March 30, 2008

Lessons for Business Schools (4)

Lessons for Business Schools by Andrea Gabor
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In his account of the history and social mission of business schools, Khurana, an associate professor at HBS, calls for a return to the social and educational aspirations first articulated by Wallace Donham and Chester Barnard. He charges that business schools, by embracing the strictures of investor capitalism and the primacy of maximizing shareholder value, have abandoned their professional mission. Khurana places the blamefor that development squarely at the feet of those who promoted agency theory.

A reflection of the growing power of economists in business schools, agency theory served to justify both the latest buyout wave and the proliferation of stock option grants as employee incentives, and shifted the focus of education from training general managers to training financiers and professional investors.

Students flocked to the fields of finance and consulting, which led to the most lucrative jobs, and away from general management, and Khurana shows how the now ubiquitous rankings of business schools also exerted a kind of perverse market logic. By measuring schools in part on such nonacademic criteria as the number of job offers graduates received and their starting salaries, the rankings fueled the race for high earnings and reinforced the bottom-line raison d’etre of a business education.

And Khurana demonstrates how the language of business — rather than education — came to dominate the thinking of educators, who now refer to students as “customers,” curricula as “value propo­sitions,” and the MBA degree itself as “a product.” Gone is even the pretense of a larger social or intellectual mission.

Back to PracticalityWith its reductionist outlook — all human motivation boils down to self-interest — agency theory is also out of step with a new recognition of the complexity and context of business organizations. Another wave of books and articles takes aim at many of the popular myths and ideologies that business school research helps perpetuate. These works call for renewing the practical relevance of management research. And they argue for developing a better understanding of the nuances inherent in the best management practices, which often reside at the intersection of art and science.

In a 2005 Harvard Business Review article, “How Business Schools Lost Their Way,” Warren Bennis and James O’Toole, both professors at the University of Southern California, charge that nearly half a century of “physics envy,” in which business schools have increasingly stressed scientific rigor in academic research, has led to a body of knowledge that lacks practical relevance for businesses. It is time, the authors suggest, to pursue a more multifaceted approach to research that balances abstract scientific inquiry with empirical research based on real-world experience, ob­servation, and judgment.

Phil Rosenzweig, in The Halo Effect…and the Eight Other Business Delusions That Deceive Managers (2007), also trains his eye on the failures of much business school research, offering a thoughtful and compelling analysis of why some of the most heralded research on business performance, much of it written by prominent professors who rely on empirical research, is highly flawed and rarely predictive of long-term company performance. Rosenzweig, a professor of management at IMD business school in Lausanne, Switzerland, uses the myth of the CEO savior to demonstrate how both journalistic and scholarly re­search is often influenced by faulty assumptions.

Most research, he argues, is simplistic in that it tries to isolate a single variable — such as the impact of CEO tenure on corporate performance — when, in fact, other factors, including market position, technology, and labor contracts, can play decisive roles. A related research problem involves oversimplifying cause-and-effect re­lationships by overemphasizing one dominant phenomenon; this is known as the halo effect.

Faulty research and abundant reliance on the halo effect explain why the companies singled out by Tom Peters and Robert Waterman in In Search of Excellence and Jim Collins and Jerry Porras in Built to Last lost their luster when the business climate changed. In what Rosenzweig describes as the “delusion of connecting the winning dots,” Peters and Waterman made the mistake of studying a sample made up entirely of successful companies.

The only way to discover what makes a company excellent, Rosenzweig points out, is to compare it to companies that are not excellent.

Collins and Porras managed to avoid that mistake when they conducted the research for their book, an effort that involved examining 200 companies and reading more than 3,000 documents, including case studies and journalistic ac­counts.

But they fell victim to the “delusion of rigorous research,” says Rosenzweig, who ex­plains that many of the sources used by the authors, such as press ac­counts, had already been tainted by the halo effect.

Rosenzweig concludes that the research behind a number of popular business books is “deeply flawed as science,” yet those books provide inspiration and comfort for readers. He warns that these works often “focus attention on the wrong priorities” and have the potential to lead managers astray. Business, he notes, is not nearly as amenable to “engineering” as managers and researchers would like to think.

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