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Did Business Schools Fail to Anticipate the Financial Crisis?

The big financial crash was swift and unexpected. It struck out of the blue some four years ago, yet its thunderous bluster did not die out as quickly as it occurred. On the contrary, it persisted, leaving the world economy in a state of shock. Markets, banks and seemingly invincible companies collapsed like a house of cards. Financial experts and corporate moguls were left wondering what went wrong and why risk management proved inefficient. Taxpayers were furious and set out on a witch hunt. Business schools were among the first to be singled out as scapegoats.

According to the general train of thought, MBA graduates from 10 years ago were in charge of the world’s finances at the time the crisis struck and should take their share of the responsibility for the collapse of the economy. These so-called experts not only failed to do their job and to foresee the risk, they were also perceived to have traded long-term strategy for short-term gains.

Philip Delves Broughton, a Harvard Business School alumnus, says a procession of Harvard-trained MBAs played a prominent role in the economic collapse, as these are “people who have the same education, who know each other, who created an economic system that has led to an enormous amount of unnecessary hardship for people”. Many business schools in the US were quickly dubbed ‘academies of the apocalypse’ while high-flying MBAs such as Harvard MBA graduate Henry Paulson, secretary of the treasury under President Bush, were labelled “toxic bankers and scammers”.

While business schools continue to deny accusations that they played a pivotal role in bringing about the recession, claiming that it is too simplistic to hold them primarily responsible, they willingly revised their curricula, bringing soft skills to the forefront.

Soft skills vs Hard Skills

Most of the Ivy League universities in the US and elite MBA schools in Europe traditionally focused on teaching their students the basics for a career in business. Hard skills such as finance, marketing, accounting, logistics and so on were among the core subjects of every respectable MBA programme. Yet the new recession has highlighted how insufficient this traditional approach to the economy can be. According to Professor Yash Gupta of the Carey Business School at Johns Hopkins University, the credit crunch has shown up the kinds of business methods that are ineffective and, worse, destructive. “It glaringly revealed an all-too-prevalent corporate mindset that measures success mainly in terms of shareholder value, with value for the organisation, workers, customers and society in general far down the list of concerns, if on the list at all.” In the wake of the recession, it became clear that the movers and shakers of the economy had to be aware not only of business theory, but also of how it could be applied in a socially responsible manner. Professor Chris Bones of Henley Business School points out that “the track record of MBA graduates with a double-first in mathematics manufacturing credit derivatives is not a good one” and believes the MBA industry must reform itself. “It’s easy to teach theoretical and quantitative stuff. But you don’t get a lot of reality and certainly don’t get today’s reality.”

The report, which predicts an improvement in MBA recruitment for 2011 in several industries, shows that the major soft skills demanded by MBA recruiters are interpersonal skills, communication skills, strategic thinking and leadership. Practice shows that many business school graduates enter the job market lacking skills beyond the ‘science of business’. Hence, business schools, including elite and traditionally minded universities, have been forced to revise their curricula and strike a balance between core subjects and soft skills (intellectual flexibility, cultural literacy, the ability to communicate ideas, optimism, creativity, a collaborative outlook and the willingness to lead). They have also been compelled to redress the issue of business ethics.

Business And Ethics

If anything, the recession brought to light one very important question of whether business could and should be ethical. The answer to it seems to be a resounding 'yes'. Especially in the aftermath of a massive credit crunch, which exposed a corporate culture that allowed executives to walk off with millions of dollars while firms lay in tatters and society was left to foot the bill.

According to Jonathan Slack, Chief Executive of the Association of Business Schools (ABS), which represents all 114 UK business schools, these institutions have and continue to instil business leaders with a corporate social responsibility (CSR) ethic. Indeed, CSR has become commonplace not only in the UK but also in the US over the last 10 years. However, it has been a side dish rather than a main course. Until recently, CSR and business ethics have not been firmly rooted in the curriculum. According to the UK Association of MBAs, just 20% of MBA courses in Britain have a mandatory CSR module. Otherwise it is optional and if students are not interested in business ethics, they can opt out of it.

However, things are now shifting at a steady pace. According to a recent report, UK business schools are now addressing the issue and conducting in-depth research into CSR and sustainability. MBA programmes in Europe and the US now promote an emphasis not only on creating value rather than extracting it, but also on the benefits to society rather than concentrating solely on profit.

Even the more conservative-minded Harvard Business School recently elected Professor Nitin Nohria as Dean, an Indian citizen with a background in corporate transformation and accountability and sustainable economic and human performance.

According to Professor Rakesh Khurana of Harvard Business School: "Now is the time for business school faculties to consider how they can contribute to the creation of a business culture that better serves the American economy and society. Business leadership must be defined in terms of value creation, not value extraction."

To achieve this, business schools have yet to agree on a shared body of knowledge and values. The good news is that they have all acknowledged the need for ethical codes that go beyond the rules and regulations of the marketplace. Codes that will not only alleviate the present recession, but will certainly help to avert the next crisis.

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