Enron lessons

What should business schools do to help prevent future Enrons and Tycos? Predictably perhaps, schools have talked about their focus on business ethics and developed new courses on corporate social responsibility (CSR). But at worst this can be tokenistic. What's really needed is a re-examination of what's already taught.

by Academy of Management Learning & Education, 2005, Vol 4 No 1, 75-91
Last Updated: 23 Jul 2013

Many of the worst excesses of recent management practices are rooted in ideas and theories that have been standard teaching in business schools for many years. In particular, students of corporate governance have been taught that managers cannot be trusted.

To ensure they seek to maximise shareholder value their interests and incentives must be aligned with shareholders by making stock options a significant part of their rewards. In organisation design, the need for tight monitoring and control of people has been emphasised. And in strategy courses, companies are told to compete not just with their competitors but with their suppliers, customers, employees and regulators.

Given this pessimistic view of human nature, perhaps it should not be so surprising that executives at Enron and elsewhere gave themselves excessive stock options, abused their employees and took their customers for a ride. Their bad executive behaviour was legitimised by theories that have become over-dominant to the point of being considered assumptions rather than propositions.

In some cases, this may have meant insufficient recognition of the problems of adopting such management practices. For example, employees subjected to hierarchical controls may of course continue to comply, but employers could well lose their willing cooperation.

In others, the evidence may leave the orthodoxy on shakier grounds than thought. A review of 54 studies of the performance effects of board composition shows that the proportion of independent directors has no significant effect on corporate performance; similarly the performance benefit of separating the roles of chairman and chief executive is found to be unproven in a review of 31 studies.

Source: Bad management theories are destroying good management practices
Sumantra Ghoshal
Advanced Institute of Management Research, UK and London Business School

Review by Steve Lodge  

Academy of Management Learning & Education, 2005, Vol 4 No 1, 75-91 recommends

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