MBAs Gone Wild

How can the economy do well while unemployment remains high? That’s the system we’ve created

Last week President Obama made what the talking heads called “a gaffe.” While speaking about the economy, he observed that the private sector was “doing just fine.” The next day he clarified. He stuck with his assessment that the private sector is doing just fine, but noted that economy wasn’t. Which raises the question: How can the private sector be “doing fine” when the economy isn’t?

The Baltimore Sun weighed in and observed that the president’s mistake was “not a lack of pessimism but a failure to be sufficiently encouraging.” The paper went on to point out that the private sector has been hiring more for 27 months straight — “4.3 million jobs altogether,” but obviously not enough. So, as the president sees it, job creation and the state of the economy are not necessarily synonymous? Seems counter-intuitive.

It’s not.

Rakese Khurana in his 2009 article “MBA’s Gone Wild,” published by The American Interest, explains how “doing fine” in the private sector has actually been somewhat disconnected from job creation. Business came to be viewed as a new academic discipline more than a century ago, observes Khurana, for two reasons: First, the emphasis on vocational training following the Civil War; Second, the emergence of the publicly traded, post-Civil War corporation, which separated ownership from management (spawning a range of problems which the Progressives sought to address). Universities responded with “Business Administration” programs. Borrowing from the German graduate school experience, business administration came to be viewed as a science, while management came to be treated as a “profession” and service to the community was elevated to the level of moral imperative.

Then the MBA took off during the 1980s. The U.S. News & World Report ratings also arrived, bringing with them what Khurana describes as “the coup de grace for the professionalization project” and with it the abandonment of service to the community. Business schools, in their endless quest for higher rankings, started directing their attention to three factors: placement, starting salaries and student satisfaction — “factors,” writes Khurana, “which have little to do with the quality of the education students receive but dramatically shape perceptions of applicants, employers and alumni.” Also, we should add, they have little to do with the original intent of the study of business and the practice of management.

Thus was born “Agency Theory.” Derived from the discipline of economics, this theory teaches that “the sole purpose of the corporation is to maximize shareholder value.” Forget professionalism and social responsibility; financial incentives were pumped up to forge the alignment between management and shareholder interests.

Business schools began turning out graduates trained to view success as any mercenary would — as a highly paid hired gun. Prior to 1980, the CEO’s job (whose compensation was about 40 times what the average working was making) extended to community matters, working with labor, protecting employees’ jobs, even addressing environmental concerns. The new type of manager (whose compensation had risen to upwards of 400-to-one) had only one objective: increase the price of stock.

Profits are critical to stock market success, and by that criteria alone, American business is doing more than just fine right now. Corporate America is sitting on more cash than at any time in recent memory. But jobs for America? If they come, that’s great. If they don’t, too often that’s even better.

Bain Capital is a case in point. Bain — Republican presidential nominee Mitt Romney’s former company — has never been about jobs per se, as Romney’s partners have said. It was all about return on investment — the application of agency theory.

Romney, by the way, is defined both by Mormonism and agency theory — two very compatible belief systems. There’s a reason why BYU has a highly regarded business school, but no theology department at all and only a tiny, marginalized philosophy department.

Back to “the private sector is doing just fine.” Well, according to agency theory, it is. Since Obama took office, allowing for the aftershock period, the stock market is up 61 percent. And profits are at an all-time high. Exxon/Mobil reported quarterly earnings up 41 percent from last year. Yes, employment continues to lag, but employment isn’t in the agency theory playbook anyway.

So long as the private sector remains ideologically wedded to agency theory, we can expect the stock market to remain high, employment figures to remain flat and public interest, middle class and community needs to be ignored, all while income and wealth distribution becomes ever more unfair.

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About The Author

Robert Herold

Robert Herold is a retired professor of public administration and political science at both Eastern Washington University and Gonzaga University. Robert Herold's collection of Inlander columns dating back to 1995, Robert's Rules, is available at Auntie's.