Agents of Fortunes

Scholars clash over whether an emphasis on maximum shareholder profit in business education is to blame for corporate malfeasance

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Opinion: The Broken M.B.A.

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By KATHERINE MANGAN

In the movie Wall Street, a ruthless and corrupt corporate raider named Gordon Gekko delivers an impassioned speech to a paper company's stockholders that outlines the freewheeling philosophy that has made him rich.

"The point is, ladies and gentlemen, that greed, for lack of a better word, is good," he says. "Greed is right. Greed works ... and greed — you mark my words — will not only save Teldar Paper but that other malfunctioning corporation called the U.S.A."

Greed has also fueled a spate of notable corporate scandals — Enron, WorldCom, Arthur Andersen, and Tyco — in recent years.

That trend has some observers arguing that today's business schools, by elevating shareholder profit above social benefits and other concerns, may have unintentionally become breeding grounds for a generation of Gordon Gekkos.

After all, prominent Enron executives caught up in that scandal, including the former chief executive, Jeffrey K. Skilling (convicted of fraud and conspiracy last month), and the former chief financial officer, Andrew S. Fastow (who pleaded guilty to wire and securities fraud in January 2004), had M.B.A.'s from prominent business schools — Harvard and Northwestern Universities, respectively.

Business-school leaders, however, say it is not fair to blame institutions for the shady dealings of some of their graduates, though they have introduced a flurry of ethics courses for their students in recent years.

Just as important, they add, is that business education's emphasis on the virtues of maximizing shareholder value is a central pillar of contemporary economic theory, and it remains a useful tool for understanding and resolving conflicts of interest among stockholders, managers, and other players in a company.

Michael C. Jensen, an emeritus professor at Harvard Business School, says that teaching the primacy of the shareholder in corporate thinking doesn't make students corrupt.

"There is no doubt that there have been many more incidents of inappropriate behavior in the business world in the last decade," he says, "but those who attribute that to a problem with the M.B.A. degree or what's being taught in business schools will have a tough time explaining it."

One of Mr. Jensen's former students — Rakesh Khurana, an associate professor of organizational behavior at Harvard Business School — is taking a stab at explaining the link at a symposium on values and free enterprise to be held this week at Harvard.

Scholars at the interdisciplinary forum — which is the fourth in a series of meetings organized by the Gruter Institute for Law and Behavioral Research with support from the John Templeton Foundation and the Alfred P. Sloan Foundation — will employ legal arguments, economic analyses, game illustrations, and even primate behavior to discuss ways in which honesty and integrity can become central to the way businesses run and business schools teach.

In a paper to be delivered at the symposium, Mr. Khurana and Herbert Gintis, a game theorist and professor emeritus of economics at the University of Massachusetts at Amherst, observe that "the founders of business schools never envisioned the notion that the sole purpose of the corporation was to serve only one master — the shareholder."

While advocates of shareholder primacy say that a focus on the bottom line leads to an efficient and profitable company, Mr. Khurana and Mr. Gintis counter that the theory "creates a corporate atmosphere that legitimizes a culture of greed in which managers are encouraged to care about nothing but personal gain, and in which such human character virtues as honesty and decency are deployed only contingently in the interests of personal material reward."

John J. Fernandes, president and chief executive of AACSB International: the Association to Advance Collegiate Schools of Business, agrees that most business schools have overemphasized the importance of shareholder profits over the past few decades.

But he says ethics and corporate responsibility have made significant inroads into the curricula over the past five years.

"An important theory of business is maximizing profits — companies have that responsibility to shareholders," he says. "But not at any cost. A company's reputation is hard-earned and easily lost."

Learning by Numbers

Still, many students graduate with their eyes fixed firmly on the bottom line. Four years ago, the Aspen Institute — a nonprofit policy-research group — published the results of a study of nearly 2,200 M.B.A. students from 13 major business schools. The study found that M.B.A. students who entered business school thinking a company's main focus should be on customer needs and product quality said that by the time they graduated, their own priorities had shifted to "shareholder value" (The Chronicle, September 20, 2002).

Those students could also be learning more than a change in attitude. Enron executives who used shady accounting tactics to hide losses were probably using techniques "premised on tools students had learned in business schools," Mr. Khurana says. "If universities and business schools just educate people with highly sophisticated financial and technical skills without the underlying values, then they're educating mercenaries and unleashing potentially dangerous members of society."

Mr. Khurana and Mr. Gintis believe that human behavior isn't always determined by a cool calculation of financial costs and benefits. They believe many people will, in fact, sacrifice some personal gain in order to maintain trust and loyalty among their co-workers, and that that ought to be better reflected in M.B.A. classrooms.

Mr. Khurana draws on his own experience starting an Internet consulting firm before beginning a doctorate in organizational behavior and an M.B.A. at Harvard. He and the other founders were interested in finding new ways to help companies solve business problems, and not just in making money, he says.

"We wanted to create a work environment that tapped into our employees' desire to change the world, by changing the way people used technology," he recalls.

At Harvard he took a course from Mr. Jensen, who taught that profit maximization should be a company's main priority. Even though "we disagreed about just about everything," he considers Mr. Jensen "a fantastic teacher, close adviser, and friend."

At the core of the battle over business schools' reliance on the traditional view of maximizing shareholder profit are conflicting views of human behavior. The classical theory (often referred to as "agency theory") that dominates today's business schools sketches out a model of corporate directors as "agents" of the shareholders with an ethical duty to perform actions that keep stock prices high, and to not squander time on the golf course or at three-martini lunches. In turn, the directors create financial incentives, such as stock options, to ensure that managers focus on increasing company profits.

But Mr. Khurana, Mr. Gintis, and other critics have used game theory and behavioral studies to arrive at different conclusions about what motivates economic decisions. One of the more entertaining demonstrations took place at Emory University in a cage containing two hungry capuchin monkeys.

"Classical economics views people as profit maximizers driven by pure selfishness," Frans B.M. de Waal, a professor of primate behavior and psychology at Emory, wrote last year in an article in Scientific American. But as descendants of group-living primates, humans have innate incentives to share and cooperate — a view reflected in a burgeoning field known as behavioral economics.

Mr. de Waal observed those tendencies in experiments conducted at the Yerkes National Primate Research Center, in Atlanta. Researchers began by placing two cups of food on a tray in front of two female monkeys named Sammy and Bias. Because the tray was so heavy, both monkeys had to pull on a bar attached to the tray to bring the food toward them. When Sammy, demonstrating the greedy impulses that have sunk many a CEO, grabbed the cup and released the bar, the tray snapped back, out of reach of a now hysterical Bias. After munching for a moment, Sammy helped Bias pull the tray so the other monkey could get her reward.

This parallels a human economic transaction because it demonstrates "cooperation, communication, and the fulfillment of an expectation," Mr. de Waal writes. Their behaviors are influenced not just by rational thoughts, but by emotions that "preserve the spirit of cooperation."

Ethical Education

Lynn A. Stout, a professor of law at the University of California at Los Angeles and an expert on corporate governance, also is using behavior to challenge the shareholder-primacy approach emphasized at business schools. She argues that businesses lose public trust and damage employee morale when they base decisions solely on how they will affect shareholders' profits. Companies are more likely to succeed, she argues, if they follow a "team production" approach in which the interests of shareholders are balanced with those of other parties, including employees and customers.

"The tough part is getting business-school professors to focus on it," she says. "We're asking them to move on from a simple 'earth is flat' theory of the corporation that's so easy to describe and apply. There's more to the corporation than the simple problem of getting the directors to do what the shareholders want them to do."

Teaching ethics to M.B.A. students is a start, as long as it is applied across the curriculum, she says. "Students are taught that ethics is a noneconomic concern, the mushy, moral part that they're supposed to throw into the mix," she says. "When they're deluged with an emphasis on economic concerns in 90 percent of their courses, the ethical component goes in one ear and out the other."

While some business schools offer a single course in ethics, Harvard has integrated it into many of the school's required and elective classes, and into more than 500 case studies. Posted on the wall of every classroom is a set of "community standards" that include "respect for the rights, differences, and dignity of others," "honesty and integrity in dealing with all members of the community," and "accountability for personal behavior."

Lynn S. Paine, a professor of business administration, chairs Harvard's required first-year M.B.A. course on leadership and corporate accountability, introduced in 2004. Students practice making decisions that are economically, legally, and ethically sound in stressful and ambiguous situations.

"All of our cases involve decisions on which reasonable people could and do disagree," says Ms. Payne. "The point is not to give a series of correct answers to difficult decisions, but to encourage students to develop a framework for decision making."

Blame Games

Some scholars, including Richard A. Posner, a federal judge and senior lecturer in law at the University of Chicago, contend that it is a waste of time to preach to business students about ethics. He believes that students should, however, be taught the boundaries over which ethical lapses cross the line into breaking the law.

"If you don't punish people for breaching ethical standards, those standards aren't going to have much effect," he says. "This is a commercial society. Having money is the surest path to prestige in the United States, and the people who go into business accept this social standard that money is the measure of your worth. You can't expect them to be the first to sacrifice their commercial opportunities in order to make a moral gesture."

Mr. Posner sees nothing wrong with encouraging business students to take ethical stands if it translates to good public relations, and, consequently, a healthier bottom line.

"If you're in a competitive environment, you the manager can't afford to be altruistic in the sense of sacrificing efficiency to achieve social goals," he says. "If you do that, your company will be less profitable, the shareholders will squawk, and you'll lose managers to more profitable companies."

Mr. Gintis and Mr. Khurana argue that business students should have the same sense of social responsibility that members of other professions have. "If you're a doctor, you don't decide how to treat a patient based on how much money you're going to make off the case," says Mr. Gintis, now a researcher affiliated with the Santa Fe Institute, an interdisciplinary research and education center.

Students should also learn to consider the impact their actions might have on their professions. Says Mr. Gintis: "I don't think people like Skilling would take the chances they did if they thought their peers would view them as rats who were besmirching the image of business."

Mr. Jensen believes that many of the critics of business schools are oversimplifying the problem. "People are frustrated because they can't solve these problems as quickly as they'd like and they're reaching out with simple solutions," he says. But he adds that the discussions at Harvard should be illuminating.

"We're going through a period in which people are thrashing around for solutions to some very difficult problems," he says. "I'm looking forward to hammering away at it."