Managers must learn why workers deserve a fair share of the spoils
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The writer is professor of organisational behaviour and head of the faculty of management at Bayes Business School, City, University of London
For more than a decade, I taught a course on business ethics. Each year, I would start with a simple question: why do corporations exist? “To maximise returns for shareholders,” one student would answer. Then another would explain that corporations have other stakeholders, such as customers and the local community.
Things always became trickier when I gave them a real business problem: what if you are running a company facing increasing competition from foreign rivals with a lower cost base? Should you reduce dividends or cut labour costs? Often the answer was the latter.
It seems my students are not alone. A recent study by Daron Acemoglu of the Massachusetts Institute of Technology, Alex Xi He from the University of Maryland and Daniel le Marie of the University of Copenhagen found that managers educated at business schools were more likely to favour shareholders over employees.
In their paper, titled Eclipse of Rent-Sharing, the authors found that employees working for companies run by a business school-educated manager earned, on average, 6 per cent less in the US and 3 per cent less in Denmark. Companies run by business school-trained managers are no more productive or innovative, but they do have higher share prices (5 per cent higher in the US) and a better return on assets (3 per cent greater in the US, 1.5 per cent in Denmark). They are also likely to pay their chief executive more.
The pattern Acemoglu and his colleagues identified is part of a wider trend. While corporate productivity has continued to increase over the past 40 years, the share of productivity gains going to employees has flatlined.
There are many reasons for this, including globalisation of supply chains, the decreasing power of unions, the increasing role of automation and the shift from higher-paid manufacturing jobs to lower-paid service sector jobs. However, the rise of business school-trained managers explains about 15 per cent of the stagnation of wages since 1980 in the US.
In 1980, just over a quarter of larger US companies were run by professional managers. Today, that number is close to half. Although the percentage of European companies run by business school-trained managers is lower than in the US, it is also growing. For instance, in 1995, about 11 per cent of Danish chief executives went to business school. Today that number is 19 per cent. Business school-trained chief executives often bring with them the ideas they soaked up in the classroom.
The two ideas that have had the biggest impact are shareholder value maximisation and business process re-engineering. In many finance and accounting classes, students learn that the purpose of the corporation is to maximise value for shareholders. In operations management classes, they often learn how business process re-engineering can be used to remove labour costs and increase profitability.
Acemoglu’s paper was confronting this approach. On one hand, it shows that the ideas we teach at business school have a profound impact. On the other, it appears that this impact is not entirely positive. The ideas business schools teach have helped improve share prices and chief executive pay but have made no difference to innovation and efficiency. Most worryingly, though, these ideas have helped drive one of the great economic ills of our time: wage stagnation.
If Acemoglu is right, business schools need to change what they teach, how they teach it and whom they teach. The good news is that some of the transformation is already under way. The Friedman doctrine — that the social responsibility of business is simply to increase profits — is out. The vast majority of business schools place greater emphasis on maximising value for a wide range of stakeholders.
Business schools have altered their teaching methods. Instead of dry case studies, students are increasingly likely to be given knotty real-world “grand challenges”. They are asked how to deal with flood risk in Pakistan, the refugee crisis across Europe or hate speech in the US, for example. It is in unpicking these wicked problems that students start to understand the wider role business plays in today’s society.
The one aspect on which business schools have made less progress is whom they teach: classrooms are often filled with people from well-off backgrounds. A class packed with members of the elite might be good for building networks but not for building empathy.
Harvard economics associate professor Gautam Rao found that when schoolchildren were placed in classes that were a mix of well-off and less well-off, they were more likely to share and volunteer, and less likely to discriminate. Perhaps business schools should take inspiration from Rao’s study and introduce greater socio-economic diversity to our classrooms.
If we are able to achieve this, then the business leaders of tomorrow might be more likely to share out the gains of productivity a little more fairly.
See the winners of our second annual Responsible Business Education Awards on January 16