We are facing the most severe economic crisis since the Great Depression. There is plenty of blame to go around. But as suppliers of ideas and talent to the business community, business schools need to accept some responsibility.
Ideas and tools—exotic financial instruments, poorly designed compensation plans, models of corporate leadership that value leaders’ charisma over substance, an uncritical embrace of laissez-faire models—were taught to MBA and executive-education students without considering whether these idea and tools would contribute to a firm’s long-term well being or endanger the legitimacy of the U.S. capitalist system.
The elite business schools also shape and perpetuate the business culture and the aspirations of their graduates. For example, even though not all military officers emanate from West Point, the role of West Point is to serve as not only teacher of military tactics but also the conscience of the profession of arms, and at times, to act as a trusted critic. Similarly the leading business schools are the collective conscience of the practitioners of business and finance.
In the runup to the crisis, many business executives were so self-interested they failed to consider themselves as custodians of their own institutions. All of us involved in business education need to ask what our role has been in fostering a culture that allows executives to walk off with millions of dollars while their firms lay in tatters and society is left with the bill.
Now is the time for business school faculties to make the most of this opportunity to consider how they can contribute to the creation of a business culture that better serves the American economy and society.
We must define business leadership in terms of value creation, not value extraction. This would be an important first step toward restoring society’s faith in our future business leaders.
A natural response to crisis is to try to make sense of it—how did we get here, could we have prevented it, and how do we fix it? But sense-making can easily turn into a less productive and more vindictive blame game. While ethical lapses and illegal activities should be exposed and prosecuted, the more urgent question is why financial crises seem unavoidable. Is it really because business schools do not have the right mission statement?
As unprecedented as current events may seem, researchers have documented at least 18 bank-centered crises globally since 1974, and the majority were preceded by runups in housing and stock markets, large capital inflows, rising public debt, and financial liberalization.
Sound familiar? One possible explanation, supported by recent neuroscientific studies, is that fear and greed are hardwired into human behavior. Periods of great prosperity breed complacency, and risks seem remote and unlikely until we overextend our financial reach and experience a rude awakening. Then fear kicks in and we rush to safety—presto, instant financial crisis! And the bigger the bubble, the louder it bursts.
The only refuge from this emotional seesaw is our intellect. Real disaster comes not from losing money—which entrepreneurs have been doing since the dawn of innovation—but rather from not being properly prepared for it.
The current crisis highlights the growing complexity of the financial system and underscores the sea change in business education from the generic to the specific, from the old boys’ network to the global financial network, and from boardroom tactics to risk analytics. By training tomorrow’s leaders to manage the risks of the financial system effectively and ethically, we’ll have a fighting chance of surviving even the largest crises. This is what business schools do, and we need to do more of it, not less.
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