Tuesday, January 19, 2010

Economic crisis - fault of MBA schools ?

BUSINESS schools were somehow being partly blamed for the economic problem faced globally last year. MBA students are said to be the cause for wreaking the havoc in the financial markets that we are all now suffering from - and business schools are chastised for not training them better, not least in failing to instil a clear sense of the wrongs from what they have studied.

Are MBA schools to blame? To the extent that graduates have been closely associated with many of the spectacular failures of financial institutions witnessed over the last 18 months, they may be criticised for the mis-quoting of risk in relation to specific financial products and an underestimation of systemic risk.

In some cases, where incentives of compensation systems were at work, the criticism also seems warranted that these individuals focused solely on serving their own self-interest and gave scant regard to their obligations to others, even shareholders.  Just as bank officers and financial advisers, trying to maximise their commissions, they sweet talked their customers to take up loans, plunge their savings into worthless bonds,etc....

I think a bit unfair to say that business schools are directly to blame, even where their graduates were closely involved; there are more basic drivers. But business schools have played a role indirectly, fundamentally due to their adherence to, and perpetuation of, an ideology that has contributed significantly to the crisis, albeit unintended. That is, the theory of maximising value (MV).

There is a theory in business schools to justify MV that says shareholders are the 'residual claimants'. Shareholders should be uppermost in the minds of management because they only receive their returns after the claims of other stakeholders have been met.

However, not all ethical obligations would be reflected in a potential economic loss, even in the long term. Consider a management practice of engaging in bribery where one can get away with it. This might be consistent with shareholder value maximisation, but not advancing societal welfare.

Aside from the assumptions required in subscribing to the MV model and the potential ethical issues unaddressed, there are major practical considerations in the teaching and application of the MV.

Many large companies today operate in countries with little or no government and a huge potential for corruption and, given technologies like the Internet and mobile phones, the way they operate can be instantly broadcast worldwide. Today's global business environment is not the simple US-centric world of free-market economist Milton Friedman - it is far more complicated.

What should business schools do? Jack Welch was right when he described value maximising as 'a dumb idea'. Business schools need to stop worshipping VM and teach with greater intellectual honesty and with attention to its many deficiencies. They also need to do a better job of developing its most plausible contending framework: stakeholder theory. This is a more complex but current and realistic view of management that recognises that the task of managers is to serve multiple stakeholders; it gives shareholders their due, but not to the exclusion of others with legitimate claims.

Finally, business schools should give more attention to their input, as well as their output. With starting salaries for MBA graduates often well in excess of probably an estimated annual sum of 6 digit figure, they need to be careful not to attract narrow- minded, self-centred people who might see it as a way to get rich quickly by eagerly and unquestioningly embracing an "money making theory" that serves that end.

Business schools should look to attract and properly train people to be responsible leaders who are well-rounded and have the capable minds and the courage to ask the critical questions that went unasked for too long.

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