The Role of Business Schools in the Financial Crisis
“Give it your best shot” says a frustrated and annoyed Dean of Columbia Business School as the interviewer in the Oscar winning documentary “Inside Job” questions him about a potential conflict of interest. The Dean, as Chairman of the Council of Economic Advisers under the Bush Administration, advised the deregulation of the derivatives market while earning hundreds of thousands of dollars as a consultant and director of financial firms that would ultimately benefit financially if the government followed his advice. But the President of the Economics Department at Harvard argues that economics and business academics Laura Tyson, Frederic Mishkin, and Larry Summers are not facing a conflict of interest despite their dual role as key public policy figures and advisers on the one hand and as consultants for hedge funds that rely heavily on derivatives, board members of financial institutions, or authors of financial market reports paid for by the Chamber of Commerce on the other.
The film does a fantastic job in laying out what led to the financial crisis, identifying those responsible, and describing its consequences. One of its broader conclusions is that the financial crisis was caused by the collusion of a small number of elite individuals looking out for their own self-interest – the same self-interest that economists continually boast to be the engine of a just and equitable society. John Cassidy, in his book “How Markets Fail: The Logic of Economic Calamities”, calls this “rational irrationality” where the rational self-interest of an individual – make money – is irrational when considering the broader negative impact on society. The revolving door syndrome is particularly pervasive whereby top executives of investment banks, public policy makers, and academics swap roles as part of an ‘incestual’ soup of elitism. According to the film, these untouchables have railroaded the world economy, have not been penalized for it, and shockingly remain in these powerful positions without any regulation to change behavior.
I was particularly intrigued by the blame placed upon the economics and business faculties of universities and colleges, the discussion of which focuses on the aforementioned conflicts of interest among professors. But the documentary falls a bit short in discussing the underlying ideology inherent in business schools and economics departments that end up as gospel in textbooks and curricula that instill a certain worldview and skill set among future executives. Many argue that the conventional business frameworks students learn in business schools are out of date and flawed in their ability to contribute to overall public welfare, making professors in those schools complicit, if not active agents, in the crisis.
Debate for a fundamental rethink of the field of finance, for instance, is practically non-existent while accounting for non-financial measures is presented anecdotally as some kind of nice to have in accounting textbooks. The marketing discipline tends to focus on execution and technological sophistication at the exclusion of social issues. But the crux of the problem, in my view, originates from my home discipline of strategic management which advises managers to increase power and influence over public opinion and public bodies, to create monopolistic environments, and to influence markets in ways that maximize benefit for the firm. Colleagues of mine, for instance, study and prescribe managerial behavior that proactively influences governmental bodies to put in place regulation that is aligned with the firm’s core competencies. Never mind public interests.
While the economics discipline can be blamed for its over emphasis on economic utilitarianism and the abolishing of government regulation in favor of the free market, the business strategy discipline can be blamed for teaching managers how to disrupt perfect markets for profit gains while at the same time limiting government intervention. Managers are taught to shape and mold their competitive environments in ways that build power over all other stakeholders (customers, suppliers, government, communities, environment, entrepreneurs, and competitors) such as the weakening of consumer protection agencies. They are taught to shape public opinion and market trends, engage in political lobbying to protect these positions, and build their organizations to be too big to fail. To this latter point, investment banks got to a size where the Securities Exchange Commission (SEC) heavily relied on their expertise when deciding whether they should raise leverage restrictions. SEC Commissioner, Roel Campos, was quoted as saying, “These are firms that do most of the derivative activity in the US. We talked with some of them about what their comfort level was”. The SEC Director then said, “The firms actually thought the number was appropriate”. The result is the creation of market imperfections that result in wealth for the firm - specifically its executives - at the expense of wealth for society.
It's important to remember that this behavior isn't a result of some mafia takeover of Wall Street or the devil himself paying a visit to the executives of these firms. These managers are simply pushing the envelope on what they learned at a fundamental level in their business school courses. The Economist nicely flagged the hypocrisy of corporate social responsibility where companies spend money on philanthropy and tout their socially responsible behavior when they work behind the scenes to build industries that make them too big to fail, command premium prices through industry concentration, and ultimately usurp the free market system. So while business schools may tout their attention to CSR and sustainability, it ultimately masks the underlying fundamental ideology of business which is, in fact, to usurp public interests if the opportunity arises.
Charging Bull photo taken from flickr.com reproduced under Creative Commons