“We pretend to work, they pretend to pay us.” The wonder of the Soviet system was its design and duration. A deeply flawed design meant Soviets played “Let’s pretend” for 70 years. It’s a similar challenge in business schools. They pretend to teach ethics, students pretend to pay attention. The wonder is that B-Schools have endured for 130 years. Recent crises might present an opportunity to make them better.
Recent graduates like Harvard M.B.A. Jeffrey Skilling have tarnished B-School reputations. “Many have blamed business-school education for creating the mind-set to manipulate the financial system and critics,” writes Diana Middleton in the Wall Street Journal. James Ellis, dean of the University of Southern California’s Marshall School of Business, says, “We taught our students how to look for cracks in the economy and we taught them how to exploit” them. Now a slate of new deans have a new message.
Harvard Business School, Northwestern’s Kellogg School of Management and Yale University’s School of Management all named new deans recently—and University of Chicago’s Booth School of Business and University of Michigan’s Ross School of Business are both in the midst of searches. “The old message of business schools was that ethics and values was an add-on,” says Judith Samuelson of the Aspen Institute. The new message is a focus “on ethics, of course, but also social responsibility,” adds Sally Blount, the recently appointed Kellogg dean. Rakesh Khurana might be dubious. He’s an associate professor in organizational theory at HBS and author of From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession. Khurana points out a design flaw in B-Schools.
It goes back to 17th century Europe. After centuries of religious wars, scientists of early modern Europe “conceptualized a basis for knowledge that promised deliverance from murderous conflicts inspired by religious dogmatism,” writes Khurana. This marked the decline of the liberal arts college and the inception of the research university. Academic disciplines became specialties. But there was no business major, since small businesses “were about all there were, even though they were inherently unreliable and inefficient,” writes Khurana.2 Big Business emerged in the late 1800s, “a volatile period of “nationalization, industrialization, mechanization, [and] urbanization,” Robert H. Wiebe writes. Yet America “was a society without a core. It lacked those national centers of authority and information which might have given order to such swift changes.”3
Science stepped in and offered “a framework within which to resolve the social conflicts caused by… the rise of the large corporation.”4 As Harvard’s Wallace B. Donham put it, “the explicit objective was to raise business to the status of professions such as the clergy or law so that it could fulfill the social functions that these once-revered institutions were no longer equipped to perform.”5 This led to the founding of the Wharton School at the University of Pennsylvania in 1881.
The “higher aims” of business schools were to create “a managerial class that would run American’s large corporations in a way that served the broader interests of society rather than a narrowly defined one of capital or labor.”6 Managers were B-Schools’ new idea. But when “salaried managers first appeared in the large corporations of the late nineteenth century, it was not obvious who they were, what they did, or why they should be entrusted with the task of running corporations.” Cue science.
Scientific management developed the theory of agency. The role of the manager was to act as an agent representing the shareholder’s financial interests by increasing worker efficiency. It’s a model built purely on economic interest rather than an accurate assessment of human nature. Science ignored what scripture says—you only manage assets, animals, and appetites. You don’t manage people. The theory of agency made ethics a charade. It would make cash king and “corporate culture” a poor pauper.
Khurana’s book traces this decline from higher aims to hired hands. He describes business schools as “a professionalization project undertaken, transformed, and finally abandoned over a period stretching from the founding of the Wharton School at the University of Pennsylvania in 1881 up to the present.”7 The decline was immediate as most university faculty viewed “management” as a pseudoscience. They feared graduates who could read spreadsheets but not Shakespeare. Economics but not ethics. While George F. Baker’s gift of $5 million to Harvard Business School in 1924 was greeted with gratitude by the school’s administration, the Harvard College graduate who would design the new HBS campus derided it with this bit of doggerel.
Fair Harvard! I hear that you’ve been such a fool
As to start a ridiculous Business School
Where ‘Grocery 2’ and Butchery 4’
Take the place of the classics you taught us of yore.
Pseudoscience is why B-Schools have been called “ill-defined institutions.” They tack between conflicting management mantras. In the 1930s, it was “human relations.” During World War II, it was the rational model of expediency and efficiency. But by 1958 it was reported that B-School graduates lack “an interest in connecting what they were learning in business school with the larger concerns of society.” By 1959, a Ford Foundation report called business schools “the slums of the educational community.”
In 1977, Alfred D. Chandler, Jr. codified agency theory in The Visible Hand. It replaced Adam Smith’s unreliable “invisible hand” with the “visible hand” of executive managers. This, writes Khurana, “represented a kind of Darwinian triumph” in the sense that Chandler argued organizations survive not so much because of good people but because organizations perform some function more efficiently than others do.
Agency theory dissolved the idea that executives should be held—on the basis of notions such as stewardship, stakeholder interests, or promotion of the common good—to any standard stricter than sheer self-interest.8
This is why research in the 1970’s indicated students in higher education generally were becoming increasingly interested in reaping large financial rewards from their education. Fortune magazine noted that the elite MBA had become the ticket required for the exe. suite. In 1978, The New York Times described a Harvard MBA as a “golden passport” to financial well-being. In 1980 a famous HBR article suggested B-Schools contribute to “Managing Our Way to Economic Decline.” A few years later, a new theory suggested the solution was a distinction between “leaders” and “managers.”
But what if the solution isn’t managers? What if the theory of agency is the problem? Without replacing this fundamental assumption—making financial return the yardstick for measuring the success of “corporate culture”—managers will keep pretending to teach ethics and workers will keep pretending to pay attention. The solution is revamping not only our ideas about work and corporation but also rebuilding the institutions that graduate our corporate leaders. How about a business school based on an accurate understanding human nature?
1 Diana Middleton, “B-Schools Try Makeover: Harvard and Other Elite Institutions Hire New Deans; the ‘M.B.A. Oath’” Wall Street Journal, May 6, 2010, B5.
2 Rakesh Khurana, From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession (Princeton, NJ: Princeton University Press, 2007), p. 24.
3 Robert H. Wiebe, The Search for Order: 1877-1920 (New York, NY: Hill and Wang, 1967), p. 12.
4 Khurana, Higher Aims, p. 55.
5 Khurana, Higher Aims, p. 117.
6 Khurana, Higher Aims, p. 4.
7 Khurana, Higher Aims, p. 7.
8 Khurana, Higher Aims, p. 323.