More cheating at U.S. business schools

Another entry in the "cheater nation" file. Notice how many of these stories happen at U.S. business schools, you know, those prepping grounds for our future business leaders, who are mythologized as the smartest and ablest among us. Yeah, right.  

Then these business whizzes go on to do great things like muni fraud, securities fraud, loan fraud, selective amnesia, and made-up LIBOR rates.

"Cheaters prosper," that's today's lesson.

Tulane University Sent False Information To U.S. News & World Report For College Rankings

January 2, 2013 | Huffington Post

URL: http://huff.to/S4VorX

Shareholder value maximization (SVM) & the financial crisis

How Business Schools Lost Their Way

If business school were a church, shareholder value maximization would be its religion. Two INSEAD professors say it's time to find a new one

By N. Craig Smith and Luk Van Wassenhove

January 11, 2010 | BusinessWeek

Business schools have been blamed for the economic crisis. Their MBA students are said to be responsible for wreaking the havoc in the financial markets we are all now suffering from and business schools are chastised for not training them better, not least in failing to instill a clear sense of right and wrong.

Are they to blame? To the extent that MBA graduates have been closely associated with many of the spectacular failures of financial institutions witnessed over the last 18 months, they may justifiably be criticized for the mispricing of risk in relation to specific financial products and an underestimation of systemic risk more generally. They may also be criticized for failing adequately to question the assumptions of the financial models being used and, with hindsight at least, for following the crowd and gambling that they could continue to dance, to borrow the unfortunate phrase of Citibank's (C) Chuck Prince (not an MBA), when it was way past time to be off the dance floor.

In some cases, where perverse incentives of compensation systems were at work, the criticism also seems warranted that these individuals focused solely on serving their own self-interest and gave scant regard to their obligations to others, even shareholders. Much like a dodgy second-hand car salesman, it seems, they knowingly sold flawed products—such as the mortgage-backed securities they knew would blow up because of unsound origination processes. Worryingly, these practices were evident in the financial institutions that have survived—and some that have prospered—in the crisis, as well as those that failed.

INDIRECT ROLE

It would be a mistake to say that business schools are directly to blame, even when their graduates were closely involved; there are more basic drivers. But business schools have played a role indirectly, due fundamentally to their adherence to and perpetuation of an ideology that has contributed significantly to the crisis, albeit unintentionally. That is the ideology of Shareholder Value Maximization (SVM). In most business schools, SVM is the leitmotif of finance teaching and implicit throughout the rest of the curriculum.

Ideologies often appear to be serving society as a whole while advancing the interests of particular sectors. So it is with SVM. The economic theory of the corporation holds that SVM results in the best social outcome: societal wealth maximization. But at the same time it serves the interests of shareholders and the managers who are its adherents and its beneficiaries, at least when their compensation is pegged to shareholder returns. This criticism of SVM is not to suggest shareholders are unimportant; they warrant a return on the capital they provide that reflects the financial risk incurred. However, this is not the same as maximizing shareholder value.

A theory advanced in business schools to justify SVM says shareholders are the "residual claimants." Shareholders, the theory goes, should be uppermost in the minds of management, because they receive their returns only after the claims of other stakeholders have been met. This is evident in companies meeting their contractual and legal obligations to stakeholders such as employees, but it is also evident in companies meeting noncontractual obligations determined by economic factors. For example, these might be obligations beyond legal or statutory requirements to a local community affected by a plant closure, where the company identifies that its reputation might be harmed and it might suffer an economic loss if the obligations are left unattended. As this example might suggest, however, not all ethical obligations would be reflected in a potential economic loss, even in the long term. Consider a management practice of engaging in bribery when one can get away with it. This might be consistent with shareholder value maximization, but not advancing societal welfare.

FAULTY ASSUMPTIONS

The theory also relies on assumptions amply demonstrated as lacking in recent months. For example, it assumes effective government regulation to ensure everybody plays by the rules and to manage externalities (outcomes not readily susceptible to market sanctions, such as pollution). It also presumes effective corporate governance such that shareholders hold management to account. More technically, it relies on various economic assumptions, such as the efficient market hypothesis (that share prices reflect all relevant information on the stock).

Aside from the assumptions required in subscribing to the SVM model and the potential ethical issues left unaddressed, there are major practical considerations in the teaching and application of the SVM ideology. While professors might explain in detail how the underlying theory of SVM treats shareholders as residual claimants, what matters is the message students take away. That message is shareholder primacy—that their purpose in business is to make decisions that put the interests of shareholders above all others.

When they go into their jobs—in finance and elsewhere—they find an environment that marches to the same tune and is incentivized to do so. The theory of SVM generally translates into practice through the mechanism of the share price. This flawed and often easily manipulated measure of long-term company value is then used as a basis for business decision-making. This has huge potential consequences for the individuals involved (rich bonuses they may not deserve) and their organizations (short-term decisions that harm long-term viability), as well as society.

DIFFERENCES IN THE DEVELOPING WORLD

If SVM is problematic from a developed world perspective, it can be disastrous from the perspective of the developing economies where global business and MBAs increasingly are to be found—as well as most of the 1 billion people going hungry in the world. Many large companies today operate in countries with little or no government and a huge potential for corruption, and, given such technologies as the Internet and mobile phones, how they operate can be instantly broadcast worldwide. Today's global business environment is not the simple U.S.-centric world of free-market economist Milton Friedman. It is far more complicated.

What should business schools do? While late in the day, perhaps, Jack Welch was right when he described SVM as "a dumb idea." Business schools need to stop worshipping at the altar of SVM and teach it with greater intellectual honesty and with attention to its many deficiencies, both theoretical and practical. They also need to do a better job of developing its most plausible contending framework: stakeholder theory. This is a more complex but current and realistic view of management, one that recognizes that the task of managers is to serve multiple stakeholders—giving shareholders their due, but not to the exclusion of others with legitimate claims.

Finally, business schools should give more attention to their input as well as output. With starting salaries for MBA graduates often well in excess of $100,000, business schools need to be careful not to attract narrow-minded, self-centered people who might see a way to get rich quickly by eagerly and unquestioningly embracing an ideology that serves that end. Business schools should look to attract and properly train people to be responsible leaders who are well-rounded and have the capable minds and the courage to ask the critical questions that went unasked for too long.

N. Craig Smith is a professor of ethics and social responsibility at INSEAD. Luk Van Wassenhove is a professor of operations management and academic director of the Social Innovation Centre at INSEAD.

The Management Myth

I stumbled onto this article and found Stewart's analysis to be extremely, uncomfortably, compelling. I've given you the topic, now talk amongst yourselves. Remember the 4 C's: Communication, Communication, Communication!

The Management Myth

By Matthew Stewart

June 2006 | The Atlantic

Most of management theory is inane, writes our correspondent, the founder of a consulting firm. If you want to succeed in business, don't get an M.B.A. Study philosophy instead

URL: http://www.theatlantic.com/doc/200606/stewart-business

MBA programs 'stacking the deck'?

I find this trend of business school admissions committees' putting more weight on a student's ajudged post-MBA employability ass-backwards. It reinforces the stereotype that the "best" b-schools are obsessed solely with their rankings, which are largely a function of graudates' post-MBA salary and job placement statistics. This phenomenon isn't new, but it sounds like more than ever, in this tough economic envioronment where employment stats at even the best schools are slipping, that b-school adcoms are trying to "stack the deck" before matriculation to show how "they" made these students into highly employable, highly paid recruits.

As one reader noted in a BusinessWeek.com forum, the success of the top U.S. b-schools is a "no-brainer:" they select the cream of the crop of dynamic, already successful students with great work experience, and then they present these students to the best companies. Voila! Great placement and starting salary figures for the school. But this trend calls into doubt what is the real value added by a b-school? Is their only value simply in playing match maker between students and companies?

It just goes to show that going to a top b-school is just a game -- albeit a very expensive game -- where students pay to play with the most desirable employers. And surely the top recruits realize it. I wonder what kind of cynicism this arrangement breeds in these future business leaders?

The big losers in all this are the career switchers, typically those with a liberal arts or non-business background, who may not compare as well, employment-wise, on Day 1 of class to the candidates who already have a track record of success in business, but who do bring new insights to the classroom, and fresh ideas and experiences to the business world. All b-schools pay lip service to diversity in their marketing materials, but according to this article, diversity is a "would like to have" and not a "must have" for b-schools. Likewise, admission of international students, who are usually at a disadantage when it comes to U.S. employment, is probably also at risk.

As more prospective U.S. MBA students who don't fit the mold for a top-20 full-time program catch onto this game, they are going to demand other, less expensive "pay-to-play" options -- like a one-year MBA, which is becoming the norm in Europe, or distance/online MBAs -- which yield a better ROI for them personally (not for the school).

The New Criterion for MBA Admissions

Amid a tight MBA labor market, B-school admissions decisions increasingly hinge on applicants' ability to land a job upon graduation

By Anne VanderMey

July 9, 2009 | BusinessWeek.com

URL: http://www.businessweek.com/bschools/content/jul2009/bs2009079_054049.htm

B-school 'silos' led to financial crisis

'Silo' Thinking Let Us Down

By Stefan Szymanski

December 28, 2008  |  BusinessWeek.com

 

Abraham Lincoln once said, "I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts." Business schools set out to prepare people to manage by telling them the truth about business, so does the present crisis prove that they have failed us?

 

As with bankers, this is a time for business school professors to show some humility. What most business schools do best is teach disciplines, such as accounting, finance, strategy, organizational behavior, and human resource management. Strengths vary, and employers have been adept at tapping into the richest veins buried in the leading schools. Thus there is a very real sense in which the best business school thinking in finance ended up being implemented in the most creative banks, that the best business school thinking in strategy ended up being sold by consultants to the world's leading corporations, that the best business school thinking in organizational behavior and human resource management ended up being applied to the recruitment and performance management of employees at the highest levels.

 

This thinking let us down. The current economic crisis is a crisis of financial analysis, a crisis of strategic thinking, and a crisis of employee management.  Bankers and dealers sold products whose risks they either did not understand or did not care for; their senior managers approved strategic plans neither understanding nor caring about the risks that were being run, and the whole show was underpinned by incentive management schemes that made no sense in anything other than the very short term.  These actions made sense taken in isolation, but when added together they more or less guaranteed a crisis. In other words, the coordination failure of the banks reflects a coordination failure inside business schools, a "silo" mentality in which the value of specifics with strictly limited applicability outweighs the value of a broader wisdom.

 

Teaching Facts vs. Teaching Wisdom

 

The problem is that teaching "wisdom" is tricky and elusive, whereas facts, however limited in scope, are unarguably facts. Most schools attempt to integrate disciplines in some way or another but faculty often find it difficult to reach common ground, and the danger is that this common ground may be little more than motherhood and apple pie. But there are signs that the disciplines are starting to converge. Economics, psychology, and finance are finding common frameworks and databases for testing theories, and these are starting to feed into the classroom.

 

If actions taken in isolation guaranteed a crisis when added together, they only did so eventually. Economists teach that markets work because they bring benefits to all; the current crisis has left many people feeling that markets are just pyramid schemes in which a lucky few get rich and the majority must lose. We have been here before. The collapse of Enron caused business schools everywhere to introduce courses in corporate social responsibility—morality had never sold so well. But ask yourself this: If you didn't know the difference between right and wrong by your late 20s, did you really think you would learn it at a business school?

 

The truth is that business schools taught managers to be profit maximizers on the grounds that self-interest works.  As Adam Smith said, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest." Rather than recognizing the moral dimension of human behavior, business schools seemed to reduce every aspect of a life to a business plan, as if the joint stock company were the only legitimate form of human associativity; charities, partnerships, cooperatives and so on came to be treated as quaint anomalies.  But this, too, is changing. Most business schools are increasingly interested in entrepreneurship and organizational forms that allow students to reach their full potential.

 

Reinvention Under Way

 

So where do we go from here? The truth is that business schools work because they enable individuals to acquire a set of skills that significantly enhance their productivity and job market prospects. Business schools will reinvent themselves as educators of more responsible managers if that is what employers want; business schools are already preparing courses for a new generation of financial markets regulators. Can we prepare people better? Only if we can break down barriers between the disciplines and create an integrated image of the business world in all that we teach. Visit any business school today, and you will find that faculty are already actively engaged in mapping out that future.

 

Stefan Szymanski is Associate Dean of MBA Programmes at Cass Business School in London.