Do MBA programs drive inequality?

Kynn Parramore has a piece in Evonomics:

…don’t look to American companies to help solve inequality any time soon. The pessimism of the Harvard alums comes despite business-school programs in recent years adding courses that examine issues related to inequality.

Why is there so little expectation that today’s MBAs will run companies differently than their predecessors have done in light of the inequality crisis? What are they learning or failing to learn?

William Lazonick, professor of economics at the University of Massachusetts Lowell, where he directs the Center for Industrial Competitiveness, sees something in the core teachings of business schools that ensures that firms do not give workers a fair shake. Lazonick, who has been on the faculty of Harvard Business School and of INSEAD business school in France, observes that starting in the 1980s, business schools underwent a transformation in philosophy and orientation that reflected shifts in the economics discipline and in the economy at large.

During that time, Wall Street was taking off and American businesses were becoming increasingly financialized —meaning that executives started to base all of their business decisions on the goal of boosting their firms’ stock prices. When corporations become financialized, executives turn their attention away from investing in the productive capabilities of employees, which is the basic building block for rising American living standards. They also tend to allocate fewer resources to research and development, which is where innovation happens. Instead, executives watch the stock market — in large part because their own compensation was increasingly based on the value of the company’s shares.

Throughout the 1980s, fewer MBA graduates went into industrial corporations; more headed to Wall Street to make a quick buck. Business schools tailored their hiring to match this trend. They hired professors, particularly economists, who favored theories that tended to prioritize the interests of shareholders and executives who cater to them. Lazonick notes that in 1985, for example, Harvard Business School hired economist Michael Jensen. Jensen, a former University of Chicago student of Milton Friedman, co-authored a famous and often-cited business paper, “Theory of the Firm,” in which he argued that the single goal of a company should be to maximize the return to shareholders. He became one of the most highly visible proponents of shareholder value ideology. Jensen and supporters of this theory believed that it would cause executives to focus on the actual performance of the firm and increase shareholder value over time. They were dead wrong: instead, executives turned their attention to the short-term goal of boosting stock value over the long-term prospects of the company and executive pay shot into the stratosphere.

How anything taken to an extreme backfires in a big way. Same is the case with this objective of business is to make profits for shareholders dictum. I hardly see this changing anytime soon.

We see near similar trends happening in India too. Whatever be your education, employment only matters if you head to India’s wall street.  This is worst seen in engineering which has become a namesake degree for most Indian students. Most hardly pursue any form of engineering post their engineering education.  Just like, these trends were celebrated in US some 20 years ago, they are being celebrated (IIT/IIM tag) here as well.

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