Have Amoral MBAs Poisoned Capitalism?

Facebook reached a point where selling user data to anyone who wanted it, no questions asked, became business practice. But this lack of morals is entirely what one should expect from a company founded by a particularly ambitious 21 year-old, who attended Harvard and is advised by management consultant MBAs argues Chad Slater, portfolio manager of the Trium Morphic ESG L/S Fund.

 

The concept of managing yet not owning a business – a professional manager – is a relatively recent phenomenon. However, the idea that college graduates should run businesses isn’t just new; it runs counter to the way things had always been done. Up to the 1800s, you either had to be an apprentice or be a member of the family, usually not even the most impressive member of the family at that: if a rich family had two sons, it was the one who couldn’t get into Cambridge who got to stay home and run the business, not the other way around.

Dangerous minds

 The dawn of the industrial revolution saw companies becoming large enough to need “middle managers”. To fill this expanding need for managers, in stepped Ivy League universities. As opposed to what many people think, Harvard Business School (HBS) was not the original business school; Wharton at University of Pennsylvania founded in 1881 was the first. HBS followed suit in 1908 and quickly became the most dominant.

The problem then, that still remains today, is that newly churned out Ivy League professional managers have none of the hallmarks of other professions. There is no Hippocratic Oath equivalent; no agreed “body of knowledge”; no ideal of service. This deficiency has sowed the problems we see in society today – highlighted by Facebook’s role in magnifying political division and threatening the very fabric of our democracies.

Some saw this coming. In his book, The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite, Duff McDonald argues that over the past 100 years, HBS has never truly figured out how to integrate ethics into its curriculum – though it’s not for lack of trying. The problem is most MBA courses are functional; ethics is philosophical. The particularly ambitious cohorts that attend the top MBA schools are impatient and would argue they have never committed a meaningful ethical transgression. Duff argues that many simply had neither the need nor the opportunity at age 26 to cross the line.

There is no Hippocratic Oath equivalent; no agreed “body of knowledge”; no ideal of service.

Chad Slater Portfolio Manager, Trium Morphic ESG L/S Fund.

Ruthless ambition

I am not arguing doing an MBA creates unethical professional classes, rather there seems to be an adverse selection problem where a certain type of ruthless and ambitious personality type enrols in a top MBA course. Stearns and Borna (1998) measured MBA students against felons imprisoned and found the felons in some ways to be more ethical. Another study showed across 200 companies the likelihood of corporate crime increased when members of the management team had either graduate business education or military experience.

As MacDonald writes,

“The fact that HBS attracts self-styled future leaders also raises the question of whether someone whose goal is to be a leader is actually the right candidate to be leading anything. Deresiewicz recalls an anecdote of one Harvard admissions interview: ‘Harvard is for leaders,’ the interviewer said, ‘so what do you want to be the leader of?’. The answer: ‘I don’t know . . . something.’ That’s not leadership. That’s aimless and unfocused ambition.”

“What they mean is nothing more than getting to the top,” says Deresiewicz. “Making partner at a major law firm, or running a department at a leading hospital, or becoming a senator or chief executive or college president. Being in charge, in other words: climbing the greasy pole of whatever hierarchy you decide to attach yourself to.”

Fortunate 500

All this dwelling on ethics and MBA matters, because these are the people who are running the largest companies in the world. Nearly a third of the world’s largest 500 listed companies by market capitalisation have a chief executive with an MBA, while HBS MBAs account for twice as many as any other school.

And what is the totem for a corporate world without principles: the unedifying spectacle of CEO remuneration. Fifty years ago, CEOs were paid roughly 20 times as much as their employees. Today, that ratio stands at a staggering 354-to-1 (McDonald). One can understand the Trump-voting blue collar worker perspective: an amoral 30 year-old pushing them around, on the instruction of a CEO who never gained respect within their industry and was parachuted in by the board.

If we look at the Facebook example, one sees many of these strains of ruthlessness or amorality. Mark Zuckerberg has left a trail of debris in his short career. From the early ousting of his business partner; to the stock listing where “lucky” shareholders have no control over voting rights despite representing much of the economic ownership (a debtholder without the security of assets as it has been aptly put); through to the aggressive monetisation of user data. The Cambridge Analytica scandal should come as no surprise to anyone who had cared to look. Interestingly, while stocks like Facebook are not the main type of focus for our ESG fund, our ESG audit would have flagged many of the issues above in the research phase of the investment, perhaps highlighting again why an ESG lens is so important.

The good news is there seems to be a shift taking place amongst millennials. The concept of “greed at all costs” may be waning after forty years in the ascendancy. This is needed as the role of a manager isn’t going to go away, but it needs to be rehabilitated. For corporate ethics to be restored, MBA programmes must begin to produce less Enron outcomes and less people whose only goal is to climb the greasy pole.