Are business schools bad for business? I recently came across a very interesting article by the late Sumatra Ghoshal, who blamed business schools for the demise in management practices because they have become obsessed with teaching maximizing shareholder value at the expense of everything else. In Bad Management Theories are Destroying Good Management Practices he claims that business schools have gone astray because they teach ideology more than they teach theory, let alone good management practices. Are business schools really that bad?
Theories turned ideologies?
Ghoshal questions the very basis for many of the topics taught in business schools, such as principal-agent theory, transaction-cost economics and game theory, among others:
- In courses on corporate governance grounded in agency theory we have taught our students that managers cannot be trusted to do their jobs – which, of course, is to maximize shareholder value – and that to overcome “agency problems”, managers’ interests and incentives must be aligned with those of the shareholders by, for example, making stock options a significant part of their pay.
- In courses on organization design, grounded in transaction cost economics, we have preached the need for tight monitoring and control of people to prevent “opportunistic behavior”.
- In strategy courses we have presented the “five forces” framework to suggest that companies must compete not only with their competitors, but also with their suppliers, customers, employees and regulators.
- MBA students are not alone in having learned, for decades, these theories of management. Thousands of executives who have attended business courses have learned the same lessons, although the actual theories were not presented to them so directly.
- Even those who never attended a business school have learned to think in these ways, because these theories have been in the air, legitimizing some actions, de-legitimizing others, and generally shaping the intellectual and normative order withing which all day-to-day decisions are made.
Theories have turned into accepted truths that have turned into ideologies about how business works and how it should be run. Few, if any, have questioned these theories, and Ghoshal puts it quite harshly when he says that
academic research related to the conduct of business has had some very significant and negative influences on the practice of management. These influences have been less at the level of adoption of a particular theory and more at the incorporation, within the worldview of managers, of a set of ideas and assumptions that have come to dominate much of management research […] By propagating ideologically inspired amoral theories, business schools have actively freed their students from any sense of moral responsibility.
Essentially then, if I follow Ghoshal’s train of thought, we have fallen victim to our own theories, or ideologies, and we should not feel so surprised at what perspired at Enron, or the Lehman Brothers for that matter.
What would business be without Milton Friedman?
In particular, Milton Friedman’s postulation that “Few trends could so thoroughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money as possible for their stockholders” does not go down well with Ghoshal, and I am inclined to agree.
I mean, who can honestly say that companies will not survive and prosper (and perhaps even more so) when they simultaneously pay attention to the interest of customers, employees, shareholders, and perhaps even the communities in which they operate? Luckily, and what bodes well for the future, some academics are in fact beginning to see business management in this light. Unfortunately, they are up against the mighty enemy of mainstream economics which is not yet ready to accept such new ideas.
MBA = Major Bad Ass?
We’ve probably all heard the usual euphemism for PhD, Permanent Head Damage, snd if I follow through on Ghoshal’s thoughts, MBA could be described as Master of Bad Administration, or as some say, Major Bad Ass, which would certainly be in line with Ghoshal’s own perception:
Combine agency theory with transactions costs economics, add in standard versions of game theory and and negotiations, and the picture of the manager that emerges is one that is now very familiar in practice: the ruthlessly hard-driving, strictly top-down, command-and-control-focused, shareholder-value-obsessed, win-at-any-cost business leader.
Maybe not all leaders are like this? I hope so.
Ghoshal, S. (2005). Bad management theories are destroying good management practices IEEE Engineering Management Review, 33 (3), 79-79 DOI: 10.1109/EMR.2005.26768
- wikipedia.org: Sumantra Ghoshal
- corporation2050.org: Bad management theories
- community.kinaxis.com: Have business schools lost their way?
- husdal.com: How far does Corporate Social Responsibility go?