Bad Theory and Management Renewal

Management scholar, Sumantra Ghoshal, accused mainstream business schools and university departments of teaching ‘bad management theories’ that were ‘destroying good management practices’. His arguments were persuasive, both as to how bad the theories were and how effective they had been in destroying good management practice. The bad theory was that management had no other social responsibility than the legal duty to maximise shareholder wealth. The good practices this bad theory destroyed were related to concern for employees, customers, the local community, the environment and (therefore) the long term, all of which were exploited and impoverished, or at the very least neglected, on the altar of short term shareholder interests.

Ghoshal argued that destroying the bad theory would be an essential first step to renewing good management practice. If the bad theory remained intact, the greed enabling culture it supported would remain as the dominant set of beliefs. Under that circumstance, initiatives promoting sustainability, transparency, fairness and integrity, as characteristic of the role of business in society, would be doomed to fail. At the end of the day, no matter how worthy an action would be, if it meant reducing shareholder return, it would not be sustained. And if an action were to harm employees, customers, the community or environment, but would enrich shareholders, it would be justified. For this to be reversed, the bad theory must be totally overturned.

One might think this should not be too difficult since the whole idea of shareholder primacy is based on a fallacy and is in contravention of company law. But it has proved a highly robust vicious cycle of self-interest maximisation. Business as usual in the City, the payment of extraordinary bonuses, the corruption of corporate top management, the deliberate creation of speculative bubbles, tax avoidance and evasion on a grand scale, the dogmatic connivance of governments and international institutions, all these and much more are aspects of the bad theory culture.

Prior to mainstream adoption of shareholder primacy, business schools taught management’s real duties as to do with creating value rather than extracting it for shareholders. The prime responsibility was for their company’s short term survival and long term growth and prosperity, recognizing that the key to success lay with the people working in the company, and their development and motivation. Relevant evidence based knowledge and understanding had become essential to management development programmes and business degrees. But this traditional approach was undermined when the bad theory became totally dominant. So Ghoshal attacked the bad theory as a first stage in changing the culture, arguing that business schools must first stop what they are currently teaching.

In jurisdictions where shareholder primacy is less pervasive, such as Japan and Germany, the genuine creation of value is still given pride of place over its extraction, and managers learn to value innovation and technology ahead of short term financial returns, and they understand their fellow employees are more important to long term success than their shareholders.

The next generation of MBAs to emerge from the business schools and university departments will have to think differently from their predecessors. Maximising shareholder take will only lead to even greater catastrophe than we already face. They will have to learn how to meet the many challenges of sustainability, transparency, fairness and integrity and build them into the businesses they serve. That is the direction indicated in The Road to Co-operation, published this month.

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