MBAs focus on the short term, harming companies and communities. Experts identify paths to a longer-term outlook.
CEOs with MBAs are more likely to manage for short-term profits, report researchers Danny Miller and Xiaowei Xu. The CEOs use positive earnings management and limit R&D, leading to lower firm market valuation over the long-term. A short-term focus also reduces firm sustainability, which requires a longer-term outlook.
How can MBA programs and companies focus on the long term? NBS asked for reflections from researcher Danny Miller and two other experts. Nancy McGaw is deputy director of the Aspen Institute’s Business and Society Program, which works to align business decisions with the long-term health of society. Mary Gentile is a faculty member and the creator and director of Giving Voice to Values, a leadership program based at the University of Virginia.
Please share your ideas: write to NBS.
What Our Research Shows – and Why MBA Training May Be to Blame
Danny Miller, HEC Montreal
If I were to say that I would rather have my health managed by a randomly chosen neighbor than a graduate of a reputable medical school, you might question my sanity. And if I were to ask whether you would have your company run by an MBA instead of someone without any business education, then using the same logic, you would opt for the former. Research Xiaowei Xu and I have conducted recently on American chief executives indicates that you might be wrong.
We studied the 5000 or so CEOs included between 2003 and 2013 in the Boardex database, which provides educational information for most executives of major US firms. We found that the 35% of our sample who possessed MBA degrees managed in a way that was quite different from their non-MBA counterparts. They tended to engage in techniques of earnings management to artificially boost earnings, and they expended inferior amounts on research and development; both of these tactics resulted in an immediate and artificial increase in profits, and, of course, a subsequent decline so that the market valuations of the MBA’s firms fell far more than those of the companies led by non-MBAs. And strangely, the MBAs managed to boost their compensation significantly more than their non-MBA colleagues — despite their inferior performance. (Our full article is here.)
In reflecting on these disheartening results, we began to think more about the content of many MBA programs — the course emphasis is on the financial bottom line, on managing by the numbers, on theories that celebrate financial achievement, on finance and accounting. The theories featured are transaction cost economics, agency theory, and other approaches emphasizing selfish motives, financial incentives, and a lack of trust. In case studies, the point of view taken is that of the CEO or shareholder; the protagonists featured are managers and entrepreneurs. Employees, the community, scientific invention, social contribution, even the customers, take a back seat. Certainly, there are courses with topics such as social responsibility; but these represent a token minority of content in a soup of pecuniary material.
I do not wish to maintain that business education causes these results. It may be that those with short-termist, opportunistic tendencies choose to enter business schools rather than programs in the arts or sciences. Nonetheless, the connection between MBA programs and our results is a sobering one.
We studied CEOs based in the U.S., and given my geographic vantage point, I am not sure how far the disease has spread. But if business schools elsewhere are absorbing these “lessons” too avidly, let the buyer beware.
This blog is adapted from Miller, D. 2017. Business education and executive opportunism: The case of MBAs. Revue Francaise de Gestion 43, 265.
Remove MBA Blinders
Nancy McGaw, Aspen Institute
Nearly 20 years ago I participated in a Business Leaders Dialogue hosted by the Aspen Institute Business & Society Program. In a seminar room in Aspen, Colorado, C suite executives met over several days to consider the role of corporations in the 21st century.
Even then, executives raised concerns about the challenges we would face as a society if business didn’t act in ways that contribute to the common good. They foresaw the possibility of a new, anti-business ideology that could lead to debilitating unrest rather than a thoughtful reform of global capitalism.
Prophetic words from 2000.
Fortunately, in the midst of these worrying predictions, there was another insight that deeply resonated with the group.
One CEO commented that leaders were more likely to act to avoid this outcome when they looked beyond their professional roles and saw themselves as grandparents, community members, sons and daughters. Seeing themselves in these roles could make them less inclined to manage their companies with a short-term financial focus that can lead to earnings manipulation and shortchanging investments for the future.
The research that Miller and Xu have conducted suggests that MBA programs place blinders on some executives who rise through the ranks. These programs encourage executives to see themselves solely as maximizers, not just for their shareholders but for themselves as well. Unfortunately, this training restricts their peripheral vision and inhibits them from seeing the larger role that they play in the world, how their actions impact others and what their legacy may be.
In the working world, how can these blinders be removed? Here are three suggestions for CEOs.
Make the choice to ask rather than tell. Engaging with others in a spirit of inquiry rather than instruction or command is a powerful way to see new possibilities and rethink the problems you are facing. Learning to craft questions and then listen deeply to what others have to say takes practice, but the results can be transformative. Take a lesson from the work done by those who study and practice Appreciative Inquiry. Ask colleagues, “When we were working at our best to create value for our community or our employees or our customers, what happened and why?” You can use these stories of optimal performance as a foundation to imagine new futures.
Seek out the social innovators within your company – the people now called “corporate social intrapreneurs.” Learn from their ideas about the new products, services, business models and practices that they believe can produce value for the firm and for society as a whole. Ask them, “What would it take for us to realize this idea?” Also ask them why this work matters to them. Their responses may help you put your own work in a broader context.
Hire people who have demonstrated curiosity and a capacity to work collaboratively with diverse teams to solve complex problems. Don’t simply look for those who have “made the numbers.” Effective collaborators appreciate the importance of seeking different points of view, working across departments, and making space for everyone on the team to contribute. This kind of effort can lead to breakthrough ideas and demonstrate the benefits that lie in looking over the horizon, not just toward next quarter’s financial results.
Flag False Tradeoffs
Mary Gentile, University of Virginia
How can we encourage and enable current and future managers and business leaders to consider both short- and long-term consequences of their decisions (because not all short-term outcomes are negative, of course); to find satisfaction and a sense of accomplishment in non-monetary rewards as well as monetary ones; to define their purpose more widely and explicitly as that of creating “value,” broadly defined and for all stakeholders?
One of the best ways to encourage this broader, deeper sort of decision-making is found in shifting the ways we all — educators and managers alike — frame the questions we ask. Rather than framing our choices as “false dichotomies” — profit versus investment in environmental advances, for example — we can begin to ask “how” to achieve both. And we can invite students to generate action plans and scripts; to rehearse them and engage in peer coaching; and to normalize the pursuit of this sort of broader set of objectives. It is through this rehearsal that students and managers alike begin to build the “moral muscle memory” that makes it feel more reasonable, more acceptable, more expected to raise this other objectives…and it prepares them to do so more effectively, more skillfully and more confidently.
Too often in our management education classes — as well as in our business activities themselves — we present all decisions as finite trade-offs. We frame our questions such that anything other than a narrowly defined, short-term oriented solution will seem hopelessly naïve or unsophisticated. It is only through actually inviting and even requiring more balanced responses, do we make it likely that students and managers will begin to experience and believe in rewards beyond short-term gratification and in success markers that are based in organizational sustainability and societal contributions as well as in financial metrics.
 The research articles on which this essay is based are:
Miller, D., & Xu, X. 2016. A fleeting glory: Evidence of short-termism among celebrated MBA CEOs. Journal of Management Inquiry, 25(3): 286-300.
Miller, D., & Xu, X. 2019. MBA CEOs, short-term management and performance. Journal of Business Ethics, 54(2), 285-300