Business schools share the blame for Enron

By Sumantra Ghoshal
Published: July 17 2003 21:33

The corporate scandals in the US have stimulated a frenzy of activity in

business schools around the world. Deans are busy pointing out how much
their curricula focus on business ethics. New courses on corporate
social responsibility are being developed. Old, laudatory case studies
on Enron and Tyco are being rewritten to show how bad their senior
managers were. In earnest seminars and over lunch, faculty members are
asking themselves what more they must do.

Business schools do not need to do a great deal more to help prevent

future Enrons; they need to stop doing a lot that they currently do.
They do not need to create new courses; they need to stop teaching some
old ones. But first, faculty members need to own up to their own role in
creating Enrons. It is their ideas that have done much to strengthen the
practices they are all now so loudly condemning.

For decades, one of the most popular MBA courses at Harvard was taught
by Michael Jensen, the creator of agency theory. This course taught
students why, given the fundamental nature of "man", managers could not
be trusted to do their job - which, of course, was to maximize
shareholder value - and how to overcome "agency problems" by aligning
managers' and shareholders' interests and incentives. Making large stock
options an important part of managers' compensation was clearly one of
the most effective ways for achieving such alignment.

At Berkeley and Stanford, business students have been taught the

transaction cost economics developed by Oliver Williamson. In essence,
this argues that the only reason companies exist is because their
managers can exercise authority to ensure that all employees do what
they are told. Managers must ensure that staff are tightly monitored and
controlled - these courses described this as the exercise of "fiat" -
while creating sharp, individual-level performance incentives.

And wherever in the world one studies management, there is Michael

Porter's theory of strategy. This asserts that to make good profits, a
company must actively compete not only with its competitors but also
with its suppliers, customers, regulators and employees. Profits come
from restricting or distorting competition, bad though this may be for
society. It is one of the most important tasks that managers are paid to
do.

It is not only MBA students who have, for decades, learnt these
theories. Many thousands of executives have been taught the same lessons
on business courses. Even those who never attended a business school
learnt to think this way because these theories were in the air,
legitimizing some managerial actions and delegitimizing others and
shaping the intellectual background against which day-to-day decisions
were made. Is it any surprise, then, that executives in Enron, Global
Crossing and scores of other companies granted themselves excessive
stock options, treated their employees badly and took their customers
for a ride when they could?

Much of the problem has arisen from the excesses of business school
academics in pretending that business is a science. Not only economists
but also those in areas such as marketing and organizational behaviour
increasingly treat business as if it were a kind of physics, in which
individual intentions and choices either do not play a role or, if they
do, can safely be taken as being determined by economic, social and
psychological laws.

The problem is that, unlike theories in the physical sciences, theories

in the social sciences tend to be self-fulfilling. A theory of sub-
atomic particles does not change the behaviour of those particles. A
management theory, if it gains enough currency, changes the behaviour of
managers. Whether right or wrong to begin with, the theory becomes
"true" as the world comes to conform with its doctrine.

This is why it is nonsense to pretend that management theories can be

completely objective and value-free. Even if the theorists pretend to be
objective, the subjects and users of the theory cannot. 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 behaviour on the part of managers
and companies. It is time the academics who propose these theories, and
the business schools and universities that employ them, acknowledged the
consequences.

The writer is professor of strategy and international management at

London Business School