I know that business schools don’t educate priests, so
calling them seminaries is provocative. The provocation is based on facts, and
these facts deserve attention. Like any other form of education, business
schools teach strongly held beliefs on how the world works and why some actions
are better than others. By the way, what I just said is not equally true for
all kinds of education. For example, science places more emphasis on how the
world works, while engineering places more emphasis on what actions are best.
Business schools are even more engineering than engineering departments,
because students taking MBA degrees are very interested in knowing what to do
to become successful, and they prefer short explanations of why the sources of
success are connected with how the world works.
This is important because the actions taken by those few
MBAs who become CEOs of major corporations are very consequential, so business
schools are also very consequential. What we teach is practiced by firms, both
when it is right and when it is wrong. A recent paper in Administrative Science Quarterly by Jiwook Jung and Taekjin Shin looks at how business schools were
behind the largest change in firm structure in recent history: the breaking up
of diversified corporations into smaller specialist firms.
This change is literally a textbook case of what firms
should do. According to finance theory of capital markets, investors are better
off diversifying by buying many specialist firms than a single diversified
firm. According to the economic theory of managers, firms are more valuable
when they are so specialized that it is easy to reward and punish CEOs based on
how well they do. The combination of these two theories moved into business
schools in the 1970s and has stayed there ever since. Jung and Shin discovered
an easy way to measure its effect: In the exact same time period, firms led by
CEOs with MBAs from before the 1970s kept diversifying, and firms led by CEOs
with MBAs from the 1970s onward were de-diversifying. The CEOs were practicing
what their business schools preached.
Does this sound like a good effect of education, or is there
anything scary about it? We like people to choose the right actions based on
knowledge of how the world works. Business schools have a special
responsibility because some of the people we educate become very important for
the society and economy. So this seems like a good outcome: for anyone who
believes what business schools teach, it was great that businesses became less
diversified.
Here is the scary part. Any form of science is wrong or
incomplete sometimes, especially if it is a young science like the branches of
knowledge that business schools teach. Remember when all the finance professors
thought the economy was healthy, just before the financial crisis? It gets even
worse when our graduates learn what actions are best but prefer short
explanations of how the world works. Remember when all investment advisors
loved web businesses, just before the dot-com bust? If we teach too
confidently, trouble will follow.
De-diversification sounds like a safe case, because there is
pretty good evidence that diversified firms are worth a little less than
de-diversified ones. But we should keep in mind that even this case isn’t
entirely clear. The de-diversification took place during a time period when
changes in competition law enforcement meant that buying competitors and
increasing prices became easier and a better use of money than diversifying.
Also, for firms heavily engaged in product development, some diversification
can be a significant advantage, as another recent ASQ paper has shown. Even the
best of our knowledge can be changed as we continue to learn. That’s how
science works, and that’s why teaching should be done with some modesty.
