In 1978, I graduated from the University Of Chicago Booth School Of Business. I completed my MBA degree at night while toiling during the day as a Purchasing Manager at a food machinery manufacturer.
The classes were held at 190 East Delaware Street directly across from the John Hancock Center. Ironically, the name of the MBA program was the “190 MBA.” What a remarkably undistinguished name!
Much of what I learned three decades ago is no longer valid. But as the philosopher John Dewey once said, the measure of an education is not what you learn, but your ability to learn how to learn.
For example, the Chicago Booth faculty constantly inculcated the notion that the purpose of a business is to “maximize profits.” All of the faculty members towed the line in terms of advocating this point of view.
Some CEOs follow this dictum to the extreme. The maniacal focus on quarterly profits culminated in the 2001 downfall of Enron Corporation, which morphed into a house of cards, the foundation of which consisted of inflated and, in some cases, downright fraudulent profits and assets.
The most recent incarnation of profit-maximization gone amuck is manifested in the financial services industry. As reported in The New York Times, it is an open secret on Wall Street that many firms use end-of-the-quarter window dressing to make their financial statements appear to be better than they really are. For instance, the management team at Lehman Brothers loaded up on an $85 billion portfolio of risky mortgage-backed securities. They did not want their shareholders and stakeholders to know about this portfolio, because such knowledge could negatively impact the firm’s stock price and their executive bonuses. So the management team moved these securities off their books, which the New York Times described as a “shell game.”
This reminds me of the David Mamet movie, House of Games, in which a small-time criminal Mike (played by Joe Mantegna) dupes various naïve souls with a multitude of cons and acts of deception. Senior executives at Lehman are on an equal moral footing with Mike the criminal. The only difference is that many of the Lehman swindlers have MBAs and could concoct more sophisticated acts of deception than the fictional Mike. Unlike the movie which was quite entertaining, the cons perpetrated at Lehman Brothers resulted in the largest bankruptcy filing in US history, an event that almost toppled our financial system.
Business school education has instilled the ethos that a good manager should win at all costs. In a recent Wall Street Journal article, it was stated that many people blame the business schools for educating their students to focus on manipulating the financial system, and, in that respect, they are partly responsible for producing the managers that have been culpable for the recent corporate melt-downs. After all, the Harvard MBA and former CEO of Enron, Jeffrey K Skilling, was the mastermind of the scheme that manipulated the firm’s stock prices. The jury convicted him of various crimes, including twelve counts of securities fraud, and he is currently serving a 24 year sentence in federal prison in Waseca, Minnesota.
At one of the business schools that I teach at, DePaul University, there is a major effort to incorporate ethics into the curriculum. This represents a sea-change in thinking, namely, that the role of business is not to simply produce leaders who will be solely focused on their self-aggrandizement at the expense of society. Rather, the implication is that business has a role to play beyond profit maximization. Indeed, it suggests that ethics do matter.
What do you think? What is the purpose of business? Does senior management have any ethical responsibilities to society at large? If so, what are they?
Wall Street pressures CEOs to focus on quarterly profits at the expense of longer-range returns. Enron is a good example of focusing on quarterly earnings until it destroys the company and the markets it serves. Sometimes the best strategy to maximize profits involves spending now, at the expense of quarterly earnings, to position the company for longer-term success. However, the pressure on CEOs in publicly-traded companies to post strong quarterly performances is enormous.
It is my experience that an executive of a publicly-traded company has three constituencies: employees, customers, and shareholders. It is always a balancing act to keep all three happy. Wall Street pressures on behalf of shareholders. How the other two constituencies fare is the result of the leadership qualities of the executives running the company. In the case of Toyota, the focus has been on shareholders (and growth and short-term profits) at the expense of customers (and product quality). Unless the three constituencies have balance, it is unlikely that there can be long-term profitability or ethical leadership in any company.
Tom,
Thank you for your comments and insights. I particularly liked how you described the three constituencies that the CEOs of public corporations face. It was also enlightening when you used this framework to analyze the problems experienced by the leadership team at Toyota. I agree with your analysis.
However, in some cases I think that the CEOs of public corporations must take into account a fourth constituency, namely, the interests of the public at large. For example, in 2007 BP, in order to take advantage of high gas prices, decided to process Canadian oil shale at their Whiting, Indiana refinery. However, the process of refining shale produces 54 percent more ammonia and 35% more suspended-solids than processing Middle Eastern crude oil. Although BP got approval from the Indiana EPA and certified that waste water contaminants would fall within the EPA pollution guidelines, once the word got out, the people of Illinois and their representatives took legal action to block BP’s initiatives, based on the argument that any additional pollutants–added to Lake Michigan–would be an environmentally unsound practice. BP has subsequently backed away from discharging higher amounts of pollution into Lake Michigan.
Is BP appropriately taking the interests of the public into account in current Gulf of Mexico oil spill? The jury is still out on that question.
Tim
Hmm. Ethics in a shark tank?
Methinks the lady doth protest too much.
The 70′s faculty at University of Chicago may not have
been politically correct,Monsieur Mojonnier, but they were accurate: profits, profits, profits!
Was it Benjamin Cardozo, who described corporations(not just American) as ‘soulless entities.’?(I believe so, but I cannot adequately source this precise quote).
And see(for example): The Enduring Ambivalence of Corporate Law
Christopher M. Bruner at:
http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=christopher_bruner
Daniel,
Thanks for your comments. I am looking forward to reading the piece that you sent me titled “The Enduring Ambivalence of Corporate Law.” You advocate a point of view that many agree with. Based on recent events, those who believe that ethics do matter are in the minority. The metaphor of “ethics in a shark tank” is startling, and buttresses your argument.
The personification of the point of view that you espouse is Gordon Gecko, who was the main character in the film “Wall Street.” Gecko stated that “greed is good,” and ran roughshod over people in order to maximize profits. If this is as good as it gets in terms of corporate governance, I am afraid that we are all in trouble.
Tim
Hi Tim; Your latest blog entry is a timely (or is it a timeless) subject…… I really don’t believe that all of us “educated” folks were not aware of ethics back in the 70′s&80′s!! As always,anyone can rationalize bad behavior. However, right vs. wrong is almost always a clear choice. Long term success is founded upon solid management and honorable practices.. in the past, as well as the present!
Steve,
Thank you for your comments. I agree with the notion that we learn ethics at an early age, often from our parents or other significant adults. I remember–at the age of 5–being chided by my grandfather for throwing a gum wrapper out of the car window. I have never done that again. That experience has done more than anything–including reading a treatise about the sanctity of the environment–to make me consider the effect of my actions on the external environment.
Many business schools, however, are trying to incorporate ethics into their curriculum. Only time will tell whether or not this education will produce “ethical” leaders.
Tim
I’m wondering what role ethics (or the lack thereof) played in the events leading up to and including the first critical hours and days following the oil rig explosion off the Louisiana coast?
Of course we must wait for hard evidence on whether profits outweighed safety in securing the well-head at 5000 feet beneath the surface of the Gulf of Mexico, and whether fear of blame and money damages outweighed ethics in the accurate reporting of spill volumes of oil into the Gulf, and the treatment of explosion survivors. This was one oil well in one field of one region of the world in which BP operates, but the spill is now consuming 50% of BP’s global profits each day(about $22M/day)(source NPR broadcast 5/27/2010). Considering the astronomical costs to BP per day, perhaps the truth and ethics became an unaffordable luxury?
I absolutely love the design style of your blog. Did you design this website theme yourself?