Can We Avoid Another Cataclysmic Meltdown Of The Global Financial System?

Chapter 3 What an MBA Won’t Teach You

Chapter 3 delves into how business education is failing American businesses and illustrates some of the  major weakness in what is being taught in MBA programs. It decries the emphasis MBA programs place on balance sheet manipulation skills versus providing assistance in acquiring managerial skills. And it discusses what can happen if one focuses on the former to the exclusion of the latter using examples taken from the pharmaceutical industry.

Specifically mentioned is Pfizer  a giant international pharmaceutical company that has more  than $30 billion  in cash on its balance sheet, yet is using these funds  for mergers rather than for early-stage research that creates new wonder drugs. Also mentioned is the investment banking firm, Morgan Stanley, who had advised the pharmaceutical industry to “curtail drug research”and use their investment capital “to create value by throwing cash back to shareholders or buying up companies that create short term revenue streams, if not longer-term profits”.

Criticism is specifically directed at those executives who run companies in industries where continuous innovation is essential for long-term survival such as those CEO’s of Big Pharma companies. They are taken to task for applying what they had learned in MBA programs about the need to  minimize the amount of cash at risk and to focus on short-term strategies that will have an immediate impact on increasing shareholder value. Examples are given showing how  such strategies have eroded their company’s ability to innovate, and have turned their companies into portfolio managers of many smaller pharmaceutical companies that still hold valuable patents that they had been able to acquire. It is then pointed out that as a consequence of this strategy, many of these “parent” Big Pharma firms end up “sucking out the value of their acquisitions” while creating little in the way of growth or job creation.

One of the disturbing conclusions  reported in this chapter is the observation that this MBA philosophy has created a corporate  mind-set  that has weakened American business over time, as is evidenced by such metrics as lower levels of R&D  spending, creation of fewer new businesses, declines in productivity, and the decline in the level of the public’s trust in the business ethics of American public company executives.

When MBA programs came into existence in the late 19^th century they were designed to provide those American public companies that were experiencing growth, with a pool of formally-trained future managers and business leaders. The initial business school course offerings were vocational in nature, focusing on industry-specific expertise and on solving of practical problems of real firms in the real world. Gradually, more rigorous disciplines were introduced into the curriculum such as accounting, engineering, economics, marketing, and statistics.

Over time, as American business became larger and as large public corporations evolved, the objectives of MBA programs became even more quantitative. Emphasis was placed on understanding micro and macro economic theory and the use of analytical tools designed to assist in making projections and setting corporate strategies. It was hoped that the emergence of MBA’s from the American business schools would produce a sufficient number of professionally trained business leaders that were prepared to lead their companies to fulfilling the promise of creating ever increasing balance sheet growth and shareholder value.

But as documented in this chapter, business education became the prisoner of the underlying doctrines contained in  the so-called “efficient-market theory” as these doctrines when implemented are supposed  to facilitate financial maximizations. As with most theories, over time, they outlive their usefulness as more becomes known and things change.

Unfortunately, business schools are still teaching too many rigid theories  that offer ways to project markets  and asset values. Most have proven to be inaccurate, as they fail to account  for emotions, biases, bad habits and pure chance. It is generally recognized that  this efficient market theory is now out-of-date, as our economy and society have proven to be  much more irrational, and unpredictable, and human experience has undermined such rigid thinking.

And as  is pointed out in this chapter it is a flawed idea to think MBA trained CEOs  should hold onto the notion that  American companies should be explicitly and exclusively managed for the benefit of shareholders and not for other stakeholders. This kind of thinking puts American companies at a disadvantage to overseas competitors in which there is a broader stakeholder model of governance. Because such companies are not operating under the same short-term pressure to make their numbers they are often positioned to outlast their American competitors.

The bottom line in all of this discussion on the existing corporate mind-set based on this MBA philosophy, is that it is time to revise some of our theories that are in many cases dictating harmful corporate strategic thinking. In order to do this, we need to introduce more ideas on how to create real economic and social value through the American financial system and jettison those that are embedded in the existing MBA based mind-set that are impeding us from making our financing system more responsive to the real economic needs of American business.