This article is cross-posted from Naked Capitalism…

There is so much crookedeness among our elites that it’s hard to know, absent more systematic study, whether Harvard is playing a leading role in this decline.

However, the glaring gap between Harvard president Drew Faust’s talk on ethics and her recent actions has stuck with me and I’ve concluded it merits discussion.

One of the basic rules of corporate behavior is that who you pay, promote, and appoint to plum jobs sends strong messages about what sort of behavior the organization really values, as opposed to the ones it professes to value. One common way in which companies signal that the official policies don’t matter all that much is via the Big Producer Syndrome. That occurs when individuals or units not only reap high compensation and other rewards, but are also subject to lower oversight. Most Wall Street firms, in the days when they were partnerships, recognized the need to strike a balance between giving employees the latitude to grasp fleeting opportunities and making sure they didn’t wind up doing harm to the franchise in the long term. The firms that didn’t manage that tension well over time were less successful than the ones that did. But that concern has long gone out the window in a world where financial services companies play with other people’s money and the notion of ethical standards is a quaint relic.

Nevertheless, when the ethics of executives generally and some of its graduates in particular come under harsh scrutiny, Harvard Business School tries to do a bit of image burnishing. After HBS grad Paul Bilzerian was sentenced for securities fraud in 1989, which was also when savings and loans and leveraged buyout companies were collapsing, the school went through a bit of soul searching. I was told by someone deeply involved in fundraising that it had concluded, based on some study, that ethics could not be taught, so it needed to rethink how it selected incoming students. I doubt anything came of that, since there hasn’t been any evidence of meaningful changes in Harvard’s or other school’s screening policies. Sociopaths could easily game any questions aimed at getting at ethical stances and real due diligence on that front would take more time and effort than an admissions department could undertake.

Fast forward twenty plus years. We’ve seen widespread bad behavior among the political and corporate elites, with Harvard at least holding its own. Former Harvard president Larry Summers was singled out by Inside Job as an example of corruption among academic economists. That isn’t surprising, since Summers protected fellow Harvard economics professor Andrei Shliefer when he and one Jonathan Hay were charged with conspiracy to defraud the US government, and Harvard was sued for breach of contract over an advisors program Shliefer and Hays ran in Russia in the 1990s. Some have claimed the real reason the faculty eventually revolted against Summers wasn’t his famed foot in mouth incident about women in math, but simmering anger about the failure to take action against Shliefer given that Harvard paid at least $31 million to settle the litigation.

Summers’ successor, Drew Faust, has tried to signal that Harvard has changed direction under her leadership, but her gestures range from unconvincing to all too revealing. For instance, she talked a good deal about how Harvard Business School had lost its ethical direction (that of course assumes it ever had one) and made a great deal of fuss about the selection of a new new dean who would help remedy this problem. From the Boston Globe:

A professor who has a strong interest in business ethics will become the new dean of Harvard Business School, at a time when the corporate world’s image has been pummeled by fallout from the 2008 collapse of financial markets and ongoing allegations of corruption and greed…. In his more than two decades on the school’s faculty, Nohria has been particularly active in business ethics, frequently writing and speaking on the need for changes in business and leadership training. A 2008 article written by Nohria and fellow faculty member Rakesh Khurana for the Harvard Business Review said “managers have lost legitimacy over the past decade in the face of a widespread institutional breakdown of trust and self-policing in business.’’ The two called for a “rigorous code of ethics’’ for business leaders, similar to the medical profession’s Hippocratic Oath.

If you believe crossing your heart and swearing you will behave in an upstanding manner will make an iota of difference in corporate conduct, I have a bridge I’d like to sell you.

Indeed, Faust seems to be a fan of the sort of ethics posturing that is regularly lampooned by Lucy Kellaway of the Financial Times. Last April, she pointedly refused to take up a call by professor and former Harvard college dean Harry Lewis to criticize (mind you, merely criticize) professor Michael Porter for his role in producing a well paid report that depicted Libya as a shining example of democracy. Per the Harvard Crimson:

In February 2006, Porter presented a 200-page document to officials in Tripoli as a consultant to Monitor, a firm formed by several Harvard professors that was under several million-dollar contracts with the country. In the report, Porter argued that Libya “has the only functioning example of direct democracy on a national level,” and that Libyans were able to directly contribute to the decision-making process, which drew heavy fire from Lewis in yesterday’s Faculty meeting. “To put it simply, a tyrant wanted a crimson-tinged report that he was running a democracy,” Lewis said, bringing up the question of whether the University should acknowledge the “shame” when a faculty member disgraces the University in such a way… In response to Lewis’ criticism, Faust said that it was not the president’s responsibility to serve as “public scolder-in-chief.” She said that Harvard recently conducted a review of the University’s policies on conflict of interest. But she said it should also be the University’s priority to support all faculty members to pursue academic inquiry.

I’m sure you recognize the Newspeak. Being paid lots of money to gain access to a valued brand is depicted by Faust as “academic inquiry.”

In January, Faust again showed what the real game is at Harvard by naming Krishna Palepu, a professor at HBS, as her senior advisor for global strategy. An article in Harvard Gazette makes clear that he’s not simply providing input to Faust and other University leaders but also playing an important ambassadorial role:

As senior adviser, Palepu will work closely with the president, provost, and colleagues to help guide the University’s international strategy, refine and test some operational proposals of the International Strategy Working Group, and develop a more effective and coordinated approach to international fundraising and to engaging Harvard alumni living abroad. Palepu will consult widely with colleagues within the University and in the broader Harvard community as he undertakes this role.

In case you missed it, “engaging Harvard alumni living abroad” translates as “traveling to fundraise from rich alumni living overseas.”

Why is this a cause for concern? Palepu is accounting professor turned governance guru who took huge consulting fees by Indian standards while serving as a director of what turns out to be the largest corporate fraud in the history of the country, Satyam Computer Services. An op-ed by Premchand Palety in Mint, one of the biggest daily business newspapers in India, depicts Palepu as a bad role model in the ethics department:

Now the big question arises about the role of independent directors who are supposed to protect the interests of investors…Krishna G. Palepu, who belongs to Harvard Business School, has been too closely associated with Raju to qualify him for an independent director’s post. He has been [founder Ramalinga] Raju’s adviser for over a decade and was also actively associated with the Satyam Learning Centre in Hyderabad. Palepu should have recused himself from taking the responsibility on grounds of conflict of interest…Palepu and Rao [another business school professor on the board] should have shown their leadership skills in influencing Raju to follow a better governance model . If Raju thought otherwise, as a last resort, they should have resigned from the board. Unfortunately they did nothing of the sort and have lowered their image and also the image of the institutions they represent… The following is an excerpt from Palepu’s bio data on the Harvard Business School website:… “Professor Palepu’s current research and teaching activities focus on strategy and governance… In the area of corporate governance, Professor Palepu’s work focuses on how to make corporate boards more effective, and on improving corporate disclosure. Professor Palepu teaches these topics in several HBS executive education programmes aimed at members of corporate boards: Making Corporate Boards More Effective, Audit Committees in a New Era of Governance. He also co-led Harvard Business School’s Corporate Governance, Leadership, and Values initiative, launched in response to the recent wave of corporate scandals and governance failures.” Is it so difficult to practice what you preach, Professor Palepu? The past few months have witnessed many scams in the corporate world; most of them have been a result of bad governance and unethical practices… The best way to inculcate ethics among students is to have a culture of ethics in the institutions, with faculty members as role models. Rao and Palepu have set a bad example by their conduct in the Satyam-Maytas case. They need to own up responsibility.

Note that this pointed piece ran on December 28, 2008. On January 7, 2009, Raju admitted that Satyam’s accounts were bogus (among other things, Raju had been withdrawing funds monthly to pay for 13,000 fictive employees). Per Wikipedia:

On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors. “The current board has failed to do what they are supposed to do. The credibility of the IT industry should not be allowed to suffer.” said Corporate Affairs Minister Prem Chand Gupta.

So the apparent message from Drew Faust is that being directly involved in an Enron-level scandal doesn’t count if it took place in a third world country. She is happy to have what amounts to a corporate governance fraud as a face to the international business community.

Faust can talk all she wants to about ethics. Her actions repeatedly indicate she isn’t willing to take any action that might get in way of the University’s fundraising or “entrepreneurship” by individual professors. I quit giving money to Harvard long ago, and her stance confirms my decision.

This article is cross-posted from Naked Capitalism…