01 Dec 1996

Organizations and Markets: A Challenging View of the World

by Susan Young


The following article is the seventh in a series on the activities and research taking place in each academic unit at HBS.

Professor Michael C. Jensen has a simple explanation for why people sometimes don't listen when they are angry and why they get defensive when someone criticizes them. "The human brain is defective," says Jensen, whose life's work has reached out beyond his research in economics, finance, and accounting to include psychology, sociology, neuroscience, and history.

Jensen explains that upsetting information triggers the amygdala, the emotional part of the brain, which in turn triggers the adrenal gland and floods the conscious brain with chemicals. By the time the information reaches the thinking part of the brain, the cortex has been tainted by the prior emotional response. Thus, messages of emotional content - performance evaluations, for example - are clouded by an emotional reaction that leaves the conscious brain incapable of making a rational response.

Understanding the irrationality of human behavior is essential for understanding how people relate - or do not relate - to each other, which is key to successfully collaborating with, motivating, managing, and leading others. This is a fundamental concept discussed in Coordination, Control, and the Management of Organizations (CCMO), one of the MBA Program's most popular electives. The course takes an interdisciplinary approach to organizational problem solving and value creation. In it, economics, psychology, and neuroscience are integrated and applied to problems in human resource management, labor economics, organizational behavior, finance, governance, and corporate control.

Jensen taught the first version of the course at HBS to thirty MBAs as a visiting professor from 1984 to 1985. He developed it while at the University of Rochester with his former colleague and frequent collaborator William H. Meckling in response to a call from students for an economics course that was applicable to real-life work situations. The pair redesigned their syllabus to view economics through the lens of organizational problems in large firms. Soon their interest in managerial issues outweighed their interest in economics, and they found themselves with a new course. Today, a much changed course with more than six hundred students enrolled, CCMO is the foundation of the interdisciplinary unit that Jensen chairs, Organizations and Markets.

Each of the unit's five faculty members brings specific expertise to its mission - "to develop a modern theory of organizations and markets that is useful to both social scientists and managers." Professor George P. Baker III, who studies management incentives and compensation systems, is investigating his theory that effective measurement of performance must use subjective judgment and qualitative assessments in combination with objective measures. Professor Carliss Y. Baldwin, with Dean Kim B. Clark, is examining the configuration of modular systems in the computer industry, while Professor Malcolm S. Salter's work on corporate strategy, organization, and governance looks at how ownership structure affects organizational performance. Asso-ciate Professor Karen Hopper Wruck, who specializes in corporate finance and internal governance and control systems, focuses on organizations in transition and is developing an elective called Compensation, Control, and Internal Governance.

A closer look at CCMO reveals the unit's penchant for breaking new ground in research and pedagogy. Because the course builds a general problem-solving framework, it is not specific to any function, firm, or industry. Instead, it draws on an eclectic collection of materials: HBS cases as well as readings from academic journals, popular literature, and current newspapers and magazines.

CCMO is divided into three sections that build on each other. In the segment titled "Foundations of a Theory of Organizations," students gain insights into human behavior through reading Daniel Goleman's popular work Emotional Intelligence. They expand their perspective on the use of knowledge in society by reading a 1945 paper from the American Economic Review. And through articles from the Wall Street Journal and The Economist they learn about "decision rights" and alienability and how these institutional devices solve the control problems in a capitalist society.

The second portion of the course, "Defining the Rules of the Game," examines organizational strategy, the theory of value, the allocation of decision rights, performance measurement, stakeholders, and compensation. Students bring their cumulative understanding of organizations to the final part of the course, "Governance and Corporate Control." While much of the reading here comes from scholarly journal articles on the topic and the popular press, students also prepare a case for most days to learn about organizational change and corporate control. Three examples are Wruck's case studies on restructuring at Safeway and leveraged recapitalization at Sealed Air and Baldwin's multimedia case on Thermo Electron.

Jensen notes that the course's content is applicable "everywhere," from the boardroom to the lunchroom. He takes pride that CCMO challenges the way students think. "This course changes how people view the world in fundamental ways," says Jensen. "It gives them a set of general principles for managing and for living."


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