In the wake of the current financial crisis, business schools have been criticized for their role in producing the managers who built the firms in which poor business decisions were made. In particular, the management theories that inform the business school curricula have been singled out for unflattering attention.
The article in the url below was written by Roger Martin, the Dean at the Rotman School of Management at the University of Toronto. Firmly embedded in the business school culture, Martin is clear about where he lays the blame:
“The prime culprit for the increasing market volatility that has brought the economy to its knees is a triumvirate of management theories taught in every business school and entrenched in every significant publicly traded company. Intended to ensure longevity and profitability, these theories instead contributed mightily to the technology crash of 2001-02 and the financial services crash of 2008.”
The three theories singled out by Martin are:
“The slide down the slippery slope began with shareholder value theory. … Next came principal-agent theory: the notion that the interests of executive "agents" are not naturally aligned with those of shareholder "principals" … . That in turn led to stock-based compensation alignment theory.”
The common factor connecting the three is the importance of the stock market as a measure of corporate (and, therefore, manager) success. These theories encourage actions that focus on investor perceptions, irrespective of a firm’s real performance. As expectations increasingly become detached from reality, Martin argues, incentives to engage in dubious tactics to meet those inflated expectations increase:
“Improving [real] performance is the hardest way to increase expectations. Easier ways include engineering a series of acquisitions to give the appearance of rapid growth or employing aggressive accounting to give the appearance of higher profitability.”
Martin argues that shareholder value theory should be replaced with incentives to maximize “book value per share” and that stock-based compensation should be replaced with pay tied to performance on “real market measures such as revenue growth, market share, profits and book equity return”:
“While these proposals may seem draconian, they are necessary to save corporations from themselves.”
The debate over the extent of the role of business schools (and U.S. schools, in particular) continues (e.g., http://www.ft.com/cms/s/2/41a49c8e-51ea-11de-b986-00144feabdc0.html).
Take care
David
Bill Werther & David Chandler
Strategic Corporate Social Responsibility
© Sage Publications, 2006
Managers must be judged on the real score
Roger Martin 845 words
12 May 2009
Financial Times
Asia Ed1
There is a pdf of the article available at:
