Are Business Schools to Blame for the Crisis?

In the upper echelons of the financial world, it's practically a requirement. Former SEC chairman Christopher Cox, has one. So do former Merrill Lynch CEO Stanley O'Neal and O'Neal's successor, John Thain. The same goes for Goldman Sachs chief turned Treasury Secretary Henry Paulson.

These men all played a starring role in last fall's financial collapse. And each is a proud bearer of a Harvard M.B.A. degree. So it's probably no surprise that many people looking for the origins of the crisis have started focusing their search on the ivory towers that produced them. Pablo Triana, a BusinessWeek columnist, is typical; he claims the collapse was caused by "a tiny bunch of guys inside a handful of financial institutions" who, he says, were poorly trained by "the status quo prevalent inside business schools for the past 50 years." Boil down his argument and it comes to this: B-schools are to blame.

Such attacks have intuitive appeal. But probe deeper, and it starts to seem like they may confuse correlation with causation. While business programs are undoubtedly flawed, it's not so easy to actually connect their problems to the crash. After all, although plenty of the worst culprits had M.B.A.s, lots of other central players lacked those dreaded initials.

Critics contend that M.B.A. programs imbue their students with a dangerous overconfidence in data and financial models; that academic overspecialization keeps students ignorant of systemwide risks; and that programs treat ethics as an afterthought. Together, some experts argue, these flaws created a myopic, mercenary mindset among America's business elite that led, predictably, to the fall.

Underlying the indictments is a more basic failure. Rakesh Khurana, a professor at HBS and author of From Higher Aims to Hired Hands, a 2007 book on the history of M.B.A.s, argues that business schools have veered from their original purpose. The M.B.A. was born during the Progressive era of the early 1900s, when the giant American corporation was a new force in society and bureaucrats struggled to keep monoliths like Standard Oil and U.S. Steel from taking advantage of markets and customers. One response was to train professional -managers—via early M.B.A. -programs—to run these institutions for the social good, not short-term profits.

After World War II, however, the Ford Foundation spent $175 million to modernize the M.B.A., molding the curriculum into something close to what we see today. This reorganization happened at the same time the radically libertarian, pro free-market views of Milton Friedman and the Chicago School of Economics were coming to dominate business. These scholars argued that markets are efficient and can regulate themselves; managers should thus work only to maximize shareholder value. That ideology came to permeate the revised M.B.A. programs.

And that is the very thinking critics claim recently got us into so much trouble. But many of their charges don't bear up. Take the first—that M.B.A.s rely too heavily on statistical models. Triana accuses the B-school establishment of "embedding potentially lethal analytical Trojan horses into our economies and markets." While business schools may deserve some of this blame, however, it's not clear they're more responsible than the broader pool of academics, journalists, and bankers who all bought into and hyped the idea that advanced analytics could give humans near total control over financial risk. It's true that Myron Scholes and Robert C. -Merton—widely considered the forefathers of analytical finance—were both business-school professors (at Stanford and Harvard, respectively). But the real numerical necromancy in last year's crisis involved "the Gaussian copula," a piece of statistical legerdemain that convinced legions of financiers they could safely repackage subprime mortgages into top-rated bonds. And that nasty trick can be traced back to a 2000 paper by David X. Li, an actuary who never taught at a business school.

As for the overspecialization critique—the charge that M.B.A. graduates are unable to see the big picture—that also doesn't withstand scrutiny. Academic research has indeed become Balkanized, as critics contend. But business students still get a smorgasbord of instruction in everything from organizational theory to marketing, and the case-study method employed by most top schools is meant to encourage out-of-the-box thinking.

Perhaps the most common critique of B-school programs is that they impart plenty of moneymaking know-how but little sense of ethics, thus producing amoral guns-for-hire. But Marshall Goldsmith, an executive coach and author, says any lapses can't be blamed on schools, since teaching ethics "is largely a waste of time" anyway. The real problem, he argues, is that while the vast majority of M.B.A. students are upstanding citizens, about 2 percent aren't—and they "won't be helped very much" by grad school. (Sometimes they don't find help on the job either, Goldsmith says, since corporations don't always sack people for ethics violations.)

Most business schools these days at least try to impart morality to their -students—the number of free-standing ethics courses at M.B.A. programs has grown 500 percent since 1988. But quality is also a problem, since these courses "were kind of shunted in" after the scandals at Enron, WorldCom, and other corporations in the early 2000s, says Philip Delves Broughton, author of a tell-all book about his two years at Harvard Business School entitled Ahead of the Curve. Harvard's Khurana adds that ethics courses are often introduced as a kind of academic theatrics used to forestall criticism, and in many cases "these courses have been quietly abandoned or marginalized" since their debut.

Still, even if all these criticisms have merit, they hardly prove that M.B.A. programs actually caused the financial crisis. After all, the incentives of a corrupt system can overpower even the best training. In cleaner systems, M.B.A.s did just fine. Take Canada. The CEOs of Scotiabank and CIBC, two of Canada's largest banks, both have M.B.A.s. Yet while their Manhattan colleagues borrowed as much as $34 for $1 of capital, institutions in Canada played it safe, averaging a mere $18 in borrowed money for every $1 they owned. As a result, they're now thriving while many U.S. banks remain on life support. What this suggests is that after graduation, M.B.A.s don't take their training into a -vacuum—they join an ecosystem with its own regulations and incentives, and these can prove more significant than classroom lessons.

But just because business schools didn't cause the crisis doesn't mean they can't—and shouldn't—be improved. Khurana's basic point, that M.B.A. programs have been diverted from their original purpose of training managers to rule in the name of society, is a valid one. To address it, he says, management needs to become a true profession, with a licensing exam and an oversight body that polices its members—something along the lines of what the legal and medical professions have.

But such a change probably isn't likely, and in the meantime, most B-schools are doing surprisingly little. The most notable change so far has been the introduction of a student-initiated pledge, mirroring the Hippocratic Oath, under which future business titans promise first to do no harm. Graduates of dozens of schools from Arizona to New Hampshire, including 54 percent of this year's Harvard Business School grads, have taken the pledge. Elite schools have also added new courses, including ones on regulation and the lessons of the current crisis. Many schools have task forces writing reports on how to adapt to the post-crisis world. But Khurana says the most likely response would be for business schools to undergo the usual "myth and ceremonies" that institutions wedded to the status quo produce when they are under pressure to change. He's probably right. The crisis "has not resulted in a systematic reinvention of the curriculum, nor should it," says Jim Light, dean of the Harvard Business School. "At the broadest level, everyone is to blame," he insists. The one factor that would likely produce real change is if programs were punished for their failures by the one force they value most: the market. Instead, like in every crisis, student enrollments are up. Which likely means more business as usual. Luckily, that business probably didn't cause the last crisis—nor is it likely to spark the next one.