Academy of Management Learning & Education, 2005, Vol. 4, No. 1, 101103.

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Comment on Sumantra
Ghoshals Bad Management
Theories Are Destroying Good
Management Practices
JOHN GAPPER
Financial Times
Even some time after his death, it is impossible to
disentangle the writing of Sumantra Ghoshal from
the man himself. More than other academics and
theorists, his work is personal and engaged. The
arguments are not dispassionate: They are consciously the work of a dissenter, a heretic. Some of
these sentences still read as though he were
speaking them in his insistent, provocative, hawklike way.
There is a quality here of a man gearing himself
up for a fight with everything around him: Milton
Friedman and the Chicago school, the agency theory of relations between shareholders and managers, corporate governance nostrums, and the narrow idea of human motivation that is taken for
granted in social science. His ambition was no less
than to change the way in which business schools
do business.

ment. To an outsider, that seems self-centered and

self-condemnatory. Surely not all corporate ills can
be attributed to ex-MBA students putting agency
theory into practice?
Clearly not, but Ghoshal was on to something.
Human beings even chief executivesare influenced by the ethical codes of the communities in
which they live. If we treat managers as financially self-interested automatons who must be
lured by the carrot of stock options and beaten with
the stick of corporate governance, that attitude will
become self-fulfilling. As Ghoshals article identifies, it took about 2 decades for the most direct
application of agency theory to blow up in the
faces of those who employed it. After the 1980s
struggle in the U.S. over whether managers should
be allowed to resist highly leveraged takeovers,
executives were increasingly rewarded in stock
and stock options in an effort to align their financial interests with those of their shareholders. That
change initially had the effect that its advocates
desired, but the unintended consequences surfaced eventually.

His ambition was no less than to change

the way in which business schools do
business.

If we treat managers as financially

self-interested automatons who must be
lured by the carrot of stock options and
beaten with the stick of corporate
governance, that attitude will become
self-fulfilling.

It is evident that the article was written in a

particularly troubling era, not only for businesses,
but also for those who teach about them. The U.S.
Congress had passed the 2002 Sarbanes-Oxley
Act, the most far-reaching federal corporate governance legislation since the reforms of the 1930s.
For Ghoshal, it was part of an unhappy trend:
Managers were being constrained as punishment
for having behaved as shareholders and academics had prescribed. Ghoshal was not the only one
to stand back and ask: How did we come to this?
His answer was provocative and counterintuitive.
He placed much of the blame not at the door of
regulators, shareholders, or managers, but at that
of people such as himself: professors of manage-

During the 2004 presidential election campaign,

President George W. Bush observed that his government had been unprepared for its catastrophic
success in being able to invade Iraq so rapidly.
The same might be said of investors that offered
huge financial rewards to managers to treat companies not as entities to be nurtured and pre101

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Academy of Management Learning & Education

served, but as properties to be manipulated in order to achieve the highest possible short-term
gains for their shareholders. Once the catastrophe
had occurred, in the form of corporate abuses such
as Enron and WorldCom, and as in more routine
cases of companies being run to produce a shortterm run-up in the share price followed by a swift
collapse, the reaction was narrowly focused on
reining in the worse instincts of managers. Corporate governance reforms were aimed at allowing
shareholders to exert yet more control over their
property.
Could things be organized better? Ghoshals answer in some ways represents a return to tradition.
It is worth noting the comparison with Delaware
corporate law, the legal framework under which
60% of Fortune-500 corporations operate. The fundamental tenet of Delawares enabling approach
is the business judgment rulethe view that
managers should not generally be secondguessed. The philosophy here is that it is counterproductive for either investors or courts to dictate
how companies are run. Managers are better
placed to take the calculated risks over strategy
and new products that are required in order to
create wealth. Delaware law recognises that managers can be crooked or disloyalit places a lot of
weight on the duties of loyalty and due care but
it takes the view that more harm than good will be
done by acting as if all managers are routinely
disloyal to investors.
Ghoshal would have approved of that, and he
would have been right. As his work here points out,
a vicious cycle can easily set in when investors or
outsiders treat managers of companies as inherently untrustworthy. Not only do they then have to
sacrifice some of their own returns to persuade
those managers to act in accordance with their
interests, but also they can end up cramping all
initiative. As Ghoshal puts it:
The managers task is to use hierarchical authority to prevent the opportunists from benefiting at the cost of others. To ensure effective coordination, managers must know what
everyone ought to be doing, give them strict
instructions to do those things, and use their
ability to monitor and control and to reward
and punish to ensure that everyone does what
he or she is told to do.
The board must take a similar attitude to the directors that it supervises. It is hard to imagine
much creative work taking place or wealth being
createdin such a company.
Shareholders, therefore, have to trust managers

March

more than agency theory suggests. First, as recent

events have shown, managers that are out to maximize their own returns rather than improve the
prospects of the company are likely to find a way to
achieve this, no matter what controls are put in
place or stock options plans implemented. Second,
a company run on the basis that nobody can be
trusted will be a dysfunctional place that has little
chance of achieving anything much for its shareholders, let alone its customers or those who work
there. And third, there is no choice, for trust lies at
the heart of wealth creation. The genius of the
joint-stock company is that an investor need not
know how to innovate or create new products in a
particular industry. The point of the exercise is
trust: The investor gives up control to a manager
who can make decisions on his behalf that will,
more often than not, be better than those he would
have made for himself.
It is less obvious that Ghoshal was correct to
place so much emphasis on the role of academia in
encouraging both management selfishness and investor shortsightedness. He can hardly be blamed
for getting exercised about management theory: It
was the professional world that he inhabited. No
doubt a lawyer or an investment banker (perhaps
even a journalist) could equally find traits in their
own professions that encouraged the excesses of
the 1990s. Still, his argument must be addressed on
its own terms, and my view is that he is half-right.
The element that is dubious is the notion that, in
the past 2 decades, business schools have sent out
into the world a group of MBAs that would have
been honorable under different circumstances, but
were inculcated into nastiness by agency theory
and other academic tenets. Frankly, it is more
likely that they learned to be selfish at their mothers knees, and no business school lessons would
have made them nicer.
Still, he was justified in his broader point. The
ethical code under which businesses and managers are expected to operate does matter. There will
always be examples of abuse, but a society that
glorifies such abuse will reap worse consequences. Managers were encouraged to measure
their contributions in terms of personal financial
wealth and the number of mergers and acquisitions in which their enterprises were involved.
Sure enough, everybody soon wanted their own
tracking stock and their own options. And the reality is that human beings are capable of behavior
that is other than self-interested. They work for
companies not only because of the financial rewards or the status it gives them but also because
their work is fulfilling, or they believe in a cause.
One has only to observe the success of the Open

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Gapper

Source software movement to realize that not everybody is always motivated by self-interest.
What this means for academic theory and business schools is open to debate. Ghoshal was in the
early stages of thinking it through, and his own
suggestions are tentative. Still, he performed a
valuable service before his death both to pose
these questions, and to challenge the absolutist
view that companies must simply be run to maximize short-term shareholder value and organized
to limit the potential for their own managers to
waste money. Ghoshal was an optimist about the
corporation and also a pragmatist. He believed
that companies would both create wealth and do
good for society if managers were allowed to display initiative, but he had no utopian vision for
how they should be organized. Similarly, although

103

he believed that his own profession had fallen into

an ideological trap, he had no blueprint for how to
correct it. He simply thought that he and his colleagues ought to do better.

John Gapper is chief business

commentator and associate editor of the Financial Times. He
has a BA from Exeter College,
Oxford, in Philosophy, Politics
and Economics and has been a
Harkness Fellow of the Commonwealth Fund of New York at
the Wharton School of the University of Pennsylvania. He is
author of All That Glitters, an
account of the collapse of Barings bank.