We Read Them For You - Building Gender Balanced Business

Some of the worst excesses of recent management practices have “their roots in a set of ideas that have emerged from business school academics over the last 30 years,” wrote Professor Sumantra Ghoshal in 2005, shortly after the Enron debacle.

Business Schools Freed Students of Moral Responsibility
By propagating “ideologically inspired amoral theories,” said Professor Ghoshal, “business schools have actively freed their students from any sense of moral responsibility.”

The Scientific Model Erased Morality
In the last 50 years, business schools developed their claim to expertise by building scientific models or what tha Austrian liberal, free-market economist Friedrich August von Hayek referred to as the “pretense of knowledge”. Concerned with the desire to discover patterns and laws, academics wanted to build neat mathematical models to explain things. In so doing, they took out the more complex factors of human behaviour and action.

Ghoshal argued that by excluding human decision-making and activity from their models, they automatically excluded issues of ethics and morality, things that only people can drive. “Since morality, or ethics, is inseparable from human intentionality, a precondition for making business studies a science has been the denial of any moral or ethical considerations in our theories and, therefore, in our prescriptions for management practice.” One clear example is the tendency of management theory to accept the notion that a manager’s job is to maximise shareholder value.

But, Ghoshal argued, shareholders don’t own the companies they invest in. They only own the “right to the residual cash flows” of the company. Furthermore, other constituencies contribute resources, notably the employees, of which managers are a part. They also take a greater risk as they invest their livelihood in a company. So, why should the value distribution only value one of the resource providers? Ghoshal answered his own question: “The answer – the only answer that is really valid – is that this assumption helps in structuring and solving nice mathematical models.”

“If we wish our students to contribute to building what Warren Bennis (2000) has described as ‘delightful organizations,’ we will have to teach them the theories that describe how they can do so.”

The Pessimistic View of Human Nature
The second problem, according to Ghoshal, was that “Liberalism”, an increasingly influential set of ideas, was based on a deeply pessimistic view of human nature, which has had damaging ramifications for management theory and the way it teaches managers to approach people in their organisations. The “gloomy vision”, as it is known, stresses the need to solve the “negative problem” of restricting the social costs arising from human imperfections.

Bad Management Ideas Change Things
All of this would not matter, but for the fact that ideas promoted in social theory are taken up by people and put into effect. If a theory assumes that the sun goes around the earth, it does not change what the sun actually does. The truth is preserved, waiting for someone else to discover it. In management theory, however, an idea (if it gains sufficient currency) changes the behaviour of managers who start acting in accordance with the theory.

Self-Fulfilling Prophecy

• Management theories based on the notion that people behave opportunistically cause management behaviours that are likely to “enhance opportunistic behaviour among people”.
• A theory that draws prescriptions on corporate governance on the assumption that managers cannot be trusted can make managers less trustworthy.

The Bad Practices Taught by Business Schools

• Managers Can’t Be Trusted
  Business schools taught “agency theory”, which implied that managers could not trusted to do their jobs. They had to be aligned with shareholders through incentives such as stock options.

• Controlling People
  Transaction cost economics extolled the need for the tight monitoring and control of people to prevent “opportunistic behaviour”, creating in turn an atmosphere of distrust and coercion between managers and employees.

• Everyone Is the Enemy
  In strategy classes, students have been taught the “five forces” framework to “suggest that companies must compete not only with their competitors but also with their suppliers, customers, employees, and regulators.”

Why, Ghoshal asks, after the scandals of Enron and others, where the idea of shareholder maximisation was seen as a primary cause, do we not question the validity of the theory? Why don’t we support the “stewardship theory”, which proposes that companies survive and prosper “when they simultaneously pay attention to the interests of customers, employees, shareholders, and perhaps even the communities in which they operate”? The honest answer, he said, is because such a perspective cannot be “elegantly modelled – the math does not exist”.

Back in 2005, Ghoshal (he did not live to see the financial crash of 2008, caused in large part by the shareholder maximising culture) had an answer for this too: “If we wish our students to contribute to building what Warren Bennis (2000) has described as ‘delightful organizations,’ we will have to teach them the theories that describe how they can do so.”

Source: “Bad Management Theories Are Destroying Good Management Practices,” by Sumantra Ghoshal, Advanced Institute of Management Research and London Business School, Academy of Management Learning & Education, 2005, Vol. 4, No. 1, 75-91.