Pursuit of social purpose sends business schools back to their roots

Leon Laubscher belongs to a new generation of business school alumni — one very different…

Leon Laubscher belongs to a new generation of business school alumni — one very different from the profit-obsessed cohorts that once emerged from MBA classrooms. Where his pre-2010s predecessors went all out for investor returns, Laubscher argues that companies should put social purpose before, or at least on a par with, profit.

“The role of business has changed significantly,” he says. “It’s not just about creating shareholder value any more; we need to be looking after the environment and making a positive contribution in society.”

Laubscher says one visiting professor — Lawrence Pratt — helped him see the link between sustainability and profitability during his MBA at Rotterdam School of Management in 2019. “A lot of people think sustainability is this hippy, tree-hugger thing, but the professor drew the connection with financial performance,” Laubscher says.

The course content was, he adds, highly relevant to his work at consumer goods group Unilever, where he is a strategy manager in the global sustainability team. “We need to figure out how to decouple environmental impact from business growth,” Laubscher says.

Business schools are overhauling their programmes, shifting away from the shareholder-primacy doctrine that has shaped much of their teaching in recent decades. Instead, they are emphasising social purpose and environmental concerns. But for reasons such as institutional inertia and graduate employability, the shift is proving difficult.

A decent profit — decently

This is not new ground for business schools: if anything, it is a return to their roots. Many institutions prioritised the advancement of moral and social objectives throughout the late 19th and much of the 20th century. Business schools in the US were built on these principles. In 1881, the Wharton School was established at the University of Pennsylvania to prepare graduates to become “pillars of the state” and advance society as a whole. In 1908, Harvard Business School’s founding mission was to train leaders who “make a decent profit — decently”.

JC Spender, emeritus research fellow at the Institute for Ethical Leadership at Rutgers Business School in New Jersey, says that, back then, there was a rich tradition of teaching business ethics at business school. “Management was seen as a socially orientated activity,” he says.

Things started to change at the end of the 1950s, when the Carnegie and Ford foundations produced influential reports that heavily criticised the lack of scientific rigour in business education. Under fire for their reliance on practitioners for teaching, schools responded by placing a greater emphasis on scientific business research.

Many professors found the shareholder-primacy model attractive, as it was simple and quantifiable. “When you adopt mathematical analysis, you have to focus on the things you can measure — and that’s profit,” says Spender.

Influential economists reinforced interest in the theory. Milton Friedman, the University of Chicago economist, argued in a landmark 1970 essay that the sole responsibility of a company was to make profits for shareholders.

In 1976, Michael Jensen, then an associate professor at the University of Rochester’s business school in upstate New York, and William Meckling, then dean, popularised agency theory, which explored the mismatch between shareholders’ and managers’ interests, and proposed aligning them through share options.

“Extreme shareholder value maximisation became the dominant paradigm at business schools,” says Peter Tufano, former dean at the University of Oxford’s Saïd Business School. “In the 1980s and 1990s, we saw the increasingly dominant presence of economists on business school faculties.”

Managerial heroin

The bull market of the 1990s helped fuel the rise of shareholder primacy but also led to unintended consequences for society, such as growing inequality. Even Jensen conceded in 2002, after the dotcom crash, that agency theory could cause harm. During the pre-crash bubble, share options had, he said, become “managerial heroin”, driving a focus on short-term prices even if the long-term consequences were disastrous.

The excesses and corporate wrongdoing of the early 2000s reinforced this idea. After the collapse of Enron and the accounting scandals at Tyco and WorldCom, business schools came under fire. Sumantra Ghoshal, a professor at London Business School, argued in a 2005 paper that by teaching “amoral” theories, business schools had “actively freed their students from any sense of moral responsibility”.

Schools placed greater emphasis on ethical practices, integrity and transparency in MBA curriculums. “The great corruption debacles at Enron and other companies created an environment where we questioned business morals,” says David Chen, adjunct professor of finance at Kellogg School of Management at Northwestern University in Illinois.

That questioning went deeper after the 2008 financial crisis. Business schools, long a pipeline of talent for banks, were seen as partly culpable. In a 2009 paper, academics Robert Giacalone and Donald Wargo wrote that the financial crash had resulted from the “toxic teaching of bad management theories” and the “cult of profit maximisation” spread by MBA courses.

Amid the soul-searching that followed the turmoil, business schools ramped up courses on ethics, professional responsibility and risk management. “There was a belief that business schools only teach greed and profit maximisation,” says Ilian Mihov, dean of Insead in France since 2013. “For me, it was a matter of survival: if we continue doing this we will become irrelevant.”

Purpose versus pay

In the past decade, growing awareness of the climate emergency has increased demand for courses on sustainability and responsible business practices — subjects that have become a big draw for prospective students.

Reetta Nevala, head of business development at Honkajoki, a Finnish company that processes and refines animal byproducts, chose her part-time MBA at Aalto University in Espoo, Finland, last year, because of its emphasis on sustainability. “If we want to provide an environment for future generations, then we need to find profitable solutions to the climate crisis,” she says.

The course is relevant to Nevala’s work at Honkajoki, including the company’s drive to promote more sustainable food production. In her sustainability module, for example, she developed a business model for a new pet food protein made from the larvae of the black soldier fly. “Insect protein can reduce food-related carbon footprints,” says Nevala, though Finland’s food regulations have constrained her ability to develop the product.

One barrier to teaching social purpose on MBAs has been the pressure to create employment opportunities for students so that they can pay off high tuition fees. “There has been this dichotomy where, if we focus on sustainability and responsible business, but corporate cultures are driven by profit maximisation, then it translates into fewer jobs and lower salaries,” says Dan LeClair, chief executive of the Global Business School Network, a group of more than 120 business schools across 50 countries.

Illustration by Bratislav Milenkovic
© Bratislav Milenkovic

Many businesses are now championing change. In 2019, the Business Roundtable, a group of US chief executives, dropped the shareholder-primacy doctrine and urged companies to “protect the environment” and treat workers with “dignity and respect”.

Many companies are not, however, spreading the word to potential employees. “We see companies that have robust ESG [environmental, social and governance] strategies, but they don’t talk about it in recruiting,” says Tensie Whelan, clinical professor of business and society at New York University’s Stern School of Business. “So students think they just need traditional skills to get a decent job and pay back their loans. Employers need to be a lot clearer.”

ESG: every subject, greener?

The result is that many students stick with traditional subjects such as finance and strategy, which they perceive as more likely to lead to high-paying careers in finance, consulting or technology. If schools are to nurture the next generation of responsible leaders — and avoid promoting poor management practices — they will need to integrate sustainability topics into those core courses, says Alfons Sauquet, quality services director at the European Foundation for Management Development (EFMD), a business school accreditation body.

Yet many schools still offer ESG courses only as electives. “You cannot teach in silos,” Sauquet says, arguing that ESG should be seen not as a standalone subject that students take, but instead as a lens through which every business function is viewed.

Accreditation bodies are driving change: EFMD stresses that ethical behaviour, social responsibility and sustainability should be embedded in business school policies and operations, teaching and research. Yet deans encounter tensions, citing time pressure on professors — and their conservatism. “If you are already very busy and have successful teaching materials, then you will be reluctant to move into new areas,” says Ding Yuan, dean of Ceibs in Shanghai. “The academic world is not known for its speed.”

David Reibstein, professor of marketing at Wharton and chair of the Responsible Research in Business & Management network, says part of the problem is academia’s “publish or perish” culture. Rankings, funding and promotions are tied to prestigious journals that neglect socially orientated research, thereby limiting course content, he argues. “The dependent variable in all our activities is profitability,” says Reibstein. “We know how to measure profitability. We don’t necessarily know how to measure social impact.”

Omid Aschari, associate professor of strategic management at the University of St Gallen in Switzerland, believes schools that do not embrace a new approach are risking obsolescence, noting that students are becoming vocal proponents for change. “The risk,” he says, “is that if students do not see the real world reflected in the curriculum, then business schools will become museums of management history.”

The winners of the FT Responsible Business Education Awards 2022 will be announced on January 19