Pursuing a social purpose sends business schools back to their roots
Leon Laubscher belongs to a new generation of business school alumni – a generation very different from the profit-obsessed cohorts that once emerged from MBA courses. Where his pre-2010s predecessors went all out to deliver returns for investors, Laubscher argues that companies should put the social purpose ahead of, or at least par with, profit.
“The role of business has changed dramatically,” he says. “It’s no longer just about creating value for shareholders; we must take care of the environment and make a positive contribution to society.
Laubscher says a visiting professor – Lawrence Pratt – helped him see the connection between sustainability and profitability during his MBA at Rotterdam School of Management in 2019. “A lot of people think sustainability is this hippie thing, but the professor made the connection to financial performance,” says Laubscher.
The course content was, he adds, highly relevant to his work at consumer goods group Unilever, where he is responsible for strategy within the global sustainability team. “We have to figure out how to decouple environmental impact from business growth,” Laubscher says.
Business schools are revising their curricula, moving away from the shareholder primacy doctrine that has shaped much of their teaching in recent decades. Instead, they emphasize social purpose and environmental concerns. But for reasons such as institutional inertia and the employability of graduates, the transition is proving difficult.
A decent profit – decently
This is not new territory for business schools: it is above all a return to basics. Many institutions prioritized the advancement of moral and social goals throughout the late 19th and much of the 20th century. Business schools in the United States were built on these principles. In 1881 the Wharton School was established at the University of Pennsylvania to prepare graduates to become “pillars of the state” and advance society as a whole. In 1908, Harvard Business SchoolThe founding mission of was to develop leaders who “make a decent profit — decently.”
JC Spender, researcher emeritus at the Institute for Ethical Leadership in Rutgers School of Business in New Jersey, says that at the time there was a rich tradition of teaching business ethics in business schools. “Management was seen as a social purpose activity,” he says.
Things began to change in the late 1950s, when the Carnegie and Ford Foundations produced influential reports that strongly criticized the lack of scientific rigor in business education. Under fire for their reliance on practitioners for teaching, schools have responded with a greater emphasis on scientific business research.
Many professors found the shareholder primacy model appealing because it was simple and quantifiable. “When you embrace mathematical analysis, you need to focus on the things you can measure — and that’s profit,” says Spender.
Influential economists boosted interest in the theory. Milton Friedman, the University of Chicago economist, argued in a landmark 1970 essay that a company’s only responsibility was to make profits for shareholders.
In 1976, Michael Jensen, then an associate professor at the University of Rochester‘s business school in upstate New York, and William Meckling, then dean, popularized agency theory, which explored the mismatch between the interests of shareholders and managers, and proposed to align them through stock options.
“Extreme maximization of shareholder value has become the dominant paradigm in business schools,” says Peter Tufano, former dean of the University of Oxford. Said Business School. “The 1980s and 1990s saw the increasingly dominant presence of economists on business school faculties.”
The bull market of the 1990s helped fuel the rise of shareholder primacy, but also led to unintended consequences for society, such as growing inequality. Even Jensen admitted in 2002, after the dotcom crash, that the agency theory could do damage. During the pre-crash bubble, stock options had, he said, become “managerial heroine,” resulting in a focus on short-term pricing even though the long-term consequences were disastrous.
The corporate excesses and misdeeds of the early 2000s reinforced this idea. After the collapse of Enron and the accounting scandals at Tyco and WorldCom, business schools came under fire. Sumantra Ghoshal, professor at London Business School, argued in a 2005 paper that by teaching “amoral” theories, business schools had “actively freed their students from any sense of moral responsibility.”
Schools have placed greater emphasis on ethical practices, integrity, and transparency in MBA programs. “The big corruption debacles at Enron and other companies created an environment where we questioned business morals,” says David Chen, assistant professor of finance at Kellogg School of Management at Northwestern University in Illinois.
This questioning deepened after the 2008 financial crisis. Business schools, long a source of talent for banks, were considered partly guilty. In a 2009 article, academics Robert Giacalone and Donald Wargo wrote that the financial crash resulted from the “toxic teaching of theories of mismanagement” and the “cult of profit maximization” propagated by MBA courses.
Amid the soul-searching following the turmoil, business schools have stepped up courses on ethics, professional responsibility and risk management. “There used to be a belief that business schools only teach greed and profit maximization,” says Ilian Mihov, dean of Inside in France since 2013. “For me, it was a question of survival: if we continue like this, we will become useless.
Objective versus compensation
Over the past decade, growing awareness of the climate emergency has increased the demand for courses in sustainability and responsible business practices – topics that have become a big draw for prospective students.
Reetta Nevala, business development manager at Honkajoki, a Finnish company that processes and refines animal by-products, chose her part-time MBA at Aalto University in Espoo, Finland last year due to the focus on sustainability. “If we want to provide an environment for future generations, we need to find cost-effective solutions to the climate crisis,” she says.
The course is relevant to Nevala’s work at Honkajoki, including the company’s drive to promote more sustainable food production. In her module on sustainability, for example, she developed a business model for a new pet food protein made from the larvae of the black soldier fly. “Insect protein can reduce the carbon footprint from food,” says Nevala, although Finnish food regulations have limited its ability to develop the product.
One of the barriers to teaching social purpose in MBAs has been the pressure to create employment opportunities for students so they can pay high tuition fees. “There has been this dichotomy where if we focus on sustainability and responsible business, but corporate cultures are driven by profit maximization, that results in fewer jobs and lower wages” , says Dan LeClair, chief executive of the Global Business School Network, a group of more than 120 business schools in 50 countries.
Many companies are now championing change. In 2019, the Business Roundtable, a group of American business leaders, abandoned the shareholder primacy doctrine and urged companies to “protect the environment” and treat workers with “dignity and respect”.
However, many companies don’t get the word out to potential employees. “We see companies that have strong ESG performance [environmental, social and governance] strategies, but they don’t talk about them when recruiting,” says Tensie Whelan, clinical professor of business and society at New York University’s Stern School of Business. “So students think they just need traditional skills to get a decent job and repay their loans. Employers need to be much clearer.
ESG: each subject, greener?
The result is that many students stick to traditional subjects such as finance and strategy, which they perceive to be more likely to lead to well-paying careers in finance, consulting or technology. If schools are to nurture the next generation of responsible leaders — and avoid promoting bad management practices — they will need to embed sustainability topics into those core courses, says Alfons Sauquet, director of quality services at the European Foundation for Development. Management Development (EFMD), an accrediting body for business schools.
Yet many schools still offer ESG courses only as electives. “You can’t teach in silos,” Sauquet says, saying ESG shouldn’t be viewed as a stand-alone subject that students take, but rather as a lens through which every business function is viewed.
Accreditation bodies are driving change: EFMD emphasizes that ethical behavior, social responsibility and sustainability must be integrated into business school policies and operations, teaching and research. Still, the deans are encountering tension, citing the pressure of time on professors – and their conservatism. “If you are already very busy and have effective teaching materials, you will be reluctant to venture into new fields,” says Ding Yuan, dean of Ceibs in Shanghai. “The academic world is not known for its speed.”
David Reibstein, professor of marketing at Wharton and president of the Responsible Research in Business & Management network, says part of the problem is the “publish or perish” culture of academia. Rankings, funding and promotions are tied to prestigious journals that neglect socially oriented research, limiting course content, he argues. “The dependent variable in all of our businesses is profitability,” says Reibstein. “We know how to measure profitability. We don’t necessarily know how to measure social impact.
Omid Aschari, associate professor of strategic management at the University of St. Gallen in Switzerland, believes that schools that do not adopt a new approach risk obsolescence, noting that students become strong supporters of change. “The risk,” he says, “is that if students don’t see the real world reflected in the curriculum, business schools will become museums of management history.”
The winners of the FT Responsible Business Education Awards 2022 will be announced on January 19