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Business schools for scandal

Sun, 28th Mar 2004

O NE OF Gordon Brown's odder budget ideas was the scheme to allow new graduates of the world's top 50 business schools to come to the UK to work for a year. Most of these establishments being American, this is presumably a very New Labour attempt to jolt British management by mainlining a shot of transatlantic enterprise culture.

The Chancellor should be careful what he wishes for. The business schools which validated the enterprise culture were also the ones that gave us Enron, Tyco and 'Chainsaw Al' Dunlap. More generally, they are at least partly to blame for the paralysing cynicism with which the public has come to regard all companies and their managers.

That's a serious indictment, but it's not mine. The charge sheet is much more formidable because it was hammered on the door Luther-like by one of business academia's own. When he was struck down this month at the tragically early age of 55, London Business School Pro fessor Sumantra Ghoshal was working on a project which took issue with just about everything currently being done in management - including and especially the role of business academics.

Ghoshal's challenge can't be shrugged off as revolutionary ideology or a woolly idealism. Originally a physicist and a genuine management heavyweight, he was a meticulous researcher who never stopped observing and questioning why managers and companies acted as they did. Why, he wanted to know, were managers so busy shooting themselves in the foot, behaving in ways that wrecked their own legitimacy and that of their companies?

Why, instead of nurturing their organisations as engines of progress, were they turning them into vehicles of exploitation and coercion, apeing markets, creating monopolies, ripping off customers and forcing employees to work ever harder while their top managers helped themselves to truly breathtaking quantities of pay?

Reluctantly, Ghoshal had come to the conclusion that the culprit was none other than the academy itself: 'We - as business school faculty - need to own up to our own role in creating Enrons,' he wrote in one of his last pieces. 'It is our theories and ideas that have done much to strengthen the management practices we are all so loudly condemning.'

Recent company excesses, Ghoshal argued, had their roots in ideas developed in business schools over the past 30 years. If managers were seeking ever- more inventive ways of boosting share prices, paying themselves over the odds for doing so and offloading the costs on to society, they were just doing what business-school courses on strategy, transaction cost economics and agency theory had taught them.

Neither was it surprising that policy-makers framed their responses in the same destructive terms. Corporate governance prescriptions are based on agency theory, for instance, with no shred of evidence that they will improve outcomes, while the Chancellor is eagerly laying out the welcome mat for clever people brilliantly trained in the very things that got us into trouble in the first place.

How did the business schools come to create today's management Frankenstein? Ghoshal traced it back to the unspoken academic project to make business studies 'respectable' by removing the subjectivity of analysing company behaviour in terms of human choices and actions, instead looking for explanations in impersonal patterns and laws - a kind of business physics.

The pretension to science has far-reaching consequences. By definition, it excludes moral or ethical dimensions from management since they are about intentions which cannot be modelled or quantified. By the same token, it can only admit strictly economic motivations, precisely because they can be quantified. Establishing shareholder value as the one true end of management allows all the complex variables that go into corporate life to be reduced to a neat set of equations. ( Mutatis mutandis , it is the same kind of economic determinism that allows Brown to assume that merging the Inland Revenue and Customs or axing 20,000 jobs at the Department of Work and Pensions are simple mathematical formulae: DWP - 20,000 = x % efficiency gain.)

But in any case, trying to make human organisations fit the causal logic of physics is an egregious error. The laws of physics are blind humans and their organisations have intentions and choices and employ strategy - one step back, two steps forward - that aren't available in the natural sciences. It not only doesn't fit with what happens in practice it's wrong even in theory.

There's a final savage twist to the infernal circle in which academics and managers find themselves entwined. Social scientists carry an even greater social and moral responsibility than their colleagues in the physical sciences, argued Ghoshal. If in physics you theorise that a brick dropped off a tall building could fall upwards, you'd get some funny looks - but it wouldn't affect the trajectory of the brick.

In the social sciences on the other hand, if enough people believe it, a 'wrong' theory can become 'right' - exactly what has happened in management. Thus, managers who treat people as opportunistic chancers encourage opportunism that justifies ever tighter controls. Governance that assumes managers can't be trusted to maximise shareholder value without hefty incentives, breeds managers who require huge stock options. Strategy based on the idea that maximising profits involves a battle for value with employees, partners and society generates corporate monsters such as Enron which do in fact distort competition and eventually destroy themselves.

When he died, Ghoshal was challenging academic colleagues not only to stop creating Enrons but to start constructing positive and realistic theories that would be the building blocks for a better corporate world. Many were responding. Contributing to this endeavour is probably not what Brown had in mind for his business-school recruits, but there could be no more urgent task or fitting memorial.

The Observer, 28 March 2004


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