Summer 2008

Getting Down to Business

– Nicholas Carr

Nicholas Carr on American business schools.

During the prosperous years after World War II, the executives who headed Amer­ica’s corporations tended to be anonymous bureaucrats. They saw themselves as the stewards of the organizations they ran, having a mix of commercial and social responsibilities. Then came the economic shocks of the 1970s, when the dominance of American corporations ap­peared to be crumbling. Under pressure from Wall Street financiers and deal makers, executives began to adopt a ­single-­minded focus on boosting profits in order to “maximize shareholder value.”

As late as 1990, the Business Roundtable, an influential group of ­big-­company chief executives and directors, still defined the role of executives as balancing the interests not only of shareholders but also of “customers, suppliers, creditors, the com­mun­ities where the corporation does business, and society as a whole.” By 1997, the Roundtable was singing from a different hymnal. Management’s duty was to stockholders. Period. “The notion that the board must somehow balance the interests of other stakeholders fundamentally misconstrues the role of directors.”

The rise of what’s now called “investor capi­talism” had many causes, ranging from the expansion of free trade to the decline of labor unions to the public’s growing fascination with the stock market. But as Rakesh Khurana explains in From Higher Aims to Hired Hands, his panoramic his­tory of business education in the United States, it was academia that provided the intellectual rationale, and the cover, for management’s transform­ation. In the late 1970s, a small group of business­school professors promoted, with much fanfare, the “agency theory” of management. Corporations exist, they argued, to increase the wealth of their shareholders, and the fundamental role of mana­gers is to act as the representatives, or agents, of the shareholders. The best way to align managers’ and shareholders’ interests is to tie managers’ compensation to the company’s share price, through, for instance, big grants of stock and stock ­options.

Agency theory, as it came to be embedded in the operations and compensation policies of busi­nesses, turned outsized greed into a desirable and often glorified personality trait for executives. The extent of an executive’s greed was, after all, a manifestation of the extent of ­his—­or, very rarely, ­her—­commitment to boosting share prices. As the pursuit of riches intensified, we saw waves of mergers and layoffs, the arrival of celebrity CEOs such as Jack Welch, and, between 1980 and 2003, a sixfold increase in executive pay. We also saw a surge in corporate scandals, as the monomaniacal pursuit of higher stock prices undermined managerial ethics. Celebrity sometimes ended in a perp walk.

Though born in business schools, agency theory represented a repudiation of the founding ideals of those schools. The first university-based business schools—Wharton at the University of Pennsylvania, Tuck at Dartmouth, and Harvard’s Graduate School of Business Administration—were established around the beginning of the 20th century. As Khurana documents, in fascinating detail, these schools saw it as their mission to upgrade management from an occupation to a profession. Managers were to join doctors and lawyers as the elite university-trained professionals who would apply their specialized knowledge for the benefit of society. In a 1908 address announcing the opening of Harvard’s business school, the univer­sity’s president, Charles W. Eliot, declared that “business in its upper walks has become a highly intellectual calling, requiring knowledge of lan­guages, economics, industrial organization, and commercial law, and wide reading concerning the resources and habits of the different nations.”

Khurana, himself a Harvard Business School professor, bemoans the loss of this idealized view. Today, he writes, the MBA degree is often viewed as “a ‘product’ that business schools simply sell to consumers.” Most business ­school graduates eschew managerial jobs altogether, opting instead for more lucrative posts at consulting firms, in­vest­ment banks, hedge funds, and private equity houses. “With little or nothing to be gained in the marketplace from reputations for intellectual rigor or educating students in the social re­spon­sibilities of management,” he writes, “busi­ness school admin­is­trators are now challenged primarily to demonstrate that their schools provide access to ­high-­paying jobs.”

It’s hard not to share Khurana’s disappoint­ment. At the same time, his lament echoes the naiveté evinced by the founders of the first business schools. Of the many quotations that pepper Khurana’s book, the most salient may be from a speech the so­cial critic John Jay Chapman gave at a 1924 dinner celebrating the recently launched Harvard Business Review. “My friends,” said Chapman, “the truth is that business is not a profession; and no amount of rhetoric and no expenditure in circulars can make it into a profession. . . . A School of Business means a school where you learn to make money.”

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Nicholas Carr, a former executive editor at Harvard Business Review, is the author most recently of The Big Switch: Rewiring the World, From Edison to Google, published earlier this year. 

Reviewed: "From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession" by Rakesh Khurana, Princeton University Press, 2008. 

Photo courtesy of Flickr/plantoo47