Why Are There Business Schools in Universities?

Rakesh Khurana, Harvard University

In 2008, Harvard Business School celebrated its 100th birthday. Harvard’s year-long centennial culminated in a two-and–a-half-day global summit in which more than 2000 business leaders, alumni, academics and a select group of invited journalists from around the world gathered to discuss the School’s contributions to American business. Moreover, in recent years the school had broadened its mission to include not only preparing managers but also producing leaders for society. The nation’s first twenty-first century president, George W. Bush, was a Harvard Business School graduate. President Bush had taken special pride in describing himself as an MBA president, and had appointed many Harvard Business School alumni to his administration, including Henry Paulson at Treasury; Elaine Chao at Labor; Christopher Cox as commissioner at the SEC, and Paul Bremer as the first U.S. administrator of post-war Iraq.

And, while the mood at the centennial was celebratory, those ensconced inside the climate-controlled, building-like tent erected for the celebration were busily checking their laptops and BlackBerrys for the latest news about the Lehman Brothers bankruptcy, the political uproar over the proposed government takeover of AIG, and the proposed 750 billion dollar government bailout of the nation’s financial institutions.

Since that fall of 2008, Harvard Business School and other elite business schools have been forced into a moment of reflection about the role they may have played in the decline of America’s global competitiveness and the nation’s most serious economic crisis since the Great Depression. Some have been strengthening their ethics programs. Others have introduced courses on the subject of social enterprise. Would a course on risk management have reduced some of the excesses of leverage? Instruction in better corporate governance?

But the central question facing business schools in the midst of capitalism’s most significant crisis in nearly a century has more than just historical interest. That question is simply, “Have business schools delivered on the social contract upon which they were founded?”

To those who are unfamiliar with the contemporary American business school, much less with its history, the question may seem akin to asking why universities have football teams, law schools or development offices. Hasn’t it always been this way, or, if not, why would we now want to do without these things?

By many quantitative measures the university-based business school has been a great success, and at no time more so than today, when more than 150,000 MBAs are awarded annually in the United States—almost triple the number awarded in 1980 (Source: US Statistical Abstracts). Once an almost exclusively American phenomenon, the MBA is now granted in more than 100 countries and is becoming a globalized credential.

The expansion of university business education has been driven, to a great extent, by the rewards to which it provides access. In recent years, an MBA from one of the elite business schools has become a golden passport to some of the most coveted and best paid jobs in fields such as consulting, investment banking, private equity, and hedge funds. The median starting salary for an elite MBA student going into finance and consulting is about $115,000 per year. Meanwhile, business school professors not only publish in respected academic journals but also sit on corporate boards, serve as well-paid consultants, and dispense valued insights in the media and executive education programs. Their activities are increasingly underwritten by well-regarded philanthropists, such as Eli Broad and Michael Bloomberg, who give generously to business schools for facilities, endowed chairs, and student scholarships.

In short, business schools are now as solid and respectable a presence on their campuses as Gothic administration buildings or state-of-the-art dorms or stadiums that rival those found in professional sports.

In contrast to this celebratory and taken-for-granted view of the contemporary business school that has been the public relations created image of business school websites, marketing material and commercial advertising in recent years, another, more troubling picture has emerged in recent years. From inside business schools themselves, respected faculty have criticized the disciplinary orientation of business school scholarship and the relevance of both scholarship and teaching in business schools to educating future managers and improving business practice.

The critique of business school research has centered on faculty pursuing narrow, discipline-based research agendas on topics remote from the actual practice of business. In an influential Harvard Business Review article in 2005, Warren Bennis and James O’Toole noted that in the top-tier business schools, faculty members are increasingly evaluated using the same criteria found in economics, sociology, and psychology departments. They pointed out that these schools increasingly hire and promote only individuals whose main interest is in publishing discipline-based, quantitative research in journals read only by fellow academics. The professor whose primary audience is educators or whose research is mostly relevant to business executives has a grim future in today’s business school.

The critique of business school pedagogy, in turn, has focused attention on both the irrelevance and, in some cases, the actual perniciousness of much of what is taught to MBA students. Henry Mintzberg, author of Managers Not MBAs, has argued that the typical fulltime MBA student, with only one or two years of work experience, has little in the way of experience or other context for making sense of most of the concepts and tools taught in business school courses. The late Sumantra Ghoshal criticized the narrow, shareholder-value-maximization model of management that has become a staple of MBA courses. The misguided conception of management imparted to business school students, Ghoshal argued, has turned the pursuit of short-term shareholder interest, as well as more or less naked self-interest on the part of managers, into managerial virtues.

That business schools have inspired such criticisms over a hundred years after they first appeared on the academic scene suggests—contrary to the appearance of solidity that they give to the casual or partial observer—that the university-based business school remains an unsettled, even inchoate institution. It is in light of this surprising reality that an historical approach to the question “Why are there business schools?” provides important insights into their present state and raises compelling concerns about their future.

In the late nineteenth and early twentieth century, the question for the nascent business school movement was, “Why should there be business schools in universities?” The answer was by no means obvious, despite a longstanding effort to make higher education serve the economic and social interests of a rapidly developing nation.

The state colleges and universities founded after the passage of the Northwest Ordinance of 1787 had, from the start, aimed to enlarge the mission of higher education in America beyond that of preparing well-born young men for the traditional professions of law, medicine, and divinity. After the Civil War, the movement to give the American university a more utilitarian cast received new impetus from the Morrill Act of 1862, which sanctioned agriculture and the “mechanical arts” as fit subjects for study in the nation’s new land-grant universities.

When the German model of the university as a center of advanced research and graduate study was grafted on to the homegrown product in the 1870s and 80s, a uniquely American hybrid was born. The new American research university, with its triple mission of teaching, research, and public service, increasingly drew such elite private institutions as Harvard and the University of Pennsylvania into its orbit. It was mostly at these elite schools, where the potential for conflict between vocationalism and academic purism was greatest, that the university-based business school was invented to legitimate business as a subject worthy of a place in the university.

That effort came about as the result of a push by a vanguard of institutional entrepreneurs, both academics and enlightened business leaders, who saw the rise of the large corporation in the late nineteenth and early twentieth century as a profound challenge to the existing social order. When the sale of shares to the public resulted in a separation of ownership and control in the large corporation, shareholders, labor, and the state all advanced claims to the right to direct this powerful new economic entity.

The university-based business school, in turn, was invented as a way of legitimating a fourth claimant to the right to control the large corporation: a new group known as managers. The strategy for advancing management’s claim to direct the new, publicly owned corporation was to create a new type of university professional school. To do so, the leaders of the business school movement allied themselves with three institutions viewed as the pillars of a new social order in the Progressive Era: science, the professions, and the new American research university. By means of this network of alliances, the university-based business school proposed to ensure that the large corporation would be run in the interests of society by turning the occupation of management into a bona fide profession meaning that it would be more than an occupation. Instead, like the professions of law and medicine, it would consist of an identifiable body of knowledge, an educational system that ensured that its practioners had mastered that knowledge through testing and continuing education, a commitment to use that knowledge for the public good, and a capacity for self-governance.

The claim that management could be made into an academic subject and a profession resembling such traditional ones as law and medicine was controversial. Even at a public institution like the University of Wisconsin, faculty in the arts and sciences proved reluctant to approve the establishment of an independent course of study in business. At Harvard, where the founding of a business school formed part of President Charles W. Eliot’s reform efforts, the new Graduate School of Business Administration was initially an object of ridicule. John Jay Chapman, a prominent Harvard College alumnus, said:

“You couldn’t find a man in the whole world more divested of the peculiar virtues that cause the regular professions to be revered than our American prominent business man. Then why should we accord him the ‘dignity’ and respect accorded to these professions? Give him something else! Give him a medal with a picture of himself and his pile; give him praise for his benefactions, for benevolence, for courage, mother wit, good luck. But don’t play upon the accordion of his vanity and ignorance by according him the dignity and respect due to other things.”

Such struggles played themselves out at public and private universities across the country. In the face of such opposition, business schools had to earn their place within the university. They did so by following a three-pronged strategy flowing from their embrace of science, the professions, and the university. First, they attempted to demonstrate that management was a science with conceptual roots in the traditional academic disciplines. Second, they proposed to elevate management into a genuine profession by developing normative as well as cognitive foundations for it. Finally, they pledged allegiance to the new American research university’s triple mission of teaching, research, and service to society. These three goals became the basis of what we call the “professionalization project” in American business education, which occupied business school leaders from the foundation of the Wharton School in 1881 up to the eve of World War II.

Not long after the end of the war, however, the professionalization project—which had achieved only very partial success—quickly began to unravel. A postwar boom in business education spurred by the GI Bill saw the creation of dozens of new business schools, leading to a dilution of academic standards. The American Association of Collegiate Schools of Business (AACSB), which had been the primary vehicle for the professionalization project, soon devolved into a mere accrediting agency.

It was in this context of weakening organizations and standards that a new institutional actor inserted itself into business education: the American foundation. In the 1950s, the newly wealthy Ford Foundation, along with the Carnegie Corporation, took up the cause of reforming American business schools. The Ford Foundation’s intervention, in particular, would have dramatic consequences for the future of business schools—and catastrophic ones for the professionalization project.

The foundation centered its efforts to improve the intellectual caliber of business education on two major objectives: making business school research and curricula more “scientific” by grounding them in quantitative analysis, and making business school faculties more “professional” by recruiting them from the most relevant academic disciplines—primarily economics. Focusing on a small number of “centers of excellence,” the foundation accurately foresaw that the means and methods it promoted in these elite business schools would “trickle down” to others.

In the 1970s, finally, the unintended consequences of the Ford reforms began a fatal undermining of the professionalization project. In the classroom, new concepts from the discipline of economics, particularly transaction-cost theory and agency theory, amounted to a direct assault on the idea of professionalism in management. Rather than self-disciplined professionals using their expert knowledge for the greater good, managers were now seen as the corruptible agents of shareholders, to whose interests they must be bound by purely economic incentives. Thus taught to think of managers as mercenaries, graduates of the elite business schools increasingly opted for jobs not as managers but rather as management consultants, investment bankers, and investment managers.

The coup de grace for the professionalization project came in the late 1980s, when Business Week published a cover story ranking U.S. MBA programs based mostly on the opinions of corporate recruiters and second-year students. Other publications soon followed suit with rankings emphasizing factors such as graduates’ starting salaries. Business school deans quickly submitted to the tyranny of the rankings, and many business educators began to abandon the pretense that they were providing anything other than a commercial product.

A 2002 AACSB report titled “Management Education at Risk” is an excellent case in point. In language heavily laced with business jargon, this document describes the increased “segmentation of consumer markets” for business education and explores its implications for “strategies to deliver educational and research services” on the part of business schools. Nowhere in this report, authored by a committee consisting mostly of university business educators, is there any discussion of education as a mission, management as a profession, or the risk to the integrity of university business schools from an uncritical adoption of a commercial self-conception.

In light of this historical descent from the professionalizing aspirations of the founders of the first American business schools to the cynical philosophical underpinnings and nakedly commercial preoccupations of university business schools today, the question “Why are there business schools in universities?” takes on an entirely contemporary relevance.

No university business school today would dare to proclaim in its mission statement (although many do in their marketing materials) that it existed to “deliver superior return on investment for its students” or to “maximize shareholder value.” In practice, however, this is about as high as contemporary MBA education aims.{{1}}MBA students, meanwhile, understanding that the content of their business school educations has little to do with the practice of business, have come to value their MBA experience largely for the access it provides to networks of fellow-students and alumni. In recent decades, the dearth of large numbers of students who feel an inward direction or calling to serve as leaders of business enterprises or entrepreneurs might explain some of the transactional orientation and obsessive concern for private gain of our current business leaders. The MBA classroom meanwhile has become less engaging both to students and faculty. Faculty accuse the students of being vocationally minded and lacking in critical thinking skills or unwilling to engage in self-reflection. Students believe the regular, full-time faculty is more interested in their own disciplines and possesses little familiarity or genuine interest in business.

This being the case, what now distinguishes university business schools from their increasing numbers of for-profit competitors is primarily the prestige and other forms of social capital accumulated by the university and generously shared by it with business schools. When the first university-based business schools were founded over a century ago, universities were willing to share this social capital so as to bring business education into the academic fold and infuse it with the university’s ideals. Why are they willing to go on sharing it now, when business schools have strayed so far from the university’s academic and societal mission?

One possible answer is that whereas a century ago business schools had to adopt the values of the university in order to establish themselves, the contemporary American university has increasingly adopted the values of business. Indeed, so thorough has been the transvaluation of values in American society generally over the last twenty-five years that one might well debate how much of their legitimacy business schools now owe to the university, and how much universities (except for the most elite) owe their legitimacy to their business schools.

Whether or not this is true at the level of social status and prestige, it is certainly true at the level of finances. As the Academy Award winning documentary Inside Job finds, highly reputable business schools and university economic departments now perform the same functions as college football or basketball programs: bringing in large dollars for the university and individual faculty, but increasingly divergent from the overall educational, intellectual, and societally oriented ideals of the university. Now that business education has become so divorced from what is supposed to go on at a university, it is an opportune time to start giving it the scrutiny that many are urging for higher education.

From the standpoint from which we have described it, the 125-year-plus history of the university business school can be plotted as an inverted V, tracing the dramatic rise and fall of a once promising institution. Our hope, however, should be that future historians will plot this same span of time as a cycle that was broken when a new generation of institutional leaders saw the need for renewal. There are signs that a new generation of deans and business school professors recognize that business schools were founded by universities not because of the dollars they are able to bring in but because of the necessity to produce a business leadership that understood the larger purpose of business in society. By bringing the intellectual traditions of the search for truth and critical inquiry into contact with students who would be socialized into using that acquired knowledge in service of creating an effective and vibrant economy, the university-based business would be serving the larger society. Look around. The need for these types of leaders has never been greater.

[[1]]Virtually every university business school now proclaims its mission to be some variant on the theme of educating “leaders.” Yet given that leadership offers no remotely adequate intellectual or normative foundation for a university professional school, one suspects that the appeal of the “leadership” nostrum lies in the suggestion of high-mindedness without the rigors and demands of educating actual professionals.[[1]]

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