Are bad management theories are destroying good management practice, and are business schools to blame? While reviewing a recent article by Fawcett and Waller (2011) in the Journal of Business Logistics on how a different (better) theory is needed to produce richer explanations and practical applications in supply chain research, I came across another interesting article by the late Sumantra Ghoshal (1948-2004), one of business academia's finest thinkers.
In what was perhaps his last paper before his all too sudden death, he blamed business schools for the demise and corruption of good business ethics, because it is obviously scientifically easier to teach shareholder value maximization at the expense of everything else than to argue for (let alone calculate the value of) corporate social responsibility as a driving force in business and supply chain management.
Obsessed as they are with the "real world" and sceptical as most of them are of all theories, managers are no exception to the intellectual slavery of the "practical man" to which Keynes referred.
According to Fawcett and Waller, "people too often perceive theory (and academic business research) as cryptic, enigmatic, impenetrable, or unfathomable—that is, something beyond the interest and comprehension of the typical decision maker. More often than not, theory is often confused with mere conjecture, hypothesis, presumption, or speculation—perhaps not worthy of serious, thoughtful consideration in the real world".
No wonder then, that managers prefer practice over theory, and this is perhaps also the reason, so Ghoshal, why many business schools are more influenced by pragmatic ideology than actually founded on sound theory:
In courses on corporate governance grounded in agency theory we have taught our students that managers cannot be trusted to do their jobs - which, of course, is to maximize shareholder value - and that to overcome "agency problems", managers' interests and incentives must be aligned with those of the shareholders by, for example, making stock options a significant part of their pay.
In courses on organization design, grounded in transaction cost economics, we have preached the need for tight monitoring and control of people to prevent "opportunistic behavior".
In strategy courses we have presented the "five forces" framework to suggest that companies must compete not only with their competitors, but also with their suppliers, customers, employees and regulators.
MBA students are not alone in having learned, for decades, these theories of management. Thousands of executives who have attended business courses have learned the same lessons, although the actual theories were not presented to them so directly. Even those who never attended a business school have learned to think in these ways, because these theories have been in the air, legitimizing some actions, delegitimizing others, and generally shaping the intellectual and normative order withing which all day-to-day decisions are made.
Indeed, the picture he draws is not very uplifting, because whatever we (managers) think, it is all based on negative assumptions, which in the end, naturally enough, do nothing else but reinforcethemselves and our already tainted view of the world:
Ghoshal puts it quite harshly when he says that
academic research related to the conduct of business has had some very significant and negative influences on the practice of management. These influences have been less at the level of adoption of a particular theory and more at the incorporation, within the worldview of managers, of a set of ideas and assumptions that have come to dominate much of management research [...] By propagating ideologically inspired amoral theories, business schools have actively freed their students from any sense of moral responsibility.
and he is particularly hostile towards Milton Friedman for his postulation that "Few trends could so throughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money as possible for their stockholders." Infact, Ghoshal questions the very basis for this assertion, and I am inclined to side with Ghoshal on this matter, as this post on corporate social responsibility on my other blog will tell you more about.
Ghoshal contends that we only have ourselves to blame:
Combine agency theory with transactions costs economics, add in standard versions of game theory and and negotiations, and the picture of the manager that emerges is one that is now very familiar in practice: the ruthlessly hard-driving, strictly top-down, command-and-control-focused, shareholder-value-obsessed, win-at-any-cost business leader.
Essentially then, if I follow Ghoshal's train of thought, we have fallen victim to our own theories, perhaps incapable of acknowledging any other reality, i.e. theory, where - in Ghoshal's own words - companies actually survive and prosper when they simultaneously pay attention to the interest of customers, employees, shareholders, and perhaps even the communities in which they operate.
Luckily, and what bodes well for the future, some academics are in fact beginning to see business management in this light. Unfortunately, they are up against the mighty enemy of mainstream economics which is not yet ready to accept such new ideas. Is it going to change? I hope so.
While Ghoshal's article is well written and not difficult to read, it is not easy to fully understand without a solid academic background. That said, it is perhaps the best argument I have come across for sustainable management practices, and I am inspired to include more sustainability related articles on my blog. It really is a loss to the advancement of business that Ghoshal isn't among us anymore, so he cannot continue to sow more of his seeds among researchers. He would have found fertile ground in me for sure.
Ghoshal, S. (2005). Bad Management Theories are Destroying Good Management Practices. Academy of Management Review 4(1):75–91.