What’s Wrong with Business Schools?

Ever since the 2008 financial crash, American business schools have been reeling from criticism. There is a widespread feeling that the financial meltdown was caused by graduates of elite business schools who created fortunes through hedge funds, derivatives, and other financial tricks.

While that view is more fiction than fact, it has spawned conferences, books, and hand-wringing about the purpose of business schools.

“Fundamental concerns about the legitimacy of business are growing,” wrote Judith Samuelson of the Aspen Institute, in a 2011 collection of international essays, Business Schools and their Contribution to Society. Business schools, she says, need to replace their amoral focus on homo economicus with a “professional stance devoted to a larger purpose—where morals, ethical reasoning and careful judgment truly matter.”

To one observer, business schools may be falling into the trap that Josef Schumpeter believed business executives would fall into—a failure to defend capitalism. Fred L. Smith, Jr., founder of the Competitive Enterprise Institute, a free-market research group in Washington, has created a project called the Center for Advancing Capitalism, and Schumpeter’s views are very much on his mind. He said in a 2015 speech that Schumpeter feared that “business leaders, lacking the conceptual skills needed to craft pro-business narratives, would retreat into a defensive crouch, hoping to defend their ever-shrinking sphere of action.”

Smith worries that business schools are neglecting their role of supporting capitalism and thus maintaining the self-esteem of those in business. (There are other problems with business schools, too, but this seems the most critical right now.)

It may already be too late to preserve the self-esteem of business executives. Rakesh Khurana, now dean of Harvard College as well as a Harvard Business School professor, thinks business schools need to become softer.

In an influential book written before the financial meltdown—but following the scandals associated with companies like Enron and Tyco—Khurana argued that the business world has lost its “helping aims” and turned managers into “hired hands.” The advent of “agency theory,” in which managers are mere agents of shareowners, spurred managers to act unethically to achieve their own goals, he argues.

Khurana’s solution is to restore meaning to the lives of those “lost” managers by re-creating a professional community of business executives.

Some of the reformist trends are coming from Europe. For example, the Vienna University of Economics and Business, probably the largest business school in the European Union, has a new socio-economics department that covers “sustainable development, environmental economics, ageing, social policy and urban planning.” Christopher Badelt and Barbara Sporn of the Vienna School (writing in Business Schools and Their Contribution to Society) say that business schools should teach that “short-term business interests can be combined with sustainability for society.”

Fortunately, not every business school professor disparages business.

Robert Simons, a Harvard Business School professor, writing in the journal Capitalism and Society in 2013, poked holes in some of the notions aired above. While his paper, “The Business of Business Schools: Restoring a Focus on Competing to Win,” avoids attacking business schools on ideological grounds (that is, as anti-capitalist), he argues that they are losing interest in a fundamental aspect of capitalism—competition. In the rest of this essay, I summarize his views.

“Companies that prevail over time—and create the most value for society—will be those that make better choices than competitors: choices that create superior value in the eyes of customers and investors,” he writes. But he sees the U.S. becoming less competitive. China outproduces the United States in manufacturing, American companies are moving service jobs overseas, and one in five American males between the ages of 25 and 54 is unemployed.

While he doesn’t blame the business schools for such statistics, Simons questions whether the United States can be globally competitive in the years ahead, now that business education has “gone off the rails” (his term). Simons discusses four ways in which business schools are failing to teach competitiveness.

Theory Creep. Business schools often take a valuable theory and over-expand its application. “Serving the customer,” for example, now includes serving the “internal customer.” Similarly, core values, which ought to be simple and clearly understood, have become “all-encompassing lists as students are taught that they should acknowledge the value and contribution of every stakeholder and interest group.”

And while non-financial metrics have a place, the list of things to measure can reach 30 or 40 variables—“all with the mistaken assumption that measuring more things results in a more complete—and therefore better—scorecard.”

This is not competitive, says Simons. Effective companies make decisions; they choose who their customers are; and they make their core values guide their choices.

Mission Creep. While non-profit organizations have long learned from business, now businesses are “importing non-profit practices.” The result is that business schools are encouraging the insertion of “stakeholder perspectives into strategic plans” and “investing in initiatives that produce societal benefits.”

Business schools also advocate public policies, such as dealing with inequality or environmental protection. The names of new programs confirm that. Consider Stanford’s Center for Social Innovation, the University of Michigan’s Erb Institute for Global Sustainable Enterprise, and Wharton’s Business and Public Policy Initiative.

Doing Well by Doing Good. The idea is that businesses should provide certain benefits to society while also earning a profit. So they elevate environmental protection, “sustainability,” or “wellness.”

But such policies can make companies non-competitive. Simons gives Wal-Mart as an example. It tried to meet the demands of environmental groups and “go green,” with smaller packages and by reducing landfill waste. But Wal-Mart saw sales fall for seven quarters—and, according to Simons, decided to go back to its core business of providing low prices to the consumer. 

Quest for Enlightenment. To erase their image as “greedy capitalists,” business executives are trying to become more of a profession, like doctors and lawyers. They advocate high standards of quality and preservation of the “dignity of the profession.”

At Harvard Business School, students are urged to take the “MBA oath,” which includes such statements as: “I will…refrain from unfair competition or business practices harmful to society…protect the right of future generations to advance their standard of living and enjoy a healthy planet…and create sustainable and inclusive prosperity.”

But what is “unfair competition”? Criticizing competitors? Lowering prices? Simons warns that being a profession, like being a guild, strangles competition.

Finally, there is corporate social responsibility (CSR). To be socially responsible, corporations must take into account other things than profit. As an illustration, CSR includes “integrated reporting”—telling the public how the company has not just achieved profit but how it has served society and how has it protected the environment. 

To Simons, this new wave of reforms is shortsighted. He says that business schools should recognize that “the business of business schools is teaching business.” That means teaching how to devise and execute winning strategies. Instead, what schools may well be offering, he suggests, is a “recipe for losing the competitive race.”

But if Fred Smith is right—that “most business schools now argue that business should accept guilt, move toward corporate social responsibility”—it’s hard to include competitiveness in the course catalog. If you believe that your fundamental activity is illegitimate, how can you pursue it fervently?