Fundamental Flaws In Management Education

I recently read an OUTSTANDING article from 2005 called Bad Management Theories Are Destroying Good Management Practices that provides an excellent analysis about problems with management education. The article was written by Sumantra Ghoshal who was a leading business academic.

This excerpt highlights Ghoshal’s indictment of management education:

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 … By propagating ideologically inspired amoral theories, business schools have actively freed their students from any sense of moral responsibility.

Given the academic nature of the paper, I’m afraid that most people won’t take the time to read through it. So I’m summarizing three underlying assumptions that Ghoshal argues (and I agree) are broken:

• Management as a social science. Unlike theories in physical science, theories in social science tend to be self-fulfilling. A management theory that catches hold, therefore, can change the behavior of managers who act in accordance with that theory. As Ghoshal states, “the “scientific” approach of trying to discover patterns and laws have replaced all notion of human intentionality with a firm belief in causal determinism for explaining all aspects of corporate performance.” In other words, the belief that management is a social science has removed any humanistic traits (like corporate culture) from the equation about what drives corporate performance.
• Agency theory. Mainstream economics works on the assumption of Homo Economicus, a model of people as rational self-interest maximizers. So “agency theory” informs management that employees can’t be trusted to act on behalf of the firm and, therefore, controls must be put in place to align their efforts. But this assumption doesn’t fully describe human motivation, especially when you look at things like mothers taking care of their children, people leaving a tip at a restaurant where they are unlikely to return, or Peace Corps volunteers. Even research like the ultimatum game (see below) shows that human beings are not driven by just maximizing their own self-interest.
  • “Ultimatum game” research: Two people are told that they can receive a sum of money if they agree on how to split it. One person makes a single proposal to the second person about how to split the money. If the second person accepts the offer, then they keep the money. If the second person rejects the offer, than neither of them gets any money. While the first person could expect about any offer to be accepted, most people offer close to 50% of the money.
• Optimizing shareholder value. Management focus has been driven by economists like Milton Friedman who argued that corporate officials have only one social responsibility: making as much money as possible for their shareholders. But the value that a company creates comes from a combination of resources contributed by different constituencies. In most cases, the contribution of knowledge and skills of employees is more important to the success of the company than the contribution of capital by shareholders. And since most shareholders can sell their shares easier than employees can find new jobs, they are actually taking on less risk. So it does not make sense to maximize the returns on only one of those resources, especially the shareholders’ financial capital.

Even Jack Welch recently said: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy.”

So it’s clearly time to reinvent management thinking. How? Take a look at my free eBook: The 6 New Management Imperatives: Leadership Skills For A Radically Changed Business Environment.

The bottom line: It’s time to purge practices built on bad theories