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To get to the bottom of the recent wave of corporate scandals, Start with what is being taught in business schools, profs say

March 1, 2005

For more information, contact: Benjamin Haimowitz, HHaimowitz@aol.com

Scholars' attack on the dehumanizing influence of present-day economics exposes deep rift on biz schools' main task -- teaching good management

It is an issue that has been smoldering in business schools: What responsibility do the schools have for the wave of corporate scandals of the past few years?

Now, just as several of the most prominent cases come to trial, the issue seems destined to flare up with renewed intensity in academe, with the publication of a final testament of an eminent management professor.

Shortly before his death last March at the age of 55, Prof. Sumantra Ghoshal, described by The Economist as "a man of boundless energy and inventiveness [who] married the theoretical and the pragmatic in a way that is rare," submitted to the quarterly journal Academy of Management Learning and Education an article that amounts to business education's version of J'accuse.

It will be published in that journal at the end of this month, along with a resounding 3,500-word endorsement from one of the U.S.'s leading management scholars and sharpest critics of business education, Jeffrey Pfeffer of Stanford University.

"Business schools do not need to do a great deal more to help prevent future Enrons; they need only to stop doing a lot they currently do," wrote Ghoshal, a professor at the London Business School. "Much of the worst excesses of recent management practices have their roots in a set of ideas that have emerged from business school academics over the last thirty years."

Particularly damaging, he continued, has been the dehumanizing influence of contemporary economics on management thinking.

The article, "Bad Management Theories Are Destroying Good Management Practices," will be accompanied by responses from such prominent management thinkers as Pfeffer, Rosabeth Moss Kanter of Harvard Business School, Donald Hambrick of Penn State University, John Gapper of the Financial Times, Lex Donaldson of the Australian Graduate School of Management, and Henry Mintzberg of McGill University.

Not only does Pfeffer express strong agreement with Ghoshal's indictment of economics; he thinks he doesn't go far enough. "If anything [he] understates the potential downside" to the growing dominance of economics over the social sciences," Pfeffer writes. "Economics is indeed taking over management and organization science just as it has taken over political science and law and is making inroads into sociology and psychology."

Much of the trouble Ghoshal had and Pfeffer has with this development derives from economics' fundamental pessimism: it is, in their view, truly the "dismal science," based overwhelmingly on a conception of people as creatures of self-interest and opportunism. A measure of the growing influence of economics, they contend, is that social science has focused increasingly on what Milton Friedman called the "negative problem of preventing 'bad' people from doing harm," as opposed to the positive problem of "enabling 'good' people to do good."

What accounts for the powerful influence of this negative perspective? In large part, according to Ghoshal, it is that economics has increasingly assumed the mantle of science, a trend from which Nobelist Friedrich von Hayek dissented when he referred scornfully to the "pretense of knowledge" in contemporary economics.

"As an example of how this pretense of science affects practice," this posthumous article argues," consider the dictum of Milton Friedman that few managers today can publicly question: that their job is to maximize shareholder value. Where did the enormous certainty that this assertion seems to carry come from?...The answer -- the only answer that is really valid -- is that this assumption helps in structuring and solving nice mathematical models...The elegant mathematics of principal-agent models can be applied to the enormously complex economic, social and moral issues related to the governance of giant public corporations that have such enormous influence on the lives of thousands -- often millions -- of people."

The fact is, Ghoshal's argument continues, "shareholders do not own the company -- not in the sense that they own their homes or their cars" -- otherwise they would not be able to enjoy limited liability. Furthermore, "most shareholders can sell their stocks far more easily than most employees can find another job. In every substantive sense, employees of a company carry more risks than do the shareholders...

"If these truths are acknowledged," the argument concludes, "there can be no basis for asserting the principle of shareholder value maximization. There just aren't any supporting arguments."

As Ghoshal saw it, the principal management theories that derive from Friedman's "negative problem" -- agency theory, transaction-cost economics, game theory, negotiation analysis -- are fundamentally at odds with enlightened management. "The picture of the manager that emerges [from these theories] 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 of which Scott Paper's 'Chainsaw' Al Dunlap and Tyco's Dennis Kozlowski are only the most extreme examples."

In sum, today's most prominent management theories give too much weight to considerations of self-interest and opportunism while giving short shrift to social and moral values essential to successful management. In Ghoshal's words, "The pretense of knowledge has led us to increasingly focus on the negative problem as a result of which we have made little analytical progress in the last thirty years on the positive problem, at considerable cost to our students, to companies, and to society."

Business schools, Ghoshal and Pfeffer argue, need to place less emphasis on the mathematical models congenial to science and more emphasis on (in Ghoshal's words) "the wisdom of common sense." It is a view that elicits agreement from two of the other scholars invited by Academy of Management Learning and Education to respond to Ghoshal's article.

"I will applaud Sumantra's plea that [business schools] allow and respect a wider array of scholars," writes Donald Hambrick of Penn State University. "Our tenured faculties are heavily populated by folks who look askance at ...synthesizers or practical interpreters."

"Economic theories are neat. People are messy," adds Rosabeth Moss Kanter of Harvard Business School. "The scientific, analytic, econometric cast to the theories Ghoshal criticizes makes them seem hard, but in truth, in practice, the so-called 'soft' ideas, in which management is an art involving people, are much harder. That's what executives say. That's what Harvard Business School MBAs say. And five years out, they often say they wish they had taken fewer finance courses and more people-oriented courses."

But what if those finance courses actually do harm? Both Ghoshal's article and Pfeffer's response cite a considerable body of research that finds the study of business and economics to be associated with moral and social shortcomings.

-- A study of close to 16,000 undergraduates at 31 colleges and universities found that business students engaged in almost twice as many cheating violations as the average for all students.

-- A study from the Aspen Institute found that student values change significantly during the two years of MBA programs, with shareholders assuming increasing importance at the expense of customers and employees.

-- In an article in the current issue (Jan.-March) of the Academy of Management Review, Pfeffer and Stanford colleagues Fabrizio Ferraro and Robert I. Sutton cite research that finds taking economics courses or majoring in economics to be associated with more free riding, more likelihood to betray co-workers, more selfish behavior, and a greater tendency to corruption.

Pfeffer concedes that more research is needed to determine whether business studies actually cause these outcomes or simply attract students who are inclined to them. "My guess is that both are involved," Pfeffer says.

"What is clear," he adds, "is that the outcomes, however caused, make for bad management."

How to reverse the proliferation of bad management theories from the business schools? Ghoshal saw a critical role for the leadership of the schools, particularly their boards. In his words, "Given the almost absolute power that particularly those of us in the tenured faculty have over all academic matters, a powerful countervailing force would be necessary for any significant redirection in our research and teaching. Perhaps the boards of governors of the different schools...can forcefully bring different perspectives and external information into the highly insular world of the business school faculty."

Pfeffer sees an overriding need to professionalize management education along the lines of medical and legal education. "Where ethics and values are very much part of medical school or law school, in business schools they tend to fall by the wayside," he says. "Several schools have begun to do something about this, though whether this will turn out to be a broad trend is an open question."

Kanter, too, strikes a cautiously hopeful note in observing that "a growing body of scholarly research shows the relationship between profitability and good treatment of employees and customers, or between financial success over time and an emphasis on all stakeholders...Perhaps good theories will prevail after all. They will if the world demands them."

Academy of Management Learning and Education, a peer-reviewed publication edited by Prof. James Bailey of George Washington University, is published quarterly by the academy, which, with about 15,000 members in 90 countries, is the largest organization in the world devoted to management research and teaching. The academy's other publications are the Academy of Management Review, the Academy of Management Journal, and the Academy of Management Executive.

Media Coverage:
Financial Times. Fair shares?. (Saturday, June 11, 2005).
Financial Times. It is time to knock shareholder value off its pedestal. (Wednesday, February 23, 2005).
National Post. Business schools get a bad rap. (Saturday, May 07, 2005).
The Economist. Bad for business?. (Thursday, February 17, 2005).
The Observer. "That's the theory and it matters...". (Sunday, October 02, 2005).
The Times of India. Are business schools bad for business?. (Monday, February 21, 2005).
Toronto Star. MBA: The devil's degree?. (Tuesday, March 15, 2005).

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