's book. But by then, he added, the financial world was in “astonishingly bad shape” and he was “sick of it.”
For Professor Jensen, embracing integrity was a profound experience.
“The most amazing things happen when you have integrity,” he said on stage. “I was incomplete as a human being. Did I succeed? I certainly succeeded. But I was incomplete.”