Time To Revamp MBA Programs?

Kelly Holland, writing in today's New York Times, asks Is It Time to Retrain the B-Schools?

The master’s of business administration, a gateway credential throughout corporate America, is especially coveted on Wall Street; in recent years, top business schools have routinely sent more than 40 percent of their graduates into the world of finance.

But with the economy in disarray and so many financial firms in free fall, analysts, and even educators themselves, are wondering if the way business students are taught may have contributed to the most serious economic crisis in decades.

This is a fair question.  I graduated from NYU's Stern School of Business - a prime feeder of the Wall Street beast - in 2007.  Though my concentration was on innovation and strategy rather than finance, I saw much of what the article points as the problem:

Critics of business education have many complaints. Some say the schools have become too scientific, too detached from real-world issues. Others say students are taught to come up with hasty solutions to complicated problems. Another group contends that schools give students a limited and distorted view of their role — that they graduate with a focus on maximizing shareholder value and only a limited understanding of ethical and social considerations essential to business leadership.

Such shortcomings may have left business school graduates inadequately prepared to make the decisions that, taken together, might have helped mitigate the financial crisis, critics say.

“There are extraordinary things taking place in business education, and a lot that is very promising,” said Judith F. Samuelson, executive director of the Business and Society Program at the Aspen Institute. “But what’s the central theorem of business education? It’s wanting.”

Some employers and recruiters also question the value of an M.B.A., and are telling young people they can get better training on the job than in business school. A growing number are setting up programs to help employees develop skills in-house.

But is the MBA program really to blame for the shortcomings of its graduates?  After all, business school attendees are self-selected. 

Still, there have been signs that all is not well in business education. A study of cheating among graduate students, published in 2006 in the journal Academy of Management Learning & Education, found that 56 percent of all M.B.A. students cheated regularly — more than in any other discipline. The authors attributed that to “perceived peer behavior” — in other words, students believed everyone else was doing it.

I draw a different conclusion from the first sentence.  MBA students are, for the most part, focused on making money and obtaining power.  They are the probably not the most ethical people before their business education.  The question is whether the MBA helps or hurts these future corporate leaders become more ethical or not.

I can say that at Stern, I saw nothing that would encourage overt unethical behavior.  Although ethics was not a major part of the program - we had one business ethics class that did reveal the worst in some students - NYU did nothing to encourage future investment bankers to take outsized risks, to encourage fraudulent hedge funds (did Bernie Madoff have an MBA?  I don't know), or to create fictitious energy trading firms a la Enron.  How many tobacco leaders forty or fifty leaders had MBAs?  Indeed, the professors, and most of the stundents, I met at NYU were nothing but ethical.

My MBA program, though, did help us understand why this unethical behavior persists: improperly designed reward systems.  One of the first papers we read in NYU was Steven Kerr's "On the Folly of Rewarding A and Expecting B" (Google it).  Kerr presages how the short-term bonus structure on Wall Street leads to outsized risk.  It explains how a focus on shareholder value leads to strip mining.

Reward systems that base bonuses on short term results lead to risky behaviors.  Proper compensation systems are not easy to design and executives do not want to wait ten years to be rewarded for their work.  That said, we clearly need to do something about today's bonus structure.  By basing rewards on long-term stock options, we have aligned executive (and in my industry - software - employees) interests to that of the owner to avoid agency costs.  The system is flawed but a step in the right direction.

Do not think, though, that the MBA program teaches leaders to focus on short-term value.  Every strategy class, every finance class, every leadership class talked only of the long-term (well, with some reasonable exceptions to ensure the company survives in the short term). 

So what about the focus on shareholder value?  Does this inherently lead to unethical behavior and are MBA programs to blame for this?   In the U.S., the board of directors is - by law - squarely on maximizing shareholder value.  Executives are agents of the owners, and as such are expected to maintain this focus.  Taking Kerr's argument to heart, compensation systems should reward executives for building long-term shareholder value.  The distance between this goal and reality accounts for what business school terms "agency risks."  An agent, in this society, is expected to behave the way they are incented. 

Some societies recognize stakeholder beyond owners.  They recognize employees, suppliers, and communities.  In Germany, for instance, the union has a seat on the board of directors.  This provides power to the union while simultaneously aligning the union with the company.  I suppose the American corporation reflects deeply seeded American values, not MBA values. 

When a company does something for its shareholders that negatively impacts outside stakeholders, we call that an externality.  For example, if I dump pig waste upstream and pollute water, downstream communities would have suffered an externality.  In the U.S., we rely on the government to pass laws to control these externalities.  It is no surprise corporate leaders lobby against these laws.  They are incented to do so, and they are mandated to do so.  Asking them to do otherwise is the same as asking the prosecuting attorney in a murder case to testify to the good character of the suspect; that is the job of the defense attorney.  America firmly believes in checks and balances.

BUT.  America does not believe the goverment solves problems.  They believe in the market.  Unfortunately given this bias, our system is designed to have the governement, not corporate leaders, control the negative impact of our focus on shareholder values.  This is not a problem the MBA program should or can rectify.  We, as a nation, must come to terms with the system we've designed.  We have a choice: more regulation and more powerful government agencies that can effectively counterbalance externalities or revamping the structure and goals of the corporation.

While writing this, I kept flashing back to Amy Wrzesniewski, my first and favorite MBA professor, now at Yale.  Amy would have pointed out that once our career is driven by money rather than passion the battle is already half-lost.  I suspect this is the nature of the incoming MBA class.  Don't blame the MBA program for this.  Blame us.

Comments

[David Neubert]

I was a managing director and trader for top tier Investment Bank. I was MBA recruitment for Harvard. In 5 years of being part of that group I only hired one person for my area. Of course, my area was derivatives trading and required a perniciousness and math over presentations. Oddly, the one HBS graduate I did hire eventually committed a kind of fraud called "hiding tickets".

[Dissertation Literature Review]

Blogs are so informative where we get lots of information on any topic. Nice job keep it up!!