by Roger Thompson

A spate of business scandals — from Enron’s spectacular collapse to stock option backdating — have put business schools on the spot to explain what, if any, responsibility they might have for what’s gone wrong in America’s executive suites. Two theories have emerged. The wrongdoers were just a disparate collection of lone bad actors on the corporate stage. End of story. Alternatively, the scandals reflected something systemic and pervasive in American business culture, with the trail winding its way back to business schools.

In his new book, From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession (Princeton University Press), HBS associate professor Rakesh Khurana builds a case for the systemic argument. He also explains how business schools have evolved over the past century, in many cases drifting from their original intent of making management a profession, with a commitment to using a body of knowledge for the good of society.

“The university-based business school of today is a troubled institution, one that has become unmoored from its orignal purpose and whose contemporary state is in many ways antithetical to the goals of professional education itself,” writes Khurana. The excerpts that follow trace business schools from their early idealism to the more recent abandonment of their “professionalism project.”

What Were They Thinking?
Today, we take managers for granted. But 100 years ago, they were fresh recruits in the inexorable march of industrial capitalism. In a grand experiment to turn management into a legitimate profession, universities invented the modern business school. Questions raised then about such schools’ purpose remain strikingly fresh today.

When they first emerged, business schools were highly controversial institutions. The profit-maximizing imperatives of business were seen to be at odds with the more disinterested mission of universities. Business education came to be an accepted and uncontroversial part of the university only through the efforts of a vanguard of institutional entrepreneurs, both academics and managers, who saw the need for creating a managerial class that would run America’s large corporations in a way that served the broader interests of society rather than the narrowly defined ones of capital or labor.

In 1926, C.P. Biddle, an assistant dean at Harvard Business School, provided one framing of what was, at the time, the highly contested question of whether and why business schools belonged in universities:

The interests of the shareholders are primarily measured in purpose of the graduate training. If its purpose is to train “hands,” or technicians, or merely successful money-makers, in my judgment the course has no place in a graduate department of a university. On the other hand if its purpose is to train “heads” or future leaders in business, it has no difficulty in justifying its existence or place.

Although the choice for business schools that Biddle presented nearly a century ago has yet to be decisively made, a number of factors suggest that all is not well within the institution of the university-based business school: recent events and trends in the corporate world; a mounting chorus of criticism directed at business schools from within their own ranks; and the implicit challenge represented by the rise of for-profit, online, and other alternatives to the traditional MBA. Biddle’s implicit question is as relevant today as it ever was. For business schools and for management itself, the times seem ripe for reopening the question of what exactly this institution is for, what functions we as a society want it to perform, and how well it is performing them.

Great Depression Rekindles the Drive for Professionalism
Sixteen business school deans, including Edwin F. Gay of HBS, founded the American Association of Collegiate Schools of Business in 1916 to set standards for the professionalization of business education. Years passed with no consensus, but the Great Depression revived interest in setting standards to educate managers with a strong sense of social and ethical obligation.

Business school deans in the early 1930s were determined to finally reach a working consensus about what constituted a professional business education, and to mobilize their institutions on behalf of a nation whose core political and economic institutions were being reexamined. From this process a unanimous consensus emerged: business schools could no longer hope that their students would recognize the social significance and relations of business once they became managers. The schools themselves were ultimately responsible for instilling in students an understanding of the responsibilities of business for the well-being of society. University of Illinois professor Hiram T. Scovill noted that “the best way for schools of business to justify their existence in view of the apparent ills and evils in business in the past is to train the businessmen of the future so that they will recognize their obligations to society.”

As in the 1920s, however, the strongest public advocate for professionalization in the most comprehensive sense of the term was HBS Dean Wallace B. Donham, who was appalled by the lack of national leadership from corporate executives in the midst of the Depression. Moreover, despite his own denials, Donham likely felt compelled to rebut Abraham Flexner’s damning pronouncement (in his 1930 book, Universities) that “Harvard Business School raises neither ethical nor social questions; it does not put business on the defensive; it does not even take a broad view of business as business.” As a result, Donham in the early 1930s renewed and elaborated his previous calls for business schools to aid in transforming management into a profession — not a mere technical specialization or guild, but rather a group self-consciously dedicated to the service of society. Donham now declared that in institutions (such as his own) that called themselves schools of “business administration,” too much emphasis had been placed on the first of these two words and too little on the second. Admin-istration, he said, required managers to focus on “the human aspects of organization.” Neither organization charts nor the “grossly misleading” application of economics to the management of business firms could be relied upon to give satisfactory administrative results.

Yet as Donham himself had long recognized, and other business school leaders now understood more clearly than ever, the task these academics were setting for themselves of educating and socializing business school students as genuine professionals would not be easy to accomplish.

The Fall of Managers
Beginning in the early 1970s, the United States entered an extended period of economic distress for which critics blamed corporate managers, who were characterized in the media as “unaccountable plutocrats.” Out of this economic turmoil emerged a new view of American capitalism. So-called agency theory, developed and promoted by leading academics at American business schools, recast management as an agent of shareholders and a servant to share price. Other stakeholders, such as workers and communities, no longer mattered.

The rise of agency theory and its dissemination in business schools reflected, among other things, the revolution in ideas about management and the purpose of the corporation that came with the emergence of investor capitalism in the 1970s. It is difficult to pinpoint exactly when the debate about the sources of America’s economic malaise, and what could be done about it, began to penetrate mainstream business schools, but HBS professor emeritus Michael Jensen has suggested that it happened in the early 1970s, when the postwar order of relationship capitalism showed its first signs of impending collapse. Jensen pointed to the publication in the New York Times Magazine in 1970 of an article on the purpose of the corporation by University of Chicago economist Milton Friedman as both a sign of growing academic skepticism about managerialism and an important cultural event in its own right. In his article, Friedman argued that the sole concern of American business should be the maximization of profit, since the existing system, in his view, was one of accommodation to a host of conflicting interests, an arrangement that damaged society’s economic well-being.

The agency theorists had a broad impact on corporate policy and, in particular, on a fundamental redefinition of the purpose of the corporation by executives themselves. Consider, for example, the shift that occurred in the course of the 1990s in public statements about the nature and purpose of the corporation by the Business Roundtable. In 1990, an official Business Roundtable policy statement declared:

Corporations are chartered to serve both their shareholders and society as a whole. The interests of the shareholders are primarily measured in terms of economic return over time. The interests of others in society (other stakeholders) are defined by their relationship to the corporation.

The other stakeholders in the corporation are its employees, customers, suppliers, creditors, the communities where the corporation does business, and society as a whole. The duties and responsibilities of the corporation to the stakeholders are expressed in various laws, regulations, contracts, and custom and practice.

The central corporate governance point to be made about a corporation’s stakeholders beyond the shareholder is that they are vital to the long-term successful economic performance of the corporation. Some argue that only the interests of the shareholders should be considered by directors. The thrust of history and law strongly supports the broader view of the directors’ responsibility to carefully weigh the interests of all stakeholders as part of their responsibility to the corporation or to the long-term interests of its shareholders.

By 1997, however, the Business Roundtable had abandoned the objections to the notion of shareholder primacy that it had expressed in its earlier statement. The new statement includes the following:

In the Business Roundtable’s view, the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to the stockholders. The notion that the board must somehow balance the interests of other stakeholders fundamentally misconstrues the role of directors. It is, moreover, an unworkable notion because it would leave the board with no criterion for resolving conflicts between interests of stockholders and of other stakeholders or among different groups of stakeholders.

Agency theory dissolved the idea that executives should be held — on the basis of notions such as stewardship, stakeholder interests, or promotion of the common good — to any standard stricter than sheer self-interest. How could they be if they were incapable of adhering to such a standard in the first place? Students were now taught that managers, as a matter of economic principle, could not be trusted.

In rejecting the managerialist ideology that had become the central justifying rationale for the existence of business schools in the years since the end of World War II, agency theory also served to delegitimate managerial authority itself. This was a striking development to have occurred in university business schools, which owed their original raison d’ÃïÃÿÃýtre to their ascribed role of legitimating managerial authority in the late nineteenth and early twentieth centuries. It represented, within the confines of a “professional school,” a thorough repudiation of professionalism as that notion had been understood in the founding era of American business schools.

The Rise of Leadership as a Mission
With the demise of managerialism, do business schools retain any genuine academic or societal mission?

Having participated, inadvertently or not, in the wholesale discrediting of American management that flowered during the rise of investor capitalism in the 1970s, by the late 1980s business schools had effectively been taken to the woodshed through the advent of the media rankings — a public pronouncement that insufficient attention by schools to the needs of their student and corporate “customers” could not be corrected from within. By the beginning of the 1990s, business schools — particularly those elite schools that had staked their reputations on academic superiority — faced a full-blown crisis of identity and purpose. It was no longer possible for business schools to tout a mission of educating managers according to the canons of postwar managerialism, for traditional managers had been successfully portrayed by the takeover artists and shareholder activists of the 1970s and 1980s, as well as by business school professors influenced by the work of scholars such as Oliver Williamson and Michael Jensen, as incompetent at best, and venal and untrustworthy at worst. Moreover, increasing numbers of students at the most prestigious schools now shunned traditional management careers altogether in favor of fields like consulting and investment banking. Faculty at the elite business schools were thus educating fewer future managers, which left them increasingly ambivalent and uncertain about what they were educating students for.

A seminal article appeared in the May–June 1977 issue of Harvard Business Review by Harvard Business School professor Abraham Zaleznik, titled “Managers and Leaders: Are They Different?” “Managers and leaders are very different kinds of people,” Zaleznik wrote, giving rise to a conceptual distinction that has proven both popular and enduring.

Eventually business schools began responding to the clarion call for developing leaders, not managers. In the early 1990s, for example, Harvard Business School formally shifted its focus from its traditional concern with general management, issuing a new mission statement that described its purpose as “to educate leaders who make a difference in the world.” Dartmouth’s Tuck School of Business came to define its primary educational goal as preparing “students for leadership positions in the world’s foremost organizations.” Stanford’s business school now aims to “develop innovative, principled, and insightful leaders who change the world,” and MIT’s Sloan School of Manage-ment, “to develop principled, innovative leaders who improve the world.”

A crucial question raised by business schools’ substitution of the leadership paradigm for the managerial one is whether the former constitutes an adequate foundation for a university-based professional school.

The Challenge Ahead
The downfall of managerialism, in the business world and in business schools, and its replacement by the ideologies of shareholder primacy and managers as the fallible, indeed eminently corruptible, agents of shareholders, have not only severely eroded the cultural authority of managers that the creators of the university business school sought to establish and uphold. These changes have also posed what I believe to be the most profound challenge faced by business schools since their appearance on America’s university campuses a century ago. During the 1980s, while the goal of management as a profession was never explicitly renounced by business schools, the essential concept was allowed to fall into desuetude, first through neglect and then through displacement by the emerging logic of investor capitalism.

I should make it clear that my intention in highlighting this shift is not to call for a turning back of the economic clock in an effort to re-create the era of managerialism, a time when too many business leaders took advantage of lax monitoring to build corporate empires with little strategic coherence, producing commensurately lackadaisical results. I do believe, however, that with the abandonment of the professionalization project and the idea that managers — not shareholders, labor, the state, or the market — should exercise ultimate control over the corporation, university business education lost the grand narrative that had sustained it from its beginnings.

The loss of this historical metanarrative of management as a profession — a narrative that had placed managers at the center of the corporation and made them the primary link between the narrower concerns of business and the broader ones of society — is, I believe, the root cause of the inchoateness and drift that, more than 125 years after the establishment of the Wharton School and nearly 100 years after the founding of Harvard Business School, characterizes much contemporary business education. The effects of this loss, in turn, are visible all around those of us who teach in business schools today.

Adapted from From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession, by Rakesh Khurana. Copyright © 2007 Princeton University Press. Used by permission.