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Harvard Business School professor Geoff Jones discusses his case, “ Thomas J. Watson, IBM and Nazi Germany ,” which explores the options and responsibilities of multinationals with investments in politically reprehensible regimes. The case considers the strategy of U.S.-owned IBM, then a manufacturer of punch cards, in Nazi Germany before 1937, and opens with IBM CEO Thomas J. Watson meeting Adolf Hitler in his capacity as President of the International Chamber of Commerce. IBM had acquired a German company in 1922 and, like other American companies, found itself operating after 1933 in a country whose government violently suppressed political dissent and engaged in intimidation and discrimination against Jews.

BRIAN KENNY: On January 8, 1889, U.S. Patent 395,782 was granted to Herman Hollerith of Buffalo, New York. The patent was titled, “Art of Compiling Statistics,” and it cemented Hollerith’s rights to an invention he called the electromechanical punched card tabulator. It may not sound like it, but this was a truly revolutionary invention, and it established Hollerith as one of the seminal figures in the development of data processing. And what’s more, it laid the groundwork for what is today a multinational powerhouse, with over 350,000 employees in 170 countries. With more than a century of experience operating in the global arena, few firms have dealt with a wider range of the challenges of doing business globally than IBM. Today we’ll hear from professor Geoff Jones about his case entitled, “Thomas J. Watson, IBM, and Nazi Germany.” I’m your host, Brian Kenny, and you’re listening to Cold Call, recorded live in Klarman Hall studio at Harvard Business School. Geoff Jones is a historian who studies the evolution, impact, and responsibility of global business. He has written extensively on the business history of emerging markets in Latin America and elsewhere, and today we will talk about Europe, I guess. Geoff, thanks for joining us.

GEOFF JONES: My great pleasure.

BRIAN KENNY: You’ve been here a few times, Geoff. We count you as a regular on this show, and you know, I think part of it is that we really like to talk about these cases that focus on historical business because there’s still so much that can be learned today from what the challenges that business leaders have faced in the past, so I think it’s a lot of fun for us to have you on the show, and we’re happy to have you back. Today, we’re looking at something that’s obviously a little controversial, as we look at IBM in Nazi Germany. Can you just help us by starting the case of what happens as the case opens?

GEOFF JONES: The case begins in Berlin, June 28, 1937. TJ Watson is sat down for a cup of tea with Adolf Hitler, who had become the chancellor of Germany in 1933. Watson is the chairman of IBM, and he’s also the president of the International Chamber of Commerce, and he’s come to talk to Hitler to persuade him that a war would be a very bad idea, and everybody should try to work to avoid it.

BRIAN KENNY: So, as a business historian, I’m curious as to how you decide on the cases you’re going to write. What prompted you to think about this as a good case?

GEOFF JONES: This case is intended for my second-year MBA course, that looks at the role of business leaders in waves of globalization from the 19th century to the present. Each case has two functions. The first function is to be a building block, explaining the major historical events of the period. This is about Nazi Germany. The second function is to explore a subject of general contemporary importance. In this case, the issue is what an international business should do in a country with a very bad and immoral government.

BRIAN KENNY: And we still have those today, so again, you know, lessons from the past that we can learn today.

GEOFF JONES: Lessons from that past. I’m always looking at… You know, the students should know the history, but the history should be directly relevant to contemporary concerns.

BRIAN KENNY: So here we have TJ Watson, who was sitting down, and he was in Germany at the time as part of a meeting of the International Chamber of Commerce. Does that group even still exist today?

GEOFF JONES: I believe it does. It goes back to 1920. It’s formed by business associations, really in the United States and France, and other people joined. Its idea is to try and create international rules of the game for business to operate in, outside the governmental sphere. This period, they do a lot of work, like arbitration between businesses in different countries. But they call themselves the merchants of peace, and their fundamental idea was that if countries do business with one another, they won’t go to war with one another, which is an idea that’s continued to be spread. We have the Golden Arches theory, developed in the 1990s, that two countries with a McDonald’s in each country won’t go and go to war, and so on, but that’s their idea. They’re the merchants of peace.

BRIAN KENNY: The case does a great job of looking at the history of IBM, which I found really interesting, from those very humble beginnings that I teased in the intro. Maybe you can put a little more context around that.

GEOFF JONES: Well, the tabulating machine, as you said, is really important. It’s the machine for data processing, before computers develop after World War II, and it’s an invention beginning in the United States, this guy Hollerith. It’s the basis for IBM.

BRIAN KENNY: Who is German, by the way, Hollerith. I didn’t mention that.

GEOFF JONES: He was a German immigrant. Right. He settled in the United States. It’s the basis for IBM, and he’s an early globalizer, and he globalizes it by selling the technology basically, including to a company in Germany, Dehomag, which is talked about in the case.

BRIAN KENNY: And he starts his business in the U.S. How does Watson make his way to what eventually becomes IBM Watson?

GEOFF JONES: Watson begins life very modestly, in a small town in upstate New York. Built a career as a traveling salesman, selling pianos and sewing machines. He goes bankrupt. Finally gets a job with a company called the National Cash Register, which is like a pioneer of modern salesmanship in the United States. He does very well, but he’s very ruthless, and eventually gets sued and sentenced to jail term, which he never serves under antitrust law, and then he’s sacked by the company. In 1914, when he’s 40 and unemployed and just had his first child, he gets an offer to join a company called CTR, Computer Tabulating Recording Company, which has got this Hollerith tabulating machine technology, and that’s where it all begins. So, he’s a kind of late starter as a business leader-

BRIAN KENNY: He didn’t hit his stride for a… Took him awhile to hit his stride, I guess. What was he like as a leader?

GEOFF JONES: He’s overwhelmingly a salesman. And he’s and ambitious salesman. He renames his company IBM in 1924, International Business Machines, even if they had very little international business. He launches a company magazine called Think, which she spent a lot of time writing articles for, and he sends every copy to every member of Congress and to every college president in the United States, because he thinks his thoughts should be shared. As a leader, he’s paternalistic. Employers have to wear dark blue suits. There’s a company’s song. There are company sports teams. He’s one of the few business leaders who doesn’t make people redundant as the Great Depression hit. In fact, he cut his own salary, but he had space to cut it, because he’s the most highest paid chief executive in the United States in the 1930s.

BRIAN KENNY: Right, right. It was interesting, because you mentioned his salary I think, which in today’s dollars was equivalent to… At the time, I think it was 364,000, and in 2018 dollars, that was equivalent to about 2 million or something. If you look at the compensation of CEOs today, which is certainly a topic that we talk about here a lot at Harvard Business School and is constantly a source of frustration for a lot of people, the gap is so much bigger today.

GEOFF JONES: I know. And very few of today’s business leaders cut their own salaries in response to the 2008 crisis.

BRIAN KENNY: Right.

GEOFF JONES: Either.

BRIAN KENNY: I know it.

GEOFF JONES: He had a different sense of responsibility, I think.

BRIAN KENNY: It certainly sounds that way, and Watson of course, his influence on IBM is still very strong today. Of course, they’ve named their data intelligence system Watson, is obviously named after him. “Think” is a branding tool that they’ve used throughout their existence, so obviously he’s still a very strong presence at IBM.

GEOFF JONES: Absolutely, and he serves for over 40 years, and when he retires over 80, his son, TJ Watson, Jr, takes over.

BRIAN KENNY: He’s got some great ambitions that come through in the case. Can you describe those a little bit?

GEOFF JONES: He has this new technology, which is extremely important for governments and for businesses, and he has a dominant role in that new technology. He has something like an 80% market share in the United States. It’s wanted by people all over the place, including the German government. So he has a very good technology, he’s very ambitious to globalize that, and over time, he’s also very ambitious to make an even bigger impact on the world, which is why he becomes president of the International Chamber of Commerce, because he has this like statesman role. 1930s, a close confidant of President Roosevelt. He’s offered a Secretary of Commerce appointment. He doesn’t take that, but not because he’s modest, because I think he thinks he can be even more powerful in other means. So he’s a man of ambition.

BRIAN KENNY: He’s on the move. So the technology. Why is the technology so important? What does it do and why does it matter so much?

GEOFF JONES: Technology. You count. It enables you to count people. So it’s developed for the U.S. Census, and it’s used in Germany for census purposes too, but as companies have like more and more data, so manipulating the data is absolutely crucial. So this is the most important information technology story in this whole period. Remember, in this period, companies are getting bigger, governments are getting bigger, they’re doing more things. When the U.S. government introduces Social Security in 1935, it needs a huge amount of information about who’s paying into the system and everything else. And it’s IBM which supplies the technology that makes it feasible, and without IBM, people are going to have to manually accumulate data and processes.

BRIAN KENNY: Which is how they did it.

GEOFF JONES: Yes, and it’s just a lot of work.

BRIAN KENNY: I thought, again, you know, making the connection back to current times, there’s been a lot of discussion about the U.S. Census, and questions that the current administration has tried to add onto that census, and the case talks about the Prussian census, and that sort… I made that connection mentally. Can you describe why the Prussian census was relevant in the context of the case?

GEOFF JONES: When Hitler comes to power in January ’33, he’s extremely keen to know who’s living in Germany, so he moves very quickly to commission a census in the largest single state in Germany at that time, which was called Prussia. It’s a very big contract, and for IBM, getting that contract is like a really, really big deal, so it’s their way into the big time in Germany.

BRIAN KENNY: And you mentioned Dehomag was already in business in Germany at the time. There were some personality conflicts, it sounded like, happening between the leader of Dehomag and Watson. How was he able to sort of assert his influence over Dehomag?

GEOFF JONES: Dehomag is this German company which has got the technology license from the U.S. originally, and Watson, back in the early ’20s, takes advantage of the huge economic crisis that hits Germany, including hyperinflation. So the German company, led by Willy Heidinger, can no longer pay the license fees to the U.S., and Watson swoops down and says, “I’ll take 90% of the equity, and in return, we’ll cancel the debt you owe.” So this guy, Willy Heidinger, who’s also an ambitious entrepreneur, built this German company from nothing, finds himself owning 10% of his company. So, he doesn’t like it, and he has no choice. He thinks it’s unfair.

BRIAN KENNY: But how do the Germans feel about an American company sort of… Was there a sense of nationalism in Germany at the time, where American businesses were frowned upon for coming in and trying to assert themselves that way?

GEOFF JONES: Germany after the war had a very bad time, and U.S. companies pour into the country and acquire things, including the largest auto manufacturer, Opel, which General Motors has owned ever since, until 2017. So there’s the sense of a country being exploited. It’s not yet hostile. It’s just sort of simmering. People are annoyed by it. They also admire the United States for its modernity and its leadership in technology. So in the ’20s, there’s rumors, but there’s nothing hostile. Things become more hostile with the growth of nationalism under the Nazis in the ’30s.

BRIAN KENNY: What was Hitler’s view of American business?

GEOFF JONES: Hitler arrives, it’s often forgotten, in a very weak position. He never gets a majority of the German vote. The German economy is still trashed by the Great Depression and the financial crisis, so whatever he thought about foreign companies, he needs American companies. He needs the jobs that they will do. So, they are fine provided they follow his rules. One of his rules is they should get rid of Jews in senior management. If they follow those rules, he’s quite happy, because he wants jobs. He wants growth. He wants ornaments. He wants motorization. And American companies can speed up all of that process.

BRIAN KENNY: But they’re asking American companies to remove Jews from high-level positions. Were there are a lot of Jews in high-level positions at this time, large firms?

GEOFF JONES: It’s often forgotten that in view of what’s going to happen, that Jews were very integrated into Germany, and they’re integrated as part of the business, even the political elite, so highly educated, talented people. Are there lots of them? No. But are they highly influential and in high positions? Yes. Yes.

BRIAN KENNY: Yes.

GEOFF JONES: Yes, a lot of them.

BRIAN KENNY: That’s a pretty radical move, to ask the firm to remove them from their positions.

GEOFF JONES: Yes, and bad things happened if they didn’t do that. Coca-Cola ran into trouble with people, a campaign against them, saying they were run by Jews. They do what they think is necessary, and everything is sweet and light again. Companies, if they wanted to do business, and they see our economy booming in the 1930s, thought they had to follow the rules. And they were the rules, which just makes the case interesting. This is passed. These laws are passed by the German parliament.

BRIAN KENNY: So, these are laws? These aren’t just-

GEOFF JONES: These are laws. These companies are obeying laws.

BRIAN KENNY: Were there any companies who took a stand and said, you know, “We’re not going to do that. We don’t think this is right?”

GEOFF JONES: As far as we know, one company, the Hollywood movie company, Warner Bros., pulled out of its German operations, as they objected. They’re the single company. No other company is known to have done anything beyond sometimes removing senior Jewish employees, providing them with jobs in other countries. IBM, I think, transferred two senior Jewish employees to the United States. That was as far as they went.

BRIAN KENNY: So, by the time TJ Watson sits down to have his tea with Hitler, it’s 1937, I think you said.

GEOFF JONES: Yes.

BRIAN KENNY: Was there any question about what Hitler’s plan for Germany was at that time, what his sort of motivation was?

GEOFF JONES: I mean, there’s a lot of evidence of what’s going on. There’s physical violence in the streets towards Jews all the time, and Watson goes to Germany several times, and surely would have seen it. Laws have been passed. The Nuremberg Laws that strip Jews of their citizenship. Trade unions had been abolished. Books had been burned in public. Conscription had been reintroduced. None of that was a secret, because we know there are huge antifascist and anti-Nazi parades in New York City. There’s an anti-Nazi league set up in Hollywood. Winston Churchill and the British Parliament is going on about the odious conditions of the Jews. There’s a lot of stuff what’s going on. There are a lot of people talking about it. But there were also mixed signals. The world community had held the Olympics in Berlin in 1936. At that event, Nazi laws had softened, maltreatment of the Jews had become less visible, so you could say there are mixed signals about where the trend is going.

BRIAN KENNY: So, we’ve got appeasement happening kind of across the board, and government relations, and business relations, and… I’m going to read a quote from the case that that you put in there, that TJ Watson said, and I would just like you to comment on that. He said, “I’m an internationalist. I cooperate with all forms of government, regardless of whether I can subscribe to all of their principles or not.” I thought that was a pretty straightforward statement that he made, but I’m just thinking about it in the context of the discussions that you were having in the classroom. I mean, is that sufficient for a business leader to take that stand?

GEOFF JONES: Well, you know, everybody knows what happened after 1937. We’re going to see millions of people murdered, a World War. And there is Watson supplying the key information technology to the Nazis, and he’s saying it’s not his business what they do with them. I would say it is wrong and inappropriate for a company to do business with governments that blatantly engage in human rights abuses. But, you know, what he’s saying has not gone away. We’re going to see in the ’50s, ’60s, and ’70s, numerous Western companies doing business with the apartheid era in South Africa, and they’d say, again, it’s not their business to criticize governments, and the story, you can take the story on to the present day, I’m afraid. So it’s a view that’s held, and asserted, I think a wrong one.

BRIAN KENNY: Do you think that given the transparency, the social media platforms that we have today, the fact that people have a view into the way firms operate that they may not have had back then, that there’s kind of a new, less tolerance of this kind of activity?

GEOFF JONES: Honestly, I have to say I don’t believe so. Companies don’t want to be caught out doing bad things, that’s for sure, but you know, if you look across many regions of the world, there are companies engaged with governments which are not forces of enlightenment or democracy, and the same old reasons come up. You know, “We shouldn’t have a position,” or “We’re not clear what’s going on.” So, I’m afraid, disappointingly, a lot of the lessons of the past haven’t been fully internalized, and I think they should be.

BRIAN KENNY: You’ve discussed this in class before? I’m just curious, without giving away any of the sort of clinchers, what’s the tenor of the discussion? It’s a very sort of emotional case, right? I would imagine.

GEOFF JONES: I mean, it’s a discomforting case at several levels, as we’ve talked. You know, it’s not clear exactly, in 1937, what to do. There’s mixed signals, which there always are, and continue to be. Watson is ranking moral issues. I mean, when meeting Hitler in 1937, he’s basically saying it’s more important to prevent a World War than to complain about what’s happening to the Jews. And that’s a tremendous moral dilemma, how you rank your moral priorities. It raises the issue of what on Earth, as a business leader, you should do if all other companies don’t do anything. Should you stand out? It raises the issue, if you’re a business leader, what you should do if your government does nothing. So I mean, I think it’s a torturous case in many ways, raising dilemmas that we’re still with. I think that students do react emotionally. I mean, there are… Every year, there are the students whose parents escaped from the Holocaust, or grandparents. I think a lot of people come to the class having absorbed the view that, you know, really, divestment doesn’t work, that it’s better to stay and engage in most situations than to just pull out or something. This case doesn’t contest that view. What it does show is that staying and talking also doesn’t do any good at all. And I think it’s extremely sobering, when you think of the Nazi experience, to think that capitalism was totally silent, almost totally silent. All these big-name American companies, and other companies, silent on what’s going on. And they were silent in a country where Jews are being beaten up in the streets, boycotted. Terrible things are happening, even before 1937, and I think that’s very sobering. And whatever you conclude, you can’t help, I think, escaping that there should have been a better outcome than that. The second extremely sobering thing about this case, which again worries students, is that there are no reputational consequences, either for IBM or for any of the other companies that were silent in this period. And I think that’s why the case is powerful, and I think it’s why the case is important for people who are going to be business leaders in the future.

BRIAN KENNY: And just one sort of… The sort of final line in the case is that Watson was leaving that meeting with Hitler to go see Mussolini.

GEOFF JONES: You know, he was a guy who exaggerated his ability to affect political events. You know, he was out of his league. He was a brilliant business leader, but he didn’t understand what was going on with Hitler and Mussolini, and that’s sobering too.

BRIAN KENNY: Well, it’s a terrific case, and I’m sure that people have enjoyed listening to you talk about it. Thanks for being here, Geoff.

GEOFF JONES: Okay. My pleasure.

BRIAN KENNY: Thanks for listening to Cold Call. I want to let you know about the newest podcast from Harvard Business School, “Climate Rising.” It’s about what businesses can and should do to confront climate change. In each episode, host David Abel of the Boston Globe gleans insights from HBS faculty, business leaders, and policy makers who are pioneering new ways of doing business in the age of climate change. It’s produced by our Business & Environment Initiative and you can find it on Apple Podcasts or wherever you listen. I’m Brian Kenny and you’ve been listening to Cold Call, an official podcast of Harvard Business School, and part of the HBR Presents network.