Mises Daily Articles
Beyond Grey Pinstripes?
Critics of free enterprise have set their sights on business schools, blaming them for recent corporate scandals. If only people like home goods retailer Martha Stewart and Enron's Jeffrey Skilling were taught business ethics during graduate school, they might not have committed their alleged crimes, or so the argument goes. The implication is that business schools are aiding and abetting accounting fraud and other misdeeds by failing to teach their students not to commit crimes.
The criticism of business schools plays into a common perception of capitalism as a lawless, under-regulated activity. Some business school representatives have even jumped on the bandwagon, engaging in self-criticism reminiscent of communist societies. Ian Mitroff, a professor at the University of Southern California's Marshall School of Business, confesses to some of the blame for the sensational misdeeds of Enron and Worldcom. "We [business schools] are guilty of being active accomplices and co-conspirators in their shoddy and criminal behavior." The lenient Mitroff does not advocate imprisonment or other harsh punishment for himself and other co-conspirators. Instead he demands that all business school deans write a collective apology for the corporate scandals in a full-page advertisement to be published in the New York Times.
The notion that educational institutions bear responsibility for the misconduct of their alumni many years or decades after graduating has been applied exclusively to the business world. Peccadilloes committed by politicians and government agencies do not evoke similar soul searching. When federal corruption was exposed at Amtrak, Social Security, and the Postal Service, we never heard of the Yale Law School or the John F. Kennedy School of Government being excoriated for the crimes of their alumni. When two students at Columbine High School went on a murder spree several years ago, no one suggested that the government-run school apologize for their atrocities.
Why has it become fashionable to label business schools guilty by association? Most likely, it is because social planners believe business schools are ideal places to indoctrinate future managers and executives. By infusing MBA students with left wing attitudes, these social planners envision a future corporate America devoid of scandal and committed to ideals other than profit.
The World Resources Institute and Aspen Institute are leading the charge to politicize management education. Their "Beyond Grey Pinstripes" program has published a survey of MBA students, Where Will They Lead? 2003 MBA Student Attitudes About Business and Society. The poll is being used as part of a strategy to promote a fundamental restructuring of business school curricula nationwide.
The survey results are hardly a scientifically accurate description of student attitudes. Few students will report to a pollster that they are uninterested in ethical business decision making. Nor will they report to be in favor of unethical business practices. The students polled probably realize that they are being asked loaded questions and want to sound intelligent with their answers.
Nevertheless, the survey purportedly finds that MBA students desire to learn more about "values-based decision making" than business schools currently teach. If the survey results are taken at face value, the students apparently feel their business school programs either do not teach them enough ethics or teach them unethical practices. Nearly half of the MBA respondents to the WRI/Aspen Institute survey purportedly believe that "the priorities communicated during business school" played a role in the recent corporate scandals.
It is hard to imagine how a student would honestly consider his own business school blameworthy. The basic disciplines of management are operations, finance, accounting, organizational behavior and marketing, none of which are designed to employ fraudulent or illegal methods. Each discipline is a rigorous, often highly quantitative approach to achieving successful results in business. Most business schools offer a supplemental course on ethics and/or legal compliance to make students familiar with basic business law and regulations.
The survey clearly assumes that ethics can be taught in a business school setting. But this assumption is highly dubious. A business school course in ethics is hardly going to transform an unethical person into an ethical one. An MBA student's ethical foundation is formed long before reaching graduate school, where the average age is about twenty-seven. If a twenty-seven year old is inclined toward morally repugnant behavior toward others, that individual is probably destined to attempt some kind of crime regardless of what a business professor might say. Some of the executives accused of corporate crime, like Martha Stewart, did not even attend business school.
The survey does not specify what business school priorities lead an otherwise ethical person to commit crimes on the job. Reading between the lines, the innuendo seems to be that profit maximization, or seeking out the highest return on investment for shareholders, is what causes managers to consider lying, cheating or stealing in the workplace. This, after all, is the story line of countless Hollywood movies in which businessmen are cast as villains.
The problem with this thesis is that profit maximization is not furthered by committing fraud. The shareholders of companies like Adelphia Communications, Tyco and Worldcom did not see their returns maximized by management criminality. If anything, economic profits were diminished by inept and/or corrupt managers. The managers who defrauded shareholders were clearly trying to enrich themselves at the expense of shareholders. The desire for profit maximization helped minimize the damage as the most profit sensitive shareholders detected warning signs early and sold their shares.
It would be ridiculous to assert that unethical conduct is taught or implicitly condoned in business school as a means of profit maximization. Management education is based on the notion of teaching students to create shareholder value through superior management practices. Every basic finance course teaches that the value of a public company is determined by the stream of future cash flows associated with its shares, in the form of dividends.
Society will always have its share of miscreants who will attempt to steal no matter what laws or academic courses are set up to discourage them. This is true even in government jobs where there is supposedly no profit motive to commit crimes. Altering business courses to de-emphasize or denigrate the profit motive will not change this reality.
While the WRI and Aspen Institute are quick to tag business schools with blame for corporate crime, they curiously ignore wider systemic failures. The SEC required public companies to disclose financial and other information to help investors judge whether a company’s securities are a good investment. The disclosures, along with the requirement that all public companies be audited by accounting firms, proved to be deficient. Restrictions on corporate takeovers proved counterproductive, diminishing the role of market forces that once served as effective regulations and constraints on corporate management. The Financial Accounting Standards Board failed to set up workable accounting standards for tax-advantaged stock options, which may or may not have created better incentives for management. Forcing graduate students to take more ethics courses would do nothing to address any of these issues.
The WRI/Aspen Institute agenda would probably do nothing to alter the frequency or severity of corporate scandals. It would, however, have more far reaching implications. The term business ethics, as these institutes define it, encompasses much more than just preventing accounting fraud or embezzlement. Graduate schools that teach this brand of ethics would emphasize "social impact management," a wide ranging term incorporating the social policy agenda of labor unions and Naderite advocacy groups. Business schools would encourage future business executives to see their role not as providing goods and services desired by consumers, but rather as furthering leftist social policy objectives such as stopping people from driving SUVs, or minimizing foreign trade.
The notion of social impact management neglects Ludwig von Mises’s fundamental insight about the market:
"Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. . . . Their buying and their abstention from buying decides who should own and run the plants and the farms. They make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities. They are merciless bosses, full of whims and fancies, changeable and unpredictable."
The desire to impose a new value system on the entire economy using ideologically dedicated producers cannot succeed because it disregards whether consumers actually want what this transformed economy would produce. If business schools start graduating managers who do not make pleasing customers their first priority, but rather seek to impose ideologically motivated goods and services on customers, these managers will certainly fail. Businesses in a competitive market will then be forced to look beyond politicized business schools for management talent.