Wednesday, September 01, 2004

B-Schools' Role in Creating Enrons

This report is mentioned at the end of this page:

Business Schools share the blame for Enronitis
(Financial Times, July 18th, 2003)

Sumantra Ghoshal, professor of strategy and international management at London Business School, writes that despite the post-Enron rush to teach business ethics and corporate social responsibility to MBA students, business schools "need to own up to their own role in creating Enronitis."

Ghoshal notes that agency theory, created by Michael Jensen at Harvard, taught MBA students that managers could not be trusted to maximize shareholder value and therefore managers' and shareholders' interests had to be aligned through incentives such as stock options.

At Berkeley and Stanford, students were taught transaction cost economics, developed by Oliver Williamson, which argues that the only reason companies exist is because managers can exercise authority to ensure all employees do what they are told. As a result, managers must ensure that staff are tightly monitored and controlled while creating individual performance incentives.

Michael Porter has argued that to be profitable, a company must actively compete not only with its competitors but also with its suppliers, customers, regulators and employees, striving to restrict or distort competition, "bad though this may be for society."

Ghoshal concludes that "by incorporating negative and highly pessimistic assumptions about people and institutions, pseudo-scientific theories of management have done much to reinforce, if not create, pathological behavior on the part of managers and companies. It is time the academics who propose these theories and the business school and universities that employ them acknowledged the consequences."

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