<p>...Here we have two books in the space of five years, by two eminent professors at the worlds most famous business school suggesting theres something deeply wrong with what and how they teach. The long-term outcomes arent what they should be. And of course, this has nothing to do with spreadsheets or marketing plans. The rot is in a culture that leads to the warped economic and personal behaviors the two men describe....</p>
<p>B-School</a> Culture: A Plea for Change - Businessweek</p>
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<p>Business schools cannot simply due to the environment.</p>
<p>It’s incredibly hard to gauge one’s character through a classroom and limited contact.</p>
<p>Now take, for example, the Army’s Ranger School. Students there eat and breathe beside each other for 8+ weeks (depending how many times they are recycled). It’s a closed environment. Everyone is tired, hungry, and mentally exhausted. The lesson to take away from those who have experienced this is how to lead and follow under tremendous pressure. You will see who will and who won’t take short cuts, back-stab others, etc. when you are around them 24/7 for 8+ weeks.</p>
<p>Business school cannot replicate that experience and neither can any environment where you do not have eyes-on 24/7.</p>
<p>Now, I’m not saying the Army does a better job of “weeding” morally-challenged members out. I’m simply saying that it creates an environment where you can see one’s true colors.</p>
<p>Actually, having read Khurana’s books and articles, I believe I can channel his sentiments. The issue is not the character of the students that business schools admit, nor the inability to reproduce an environment of comparable intensity and collaboration as the Army Ranger School. </p>
<p>Rather, the problem that concerns Khurana is that business schools may actually be encouraging the primacy of shareholder value above all. They emphasize the treatment of firms are mere profit-generating institutions and nothing more, and by extension, the treatment of employees as nothing more than assets. Suggestive evidence indicates that business school students emerge more likely to engage in ethically questionable, ‘profit-maximizing’ behavior than when they had started the program. Certain business strategy and economics courses are particularly pernicious for they specifically teach you to seek maximum payoffs.</p>
<p>Umm, the goal of a business is to maximize shareholder value above all. A firms main goal is to make as much profit as possible, within the realm of the law. </p>
<p>Employees are free to pursue other employers if they feel they are underpaid or not treated fairly.</p>
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<p>Umm, no it isn’t. Or, at least, that’s far from clear and has indeed been a topic of extensive debate within the business ethics community for decades, perhaps even centuries. Your logic essentially justifies every rapacious activity that firms have engaged in repeatedly throughout history, as long as that the activity is technically legal. For example, tobacco firms should be encouraged to do whatever they please in those countries that just happen to have weak or non-existent anti-tobacco regulations. The British East India Company was perfectly justified in establishing military control over and repressing native Indians and instigating both Opium Wars that not only forbade China from attempting to stop the opium trade, but also forced them to cede Hong Kong. {The historical analogy would be, in response to US laws forbidding cocaine, Colombia not only declared war on and defeated the US, but also forced the US to surrender Manhattan.} After all, there was no law against what the East India Company was doing. Indeed, they were the law. Similarly the United Fruit Company was perfectly justified in violently suppressing labor movements and supporting military coups and dictatorships in Central America, because there was no law forbidding such activities. {Again, that’s because they were the law.} The term ‘banana republic’ originated from the deep ties of Central American regimes with United Fruit. </p>
<p>The fact that you asserted the primacy of profits above all within whatever legal regime the firm happens to be operating within - even if the firm itself created that legal regime - I think actually speaks to the core of the problem. I doubt that you developed that stance by yourself. Somebody taught that to you - probably Milton Friedman or one of his acolytes. But just because Friedman or anybody else taught you something doesn’t necessarily make it right. The true goals of any business are necessarily subjective. </p>
<p>Indeed, we can see such non-profit-maximizing behavior even today. Many small businesses were started not because the proprietor actually wants to maximize his profits. Heck, I know many proprietors who freely concede that they would probably generate more income if they worked for somebody else. What they enjoy about running their own business is being their own boss, setting their own hours, and being free to choose the clients that they like.</p>
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I agree with you Sakky. I believe business schools may be a facilitator of that mentality and they should be responsible for such. However, I doubt they are completely life altering in the sense of modifying one’s ideology. Culturally, America is to blame as well.</p>
<p>Perhaps this is why the demographics among top business schools has been changing in the last few years. There seem to be a lower % of those who previously worked in the financial sector.</p>
<p>Individuals are free to do as they please. If someone wants to start their own business they do not have to maximize profit, they are simply maximizing their utility. Publicly owned companies do not have that luxury. They are to maximize shareholder value, which in the majority of times means profit (within the realm of the law simply because long term profit maximization is risked with illegal activity). Companies are agnostic and should seek only profit. In certain circumstances they can deviate from this, but only if the majority of shareholders support this. </p>
<p>You have an opinion and that is fine, I have no problem with it. I am a strong follower of Friedman. If you want to sacrifice profits for better workers comp, above what the market would pay, that is fine. If you do it with my invested dollars, providing me with a return below what can be achieved, expected, or provided by a competitor, I will simply sell those shares and invest my capital elsewhere. As will many if not most market participants.</p>
<p>Furthermore, there is no right or wrong. We are all free, independent individuals. Also, Harvard could teach basket weaving in their MBA program and people would still go simply for the Harvard brand.</p>
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<p>Actually, even plenty of public companies probably do not maximize their profits, but rather serve largely at the whims of certain individuals. Facebook will IPO on Friday, but even afterwards and for the foreseeable future, Zuck will retain complete voting control of the firm through not only his dominance of Class-B voting supershares, but also through the agreements he has made with other investors to pledge the voting rights of their shares to him. Larry Page, Sergey Brin, and Eric Schmidt have similarly retained full control over Google through a similar dual-class share arrangement.</p>
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<p>Well, I suppose we’ll find out on Friday, but there certainly seems to be no shortage of investor interest in the Facebook IPO, despite the fact that everybody knows that not only is Zuck in full command of the firm, but also that whether he is truly driven to maximize the profits of Facebook, as opposed to simply pursuing technology projects of interest to him, is highly questionable at best. {Think about it - if you were worth nearly $20 billion while still only 28 years old, would you be driven to maximize profits? Or might you be more interested in other life goals?} </p>
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<p>Sure, but that doesn’t mean that Harvard Business School should teach something potentially deleterious to society. Indeed, the opposite is true. You said it yourself - HBS has the most established brand name in business education. HBS graduates have access to many of the most powerful positions in the world through. {HBS has already spawned one President of the United States, and this year has perhaps a 50% chance of having another.} It therefore behooves HBS to ensure that its students are taught the right lessons. But that obviously raises the question of what are the right lessons, which speaks to Khurana’s point.</p>
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<p>I believe it also bears mention that many (probably most) HBS grads will not be joining public firms anyway, or even if they do, won’t be there for long. The top employer of HBS grads in many years is McKinsey, a private firm answerable only to the partners. BCG likewise hires numerous HBS grads and likewise is answerable only to its own partners. Many other HBS grads either join VC/LBO/HF directly or after a stint at a (perhaps public) investment bank; very few VC/LBO/HF firms are public. Others will join/found tech startups, which if they ever do become public is usually around the time that they leave the firm as multi-millionaires. </p>
<p>The upshot is that even if you do believe that public firms should exist solely to maximize profits, that doesn’t inform the many HBS grads who find themselves working for private firms that may or may not maximize profits.</p>
<p>Facebook is having an IPO, doesn’t mean it is truly publicly owned. The float is very limited with MZ remaining in control. Even though, he will now face pressure from investors and the general market to meet earnings and profit projections. If Facebook wants to benefit from being in the market it will ultimately have to maximize profits for investors. </p>
<p>Yes, many people from top business schools will join private employers, many being in finance and consulting. Those people will do so out of a desire to maximize their own personal utility.</p>
<p>And you are correct, Harvard can teach whatever it wants, doesn’t mean it will change anything. I would suppose that if Harvard wants to really change things it would simply remove a concentration in finance, where most of the profit maximizing mantra emanates from.</p>
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<p>But that’s the question: does it really want to ‘benefit’ from being in the market? Facebook doesn’t really need to access capital from the public markets, as it is already a highly profitable and established firm. It seems that the main reason that Facebook is IPO-ing at all is to provide liquid wealth for the VC’s and especially the early employees. </p>
<p>I also question exactly how much pressure the public markets could ever place upon Zuck. By design, he controls the majority of the voting stock and therefore the board. The legal protections available to minority shareholder rights in breach of Zuck’s fiduciary responsibilites are the only leverage available to use against him; other than that, Zuck is essentially free to do with the company as he pleases. Indeed, Zuck has even written an open [letter</a>](<a href=“http://www.slate.com/articles/technology/technology/2012/05/facebook_ipo_the_social_network_is_getting_100_billion_you_ll_get_more_ads_.html]letter”>Facebook IPO: The social network is getting $100 billion. You’ll get more ads.)to the investment community that specifically states that “Simply put: we don’t build services to make money; we make money to build better services” - an outright declaration that he has no intention of maximizing Facebook’s profits. </p>
<p>Nevertheless, it seems to me that Facebook is going to be the premiere IPO event of the year, drawing widespread investor interest throughout the world. And even if the investment community eventually disagreed with Zuck’s leadership of Facebook and chose to divest themselves from Facebook - honestly, do you think he would really care? Even if Facebook’s market cap (and hence Zuck’s wealth) dropped by a whopping 95% from its expected Friday share price due to investor apathy, he would still be a billionaire. Honestly, once you’re past a certain level of personal wealth, money simply doesn’t matter anymore. </p>
<p>But like I said, that’s all predicted on the notion that the public markets are beneficial to firms in the first place. The entire premise of the private equity industry - a common destination for many HBS graduates - is that many firms are better off restructured and managed under private ownership, away from the prying eyes of the public markets, at least for awhile. Granted, I am also aware of the irony that some private equity fund managers are themselves publicly traded. Nevertheless, what is clear is that whether public markets and equity ownership are beneficial for any particular company is ultimately a case-by-case empirical question. </p>
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<p>But the question is, what are the motivations of those private employers?. Are those firms trying to maximize their profits? Maybe some are. But surely others are not. Like I said, private firms are subject to the whims of their owners, and owners often times aren’t highly incentivized to maximize profits, but rather are interested in other goals, whether they be status, social responsibility, or something else altogether. This is particular true when those owners are already rich. </p>
<p>Put another way, if public ownership was truly so beneficial for all firms, then why don’t McKinsey, BCG, and Bain - the ‘holy trinity’ of strategy consultants - become public companies? </p>
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<p>Or pair the teaching of the philosophy of shareholder primary with other philosophical views of corporate governance. Whether shareholder primacy is correct or not is a subjective, normative opinion that is ultimately unprovable.</p>