Michael C. Jensen, Who Helped Reshape Modern Capitalism, Dies at 84

Michael C. Jensen, an economist and Harvard Business School professor whose evangelizing for stock options, golden parachutes and leveraged buyouts helped to reshape modern capitalism and empower Wall Street’s greed-is-good era, died on April 2 at his home in Sarasota, Fla. He was 84.

The death was confirmed by his daughter Natalie Jensen-Noll. She did not specify a cause.

Even before he embarked on a peculiar late-career intellectual partnership with Werner Erhard, the controversial self-help guru who created est, Professor Jensen’s colleagues considered him among the most freethinking and divisive economists of his generation.

“Mike was a kind of born proselytizer,” 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 sure of himself in terms of his ideas being correct and, you know, pathbreaking.”

They were also incendiary.

In his book “The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite” (2017), the journalist Duff McDonald called Professor Jensen an “instrument of intellectual violence” who “created a Frankenstein that no one knows how to kill.”

Professor Jensen began his academic career in the late 1960s, when a seismic shift in economic theory was underway. For decades, students studying management — especially at Harvard Business School — were taught that executives (and their companies) should have a social conscience.

Then, in 1970, the economist and free-market theorist Milton Friedman published his groundbreaking essay, “A Friedman Doctrine — The Social Responsibility of Business Is to Increase Its Profits,” in The New York Times Magazine.

A business that “takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution,” Mr. Friedman wrote, is “preaching pure and unadulterated socialism.”

Professor Jensen, a free-market adherent himself, endorsed Mr. Friedman’s essay. But he detected a hole in the argument, which he explored in a seminal paper, “Theory of Firm: Managerial Behavior, Agency Costs and Ownership Structure,” written in 1976 with William H. Meckling while they were both professors at the University of Rochester.

The paper explored the misalignment of interests between managers and the companies’ owners, the stockholders, which they said made it impossible for firms to exist solely for increasing profits.

A chief executive, for example, might value hiring a chauffeur for an easier commute over reducing costs that eat into profits, hire more employees for the status boost of running a bigger company or reinvest profits into short-term, sure-thing projects rather than taking on riskier long-term ideas.

“This was the beginning of breaking open the black box of the firm,” Professor Jensen said in an interview published in the Journal of Applied Finance. “Obviously, firms don’t act, only individuals act, but firms have behavior, and this behavior is based on the system as a whole.”

To align the interests of both parties, Professor Jensen encouraged the use of stock options and equity as primary forms of compensation. He endorsed taking on debt to buy other companies because loan payments and reduced free cash flow would force executives to better manage costs. And he blessed golden parachutes — the large payments to executives after a merger or the outright sale of a company.

“Think about the problem in the following way: Top-level managers and the board of directors act as stockholders’ agents in deals involving hundreds of millions of dollars,” he wrote in Harvard Business Review. “If the alternative providing the highest value to stockholders is sale to another company and the retirement of the current management team, stockholders do not want the managers to block a bid in fear of losing their own jobs.”

Executives walk away with their pockets comfortably lined with cash, the theory goes, but so do investors.

“He was clearly some kind of genius,” said Nicholas Lemann, the former dean of the Graduate School of Journalism at Columbia University, who interviewed Professor Jensen for his book “Transaction Man: The Rise of the Deal and the Decline of the American Dream” (2019). “I think he’s much more important in shaping the America we live in now than most people recognize.”

That shaping largely transpired at Harvard Business School, which Professor Jensen joined in 1985, at the height of President Ronald Reagan’s pro-business economic policies. Two years later, in Oliver Stone’s movie “Wall Street,” Michael Douglas portrayed a fictional corporate raider, Gordon Gekko, who declared: “Greed, for lack of a better word, is good. Greed is right. Greed works.”

Professor Jensen taught his theories in a class he called “The Coordination and Control of Markets and Organizations,” one of the most popular electives at the business school.

“Have no doubt about it, the most powerful man at HBS in the early 1990s was Michael Jensen,” Mr. McDonald wrote. “He was much more engaged with students, those students were all going to Wall Street, and Wall Street firms were all sending money back to HBS.”

Michael Cole Jensen was born on Nov. 30, 1939, in Rochester, Minn. His father, Harold, was a linotype operator at a newspaper and drove a taxi. His mother, Gertrude (Cole) Jensen, managed the home. The Jensens struggled financially; Michael’s father drank and gambled heavily.

“The idea that there might be some other way of life for anybody in the family seemed fanciful,” Mr. Lemann wrote. “Mike Jensen assumed that he would be a linotype operator, too.”

A teacher at the vocational high school Michael attended recommended him to a recruiter at Macalester College in St. Paul. He had no plans to attend college, but he asked the recruiter if the school had classes on the stock market.

“Yes, we do, the recruiter said,” Mr. Lemann wrote. “It’s called economics.”

He enrolled. After graduating in 1962, he paid his way through graduate school at the University of Chicago — the intellectual home of Mr. Freidman and other free-market theorists — by working the night shift in the press room of The Chicago Tribune. He earned an M.B.A. in finance and a doctorate in economics in 1968, then joined the University of Rochester.

His marriages to Dolores Dvorak and Toni Wolcott ended in divorce. In addition to his daughter Natalie, he is survived by another daughter, Stephanie Jensen; a sister, Gayle Marie Jensen; and four grandchildren. He had homes in both Sharon, Vt., and Sarasota.

Later in life, after Wall Street had been besieged by corporate stock option scandals and politicians derided excessive compensation packages, Professor Jensen acknowledged that his ideas had spiraled out of control.

He told The New Yorker in 2002 that basing compensation so heavily on options incentivized executives to lie about financial results. Stock options had become “managerial heroin,” he said; what the business world lacked was integrity.

Around 2012, with Mr. Erhard, he founded the Erhard-Jensen Ontological/Phenomenological Initiative. They offered weeklong seminars on leadership, which they taught in far-flung places, typically near beaches. The cost: $3,000 per person. Mr. Lemann attended one in Bermuda.

“I was involved in reorganizing the financial industry,” Professor Jensen said onstage, according to Mr. Lemann’s book. But by then, he said, the world of finance was “staggeringly bad” adding “I’m sickened by it.”

Embracing integrity was, for Professor Jensen, a profound experience.

“The most wonderful things happen if you have integrity,” he said onstage. “I was incomplete as a human being. Was I successful? Sure I was successful. But I was incomplete.”

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