(FORTUNE Magazine) – Nobody has ever accused the Harvard Business School of being an ivory tower, a refuge for woolly-minded scholars out of touch with real life. No, this is a worldly institution and a great worldly success. It has produced scores of chief executives for America's leading corporations, including Ford, Johnson & Johnson, Xerox, and Colgate-Palmolive. Companies from six continents send their top people to its executive courses for just the right finishing, at prices up to $22,500 for the 11-week Advanced Management Program. Employers from Wall Street to Silicon Valley flock to Boston to hire recipients of the school's master in business administration degree, offering starting salaries that sometimes exceed $100,000 a year. Nearly 7,000 of the brightest college graduates in the U.S. compete for 800 places in each MBA class. The professors, too, are a worldly crew. Mercedes and BMWs dot the faculty parking lot. A controversial new book, The Empire Builders, accuses the dons of grubbing for power and money in all sorts of unseemly ways, such as using their positions to land consulting jobs and seats on corporate boards. Dean John H. McArthur denounces the ''shabby, mean-spirited, and false manuscript'' as being riddled with ''hundreds of factual errors, invented quotations, and fabricated events.'' What the book does not attempt to do is address troubling questions about the school's role in fostering the competitiveness of American industry.

IN A FUNDAMENTAL way the Harvard Business School is growing more remote from corporate America: Increasingly its MBAs don't want to work there. Not in line jobs or for big companies, at any rate. This year, for the first time, an institution that has proudly proclaimed its mission as educating ''general managers and business leaders,'' not ''functional specialists or theorists,'' saw over half its graduating MBAs go into investment banking or management consulting (see chart). These two fields pay the highest starting salaries. Another 15% of the class headed off into venture capital, real estate, commercial banking, investment management, or other financial services. Less than 25% of 1987 MBAs took jobs with manufacturing companies, and most of these were staff, not line, positions. A look at where graduates end up five or ten years out suggests that few subsequently move into the managerial mainstream. ''Having just come back from my tenth reunion, I can say that essentially nobody from my class is on the path to running a large business,'' says a 1977 MBA who graduated in the top 5% of his class as a Baker Scholar. ''The image of the business school is that it produces the captains of industry. But now it's producing the incredibly well-paid lieutenants of Wall Street.'' A matter for concern? People like Donald Petersen, chief executive of Ford, think so. Petersen, a Stanford MBA, last year stirred a Harvard audience with his plea that the best and brightest seek leadership positions with America's big manufacturing corporations. Others point out that the largest industrial, retailing, transportation, and utility companies still account for more than two-thirds of the U.S. gross national product. If these enterprises are to fare well in the global competition, they will need the smartest possible managers at the helm. But why blame the lemminglike defection of MBAs in pursuit of the dollar on Harvard? The same situation confronts virtually all of the best business schools, though not always in the same proportions. Isn't the real problem greedy students? In attenuated form Harvard seems to buy that argument. ''I've had students who said they really wanted to go out and get line jobs,'' says Robert H. Hayes, an expert on manufacturing and co-author of the famous 1980 article ''Managing Our Way to Economic Decline.'' ''Then salary offers came in. It's awfully hard for an MBA who is $20,000 in debt, living in shabby housing, and driving a clunky car to say to a spouse who has been working to support the family: 'I'll take the $40,000 job in Podunk, but I have an offer from Morgan Stanley for $60,000 with a $40,000 bonus.' '' Blaming the students seems too easy, though, a variant on the old Hollywood rationalization: ''We can't be better managed because the inmates are running the asylum.'' The business school, after all, chooses who gets in, determines what students are taught, and sets standards for everyone at the institution. If any business school is capable of turning out managers, it should be Harvard. The school has more money (an endowment of $250 million), a bigger faculty (180), and greater celebrity than any competing institution. It also produces more MBAs (Wharton graduates about 750 each year, Stanford a mere 310). Perhaps most important, Harvard has long emphasized the practical nature of the education it offered, an emphasis embodied in its commitment to the case study method. While professors at other schools lectured on the latest theory of consumer behavior, say, Harvard had students tackle problems from the real world, dissecting cases that reflected the difficulty, and excitement, of being a manager. At least that was how case study was supposed to work. Cases, which used to put students in a manager's shoes, now frequently read more like a finance text. This may explain something about why Harvard no longer turns out so many people inclined toward general management. Together with other changes, it also helps account for why an institution whose graduates include Martin Siegel and some of the smaller fry in Wall Street's insider trading scandals has yet to get its act together to teach about ethics, notwithstanding 60 years of faculty wrestling with the issue and a recent multimillion-dollar gift from John S. Shad, MBA '49, aimed at furthering the effort. Dean McArthur says he is unworried by the trend in MBA placement, as it's known in the trade: ''I think it's crazy where they're going, but we ought to just relax and enjoy it; it won't last long.'' McArthur, who used to be a finance professor, contends that the bubblelike expansion of investment banking houses, which has sucked so many MBAs into Wall Street, can't continue.

BUT OTHER strong trends are at work here. To a degree, Harvard influences the career choices of its graduates more than two years earlier, when it culls those 6,800 applicants down to the fortunate 800. The business school increasingly requires real-world job experience from the people it admits, and almost no one gets in straight from college anymore. The median age of this year's entering class is 26.1, up from 25.8 last year. In the school's view, these more seasoned types will be better able to resist the stampede to high- dollar jobs. What school officials don't talk about as much, however, is where the students obtained their job experience: In 1987 nearly a quarter of the new class came from investment banking houses or management consulting firms. In recent times these outfits have heavily recruited undergraduates from prestigious colleges, put the new hires to work crunching numbers in jobs with a title like ''research analyst,'' and then coached them on how to get into business school. So developed has the practice become that a former Stanford Business School admissions director, Kathleen Gwynn, has started a company devoted to counseling analysts on, for example, how to write a business school application. Her principal accounts: First Boston, Goldman Sachs, and Bain & Co., the Boston-based consulting giant. When the former analysts arrive at Harvard, they and their new classmates encounter a recruiting blitz spearheaded by -- who else -- investment banks and consulting firms. The first offer is usually a summer job. The next year it's a permanent position, with a nice signing bonus attached. The word that drops from the lips of just about every faculty member in describing the competition among employers is ''frenzy,'' as in ''feeding frenzy.'' But Harvard isn't doing as much to curb the madness as some competing institutions. The business school student newspaper recently carried advertisements for three upcoming speeches on campus by top investment bankers -- two inviting ''interested students'' to receptions afterward -- three ads announcing appearances by management consultants, and one full-page declaration that Booz Allen & Hamilton ''looks forward to meeting first-year students'' at a series of cocktail parties at a nearby hotel. This was the third week of the first semester. By Christmas, says one of Harvard's senior associate deans, the recruiting companies ''know 500 students; they know our students better than we do.'' Employers may also know that fully 30% of graduating MBAs go to work for the same outfit that gave them a summer job between first and second year. Through the end of one school year and into the next, the pressure on students builds, as the tom-toms tell of spectacular offers made to classmates. By the time spring of the second year rolls around, which ten years ago was the official recruiting season, the action is pretty much over, as some would-be employers have discovered to their dismay. What does the business school get from all this, aside from a big challenge in keeping students faintly interested during their last months? Every year the placement office surveys members of the graduating class about their jobs. The glossy brochure, showing who goes where and the median salary graduates command in each industry, is given wide circulation. Presumably the eye- popping salaries encourage similarly superior individuals to consider applying to Harvard. But the business school has a much more direct interest in seeing its students earn a lot of money. As recently as the early 1970s, it was hobbling along with an endowment of $30 million and maybe $1 million in annual gifts. In the interest of breaking even, the school began to rethink its fund raising, or the lack of it. Shortly after he became dean in 1980, McArthur put Professor Hugo E. R. Uyterhoeven in charge of fund raising. Uyterhoeven made such a success of it that around $18 million in gifts will come in this year, vs. about $4 million in 1980. Recalls Uyterhoeven: ''We decided to go the alumni route. We found that companies aren't all that generous.'' The secret to alumni giving, the business school discovered, is tapping reunion classes, particularly the 25th reunion class, and the key to this is enlisting alums who give generously themselves and can put the arm on others to do likewise. Every 25th reunion class since 1980 has had an investment banker or a management consultant as its chairman or gift chairman.

A COLLAPSE in hiring by investment banks -- or I-banks as some me-generation types on campus call them -- thus might have repercussions that reach far beyond placement. Is such a collapse inevitable, as McArthur suggests? You can imagine the scenario: Financial markets decline, merger activity cools off, margins contract, and all those blue-suited gunslingers in lurid suspenders finally get what's coming to them. Certain trends suggest, however, that even if investment banking suffers hard times, the hiring of top-flight MBAs may not fall off that dramatically. Investment banking looks increasingly like a new-products game. Who better to come up with the next winky-doo-backed security than a newly minted MBA, full of the latest financial esoterica and churning with ideas? Moreover, management consultants have learned that if they want to keep hiring Harvard MBAs, they must never, ever, lay off recently recruited graduates. Better to prune the tree further up, at the third- or fourth-year associate level. Despite ups and downs in the business, consulting's share of Harvard's graduating MBA class has hovered around 20% for ten years. Harvard is already taking steps to correct the skew in its admissions policy, in ways that may eventually affect where students go. Two years ago it stopped requiring the GMAT, the business school equivalent of college boards, in part to reduce the importance of how adept an applicant is with numbers. Laura Fisher, the new admissions director, talks about the need for ''strategic diversity'' in making up an MBA class, and Harvard has begun to put out word on college campuses that analyst's programs are no longer the royal route to you know where. In fact, the school hints, it may limit the number of people it takes from such programs. Some faculty members say they have tried to steer students away from the chase after money. ''Our faculty is outrageous in what it says about Wall Street,'' observes Professor Joseph L. Bower, a senior associate dean. The problem is not what the professors say but what they do: Some are in fairly hot pursuit of money themselves. Knowledgeable critics of Harvard tell a story about a former professor there. Every year the man would be pictured in the faculty directory against a backdrop of empty bookshelves. If you visited his office, the story goes, you would find that it too was apparently unused: The professor was spending so much time on moneymaking activities outside that he was almost never there. Finally the dean, one of McArthur's predecessors, gave him a choice: Cut back on the outside stuff, or leave. He left. The problem, or what faculty members prefer to call the ''inevitable tension'' between work inside the school and work outside it, continues. The business school pays senior professors as much as $112,000 a year, plus another two-ninths of their salary if they work over the summer. In their spare time they can earn considerably more than this. Some do, including Professor Michael E. Porter, probably the faculty member best known outside the school (see box). Most of the faculty's outside work falls into one of four categories: consulting, teaching in corporate training programs, testifying as expert witnesses, or serving on corporate boards. Of late, teaching has become the hot ticket; a senior professor can command over $5,000 a day for teaching a corporate audience essentially the same cases he does back at Harvard. In 1983 McArthur set up a faculty committee to review the school's guidelines on outside activity. The committee recommendations, submitted a year ago, begin by affirming existing policy, the first principle of which is ''A certain amount of consulting is good''; it keeps professors in touch with the business world and may uncover situations that can be written up as cases. The report goes on to express concern about the lopsided distribution of outside activity across the faculty. In a survey three years ago, 20% expected to do less than 15 days of consulting, not enough in the eyes of the committee. On the other hand, 10% expected to do 40 or more days -- 40 being the maximum supposedly allowed. The report advises caution in taking corporate teaching assignments. But it recommends leaving the limit at 40 days a year, even though a survey of the faculty revealed that 85% believed tenured professors do too much outside teaching. Other recommendations: Clarify reporting of outside activities and have faculty members discuss with the dean any tough cases, such as the opportunity to serve on more than four boards at once. Properly handled, all this ''will permit professors . . . to earn income supplementary to University salaries that will permit a good standard of living.'' Ten years ago a joke among students had it that certain professors used their faculty salary to pay a small portion of their tax bill. These days some MBA candidates want to emulate their professors. They hope, for example, to go to work for a consulting firm that Michael Porter helps run. But who on the faculty holds up the example of the general manager? ''We all do,'' say a surprising number of professors, ''in the cases we teach.'' Their answer barely skims the surface of another profound change at the business school. Who are these professors and what do they talk about in the classroom? In the old days faculty members came up through the ranks of Harvard's doctor in business administration program. But as bright MBAs increasingly chose high-paying jobs over graduate study, that pipeline pretty much dried up. The number of new students seeking the DBA has dropped from 60 a year in the 1970s to nine or so recently. And McArthur faces the necessity of replacing a third of his senior faculty in the next decade. In response he has taken several steps. He has brought in eminent faculty members from other business schools and given them full professorships. He has set up joint Ph.D. programs, working, for example, with the departments of psychology and sociology to develop a Ph.D. in organizational behavior. Increasingly too he has gone outside to recruit Ph.D.s in the business school disciplines -- marketing, say, or finance.

WHAT ALL of this translates to is a faculty that is more discipline based, more focused on scholarship in a particular specialty than in writing cases. Aspirants to tenure, instead of getting a Harvard MBA and then serving an apprenticeship developing cases under a senior professor, today are more likely to have started out producing scholarly articles for the North Frisian Journal of Theoretical Microeconomics. During their perilous navigation of Harvard's tenure track -- only two or three out of ten make it -- they understandably want to keep their scholarly credentials up to date, against the day they have to seek employment at another business school, most of which emphasize the disciplines even more than Harvard. Cases are still the basis of class discussion at Harvard, and new faculty members are still given considerable coaching in how to teach them. But to use case writing as a primary means of research, to devote months to trying to capture all the twists and turns of an actual manager's experience? That won't get you anywhere in a discipline-based world. Cases themselves have changed as a result. Classically they began with a manager in a tough spot (''Lemington Burford sat in his darkened office and reflected on the events that had brought his company to this sorry pass'') and ended with a pointed question (''What should Burford do?''). The teacher led students through an aggressively Socratic dialogue -- ''You think he should cut production? But if he does, what about . . .'' -- that required them to back up their recommendations with reasons. Done right, the experience offered an exhilarating sense of what it was like to be a manager. Cases now more frequently look like what once would have been considered background material -- a description of a theory, a list of procedures, someone's framework for analysis. (''Burford wondered whether the capital asset pricing model might not be appropriate here. The capital asset pricing model is . . .'') Asked how his approach to cases has changed, a marketing professor replies: ''I've learned to write technical notes that look like cases.'' The evolution of case studies has in turn affected the school's curriculum. For as long as anyone can remember, Harvard's courses have mostly bubbled up from its faculty's interests: A professor would become intrigued by something and do research on it. If he stayed interested, he or a researcher might write cases on the subject, which might serve as the readings for a new second-year elective course. If the course proved popular with students -- and Harvard's faculty is extremely market driven in this respect -- bits of it might make their way into a required first-year course. What MBA candidates have wanted of late are financial formulas, mathematical models, and analytical tools -- the kind of stuff consultants and investment bankers use. In the past ten years such materials have made their way into the classroom and altered the curriculum. Consider, for example, how Business Policy I turned into Competition and Strategy. Ten years ago BP I, as it was known, was the only required course in the first semester of the second year. It treated corporate strategy, in the genteel tradition of those days, not as a set of formulas but as the mission of the company, its distinctive competence, reflecting the values of its managers. The course was not particularly popular. About this time a young assistant professor named Michael Porter, the ink still relatively damp on his Harvard Ph.D. in the economics of industrial organization, wrote a technical note ''On the Structural Analysis of Industries.'' The note became assigned reading in BP I, ''as a way of making the process more rigorous,'' Porter says. He then went off to teach in one of the executive programs and began writing cases. These, centering on concepts such as ''barriers to entry'' (high start-up costs, say, or established brand names), formed the underpinnings of a second-year MBA elective he introduced in 1977, Industry and Competitive Analysis. It was an immediate smash, in some years attracting 400 students. Ideas from the course began filtering into BP I. Finally, in 1983, McArthur persuaded Porter to take over Business Policy I, which had been shifted to the spring of the first year. Porter describes what happened next: ''I took out all the material on the general manager, and on the values of society and the manager. It became a course in strategy, not in general management.'' All that remained was for BP I's name to be changed, which happened in 1986. So what if Harvard isn't turning out MBAs who will become general managers? As Professor Joe Bower points out: ''A lot of restructuring is being done by consultants,'' not to mention investment bankers. Many of the consultants will eventually become venture capitalists, investing in and helping to guide new enterprises. Some faculty members think that is just nifty. Says Rosabeth Kanter, an expert on the often hidebound ways of large corporations: ''Some large companies are still so bureaucratic that I'm not sure I could recommend that my students go to work there.'' Or, as another Baker Scholar, class of 1982, puts it: ''This captain of industry stuff -- is he a person willing to work for 30 years to be chairman of GM and deal with the bull---?'' Yes, as a matter of fact. Also, increasingly, the person who tries to cut through the bull at GM and change the hidebound ways. Harvard Business School professors talk and write eloquently of the challenges facing business: globalization, an accelerating succession of new technologies, the need to manage organizations of unprecedented scale. But who, in 20 or 30 years, will be responsible for meeting these challenges at the largest companies, at the end of the day, when the people in blue suits have flown back to New York or Boston? Probably not Harvard MBAs, unless the business school rededicates itself to its historic mission.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: WHERE THE MBAS WENT AND . . . HOW MUCH THEY MADE Many more picked careers in investment banking, at the expense of jobs with manufacturing companies. Consulting held its own. Salaries are medians of what students got, except for manufacturing, where they are averages. Bonuses often raise the starting salaries of investment bankers to $70,000 or more. DESCRIPTION: Graph of Harvard Business graduates' career choices; average first-year salaries in investment banking, manufacturing and management consulting.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: HARVARD BUSINESS SCHOOL'S 1987 CASH FLOW The school moves in and out of the debt markets but didn't borrow this year. Funds for research go 40% for developing cases, 60% for straight scholarly work. In 1987 the payback from student loans equaled money lent out. DESCRIPTION: Chart of Harvard Business School's income and expenses.