Today's law, economics and business students are tomorrow's politicians, CEO's and board members. Most graduate believing that the purpose of the corporation that they will one day regulate, lead and govern is to maximize shareholder value (MSV).
According to Colin Mayer, professor of management studies at Oxford’s Saïd Business School:
“The prevailing view in business schools has been that a primary function of corporations is to further the interests of their shareholders”
Is producing leaders, perfectly sympathetic to the needs of the investment industry, the goal of business school? Consider the following.
Using curricula, syllabi and interviews of both faculty and students the Brookings Institution made a number of findings in its report "The Purpose of the Corporation in Business and Law School Curricula" published in 2011:
- most business schools don't teach the purpose of corporations
- those that do are more likely to emphasize the goal of maximizing shareholder value, especially in law schools
- some law schools only teach the shareholder value model
- after completing business school, students are more likely to sees shareholder value as the most important goal of the corporation
The Brookings study is re-enforced by Aspen Institute findings. Melissa Korn of the Wall Street Journal reported a survey conducted by the Aspen Institute claiming that “60% of new M.B.A. students view maximizing shareholder value as the primary responsibility of a company; that number rises to 69% by the time they reach the program’s midpoint”. The Wall Street Journal is not alone in reporting that management education is grounded in shareholder primacy. The Financial Times reports in an editorial entitled “Mixed Messages In the Classroom”:
“Surveys, studies and papers point to the fact that shareholder primacy remains the organising principle behind the MBA in many business schools and dominates management education culture”.
Perhaps surprisingly, the credit for inculcating MSV thinking within business schools doesn't go to those who stand to gain the most. According to Sarah Murray ["MBA teaching urged to move away from focus on shareholder primacy model"], the universities are responsible. She argues the reasons range from the tenure system to institutional inertia and she has the support of a number of those within the system. More on this soon.
Investors are more the opportunistic beneficiaries of an education system that inexplicably tilts the playing field in their direction.
If business education is rooted in shareholder primacy, its strongest branch is the finance faculty. In a Memo published by the Purpose of the Corporation Project, the authors conclude that the main purpose of "financial reporting is to provide information to the capital markets, accounting standards are developed and legitimized based on their ability to convey the value of corporations". It is hard to imagine an industry having a more perfect competitive advantage. Graduates, rising through public companies and throughout the economy, ready to do what is needed for the finance industry to prosper.
The long term challenge for the investment industry is that not all students are co-operating.
The International Student Initiative for Pluralism in Economics (65 associations of economics students from over 30 different countries) recently published an open letter calling for three forms of pluralism that must be at the core of curricula: theoretical, methodological and interdisciplinary within education. Their message is simple: they're not going to take it anymore. And educators are starting to listen and talk openly about change.
However, in the short term this development shouldn't be a problem. 80% of the class of 2002 believed in MSV and they're making their way to the top of the ladder ready and willing to stay on message. More on this next post.
If you want to learn more about the role of MSV in business education I recommend Unrealized Potential: Misconceptions About Corporate Purpose and New Opportunities for Business Education. According to author Miguel Padro of the Aspen Institute, "Business education is uniquely positioned to develop business leaders and investors who exercise sound judgment, resist the allure of the short term, and thus help realize the full potential of the corporate form". Well said.
About the Marketing MSV Series. In the lead up to this year's Annual Global Drucker Forum, November 13-14 in Vienna, I'm posting a series of unofficial perspectives on the way maximizing shareholder value is marketed. My point is not that shareholder primacy is wrong (it doesn't have to be), but that if we don't address the ways MSV is marketed we'll never know if there's something better.