Do business schools—and their products, MBAs—really matter?
Business school professors often lament that business education has no impact on the real world—that they waste their energy debating esoteric theories that nobody outside the academy pays attention to. But at the same time, business school critics claim that through excessive risk-taking and profit-maximizing at any cost, MBAs drove the economy into the financial crisis and the great recession a decade ago
In a recent study, we examined how much business schools really matter. Does business school education really shape students’ minds and behaviors many years later, when they have reached top positions at major corporations and financial institutions?
We explore this question by looking at how CEOs engage in diversifying acquisitions over the last three decades. We chose to study corporate diversification because business professors dramatically changed their views about it during the period under study. This allows us to see how the business school curriculum impacted students.
Up until the 1960s, business school professors viewed diversification as a valuable strategy. Kenneth Andrews, a Harvard Business School (HBS) professor, wrote in 1951, “The purposeful diversification of American corporate enterprise has been accomplished with the hope of attaining greater stability in organization and earnings, greater efficiency in the use of company resources, greater economy in marketing operations, or greater returns from the exploitation of unexpected opportunity and peculiar economic conditions.”
Thoughts on diversification turned into skepticism in the 1970s and outright criticism in the 1980s. This reflected a broader shift in business education. As Rakesh Khurana meticulously described in From Higher Aims to Hired Hands, the 1970s witnessed a rise of financial economics as the dominant discipline in business schools.
In particular, agency theory in financial economics became mainstream and dominated both academia and practice. Based on the belief that managers are agents who work for the shareholders, agency theory views diversification as a prime example of managerial opportunism at the expense of shareholders’ wealth.
During the 1970s and the 1980s, Michael C. Jensen, another HBS professor well-known for his articulation of agency theory, promoted a new agency-theoretic orthodoxy that corporate managers should avoid diversification and instead focus on the firm’s core business.
While theories and evidence against diversification emerged in the 1970s, many U.S. firms remained diversified well into the 1980s. Why did the decline of corporate diversification unfold so slowly?
We believe it was because corporate strategy reflects the views of top decision makers, and change in strategy follows only from a new crop of decision makers. It took 20 to 30 years for those MBA students who absorbed a skeptical view on diversification in the 1970s and the ‘80s to climb up corporate hierarchies, replace CEOs at major firms, and put the brakes on diversification.
To test our argument, we collected data on 2,031 CEOs who ran 640 large U.S. corporations from 1985 to 2015. We also gathered information on their educational background, such as the school they attended for an MBA and their year of graduation. We split our sample into three cohorts—CEOs who earned an MBA before, during, and after the 1970s—and examined whether these groups made different strategic choice about diversification.
Here’s what we found: Compared with CEOs without an MBA, CEOs in the first cohort, who earned an MBA before the 1970s, were 17% more likely to pursue diversification at some point during their career. The later cohorts of CEOs, those who earned an MBA in the 1970s and later, were less likely to pursue diversification than their non-MBA counterparts, by 24% and 30%, respectively.
We also conducted some additional tests. A quarter of CEOs with an MBA in our data graduated from HBS, where Michael Jensen taught agency theory beginning in 1985. Given his elevated role in popularizing agency theory, we expected that being exposed to his teaching had an enduring effect on students’ views of diversification. We found that CEOs who attended HBS after Jensen joined the school were 83% less likely to engage in diversification than those who went to HBS before that.
We also compared HBS-educated CEOs with the CEOs who had MBAs from other schools or who didn’t have an MBA. HBS education had a strong negative effect on diversification only after Jensen’s arrival.
If being exposed to modern financial economics was a crucial factor in altering MBA graduates’ views on diversification, we would expect to see the negative effect of MBA education on diversification to be stronger for CEOs who graduated from business schools with a top-ranked finance program. We found this to be accurate. The effect of MBA education during or after the 1970s was observed only for CEOs who trained at one of the top 50 business schools in finance.
This has implications that go far beyond corporate diversification strategy. The late business professor Sumantra Ghoshal warned that business schools had direct and negative influences on management practices, contributing to major corporate scandals and economic crises. As more students, scholars, leaders, and pundits are now reflecting on the influence of business schools, it is precisely the time when business educators should realize their responsibility and potential.
What business schools teach matters, because their products—MBAs—eventually become powerful and faithfully follow what they’ve learned. The impact of business schools on society only becomes clear after many years.
Jiwook Jung and Taekjin Shin, “Learning not to diversify: The transformation of graduate business education and the decline of diversifying acquisitions.” Administrative Science Quarterly 2018
Image: HBS1908 via Wikimedia Commons (CC BY-SA 3.0)