A Critique on management theories after Enron and Tyco

Muhammad Riaz

History

Economics

Management

Law

Philosphy

VS

Sumantra Ghoshal (1948–2004)• Indian organizational theorist, Professor of Strategic

Management at the London Business School (LBS), and founding Dean of the Indian School of Business in Hyderabad.

• Born in Calcutta, graduated from Delhi University with Physics and at the Indian Institute of Social Welfare and Business Management.

• He worked for Indian Oil Corporation, before moving to the United States on a Fulbright Fellowship and Humphrey Fellowship in 1981.

• Ghoshal was awarded an a PhD from the MIT Sloan School of Management in 1983 and 1985 respectively, and was also awarded a D.B.A. degree from Harvard Business School in 1986.

• In 1985, he joined INSEAD Business School in France and wrote a stream of influential articles .

• In 1994, he joined the  LBS. Ghoshal was a Fellow of the Advanced Institute of Management Research (AIM) in the U.K and a Professor of Strategic and International Management at LBS.

• Ghoshal married Sushmita and they had two sons. He died of a brain hemorrhage on 3 March 2004 .

Jeffrey Pfeffer (1946)• An American business theorist and the Professor of

Organizational Behavior at the Graduate School of Business, Stanford University.

• He is considered one of today's most influential management thinkers.

• Pfeffer graduated from California; received his BS and MS degrees from Carnegie-Mellon University and his PhD from Stanford.

• He taught at  University of Illinois and University of California, Berkeley.

• Pfeffer has given talks in 34 countries around the world and has won numerous awards for his articles and books.

• He was elected a fellow of the Academy of Management more than 20 years ago, was a fellow at the Center for Advanced Studies in the Behavioral Sciences, and has won the Richard D. Irwin award for scholarly contributions to management.

Henry Mintzberg  (1939)• Henry Mintzberg is an internationally renowned academic and

author on business and management.

• He is currently the Cleghorn Professor of Management Studies at the Desautels Faculty of Management of McGill University in Montreal, Quebec, Canada, where he has been teaching since 1968.

• He earned his Master's degree in Management and PhD from the MIT Sloan School of Management in 1965 and 1968 respectively.

• Mintzberg, roles, or expectations for a manager’s behavior are very popular, which fall into three categories: informational (managing by information){Monitor, Disseminator, Spokesperson}, interpersonal (managing through people){Figurehead, Leader, Liaison}, and decisional (managing through action){Entrepreneur, Disturbance Handler, Resource Allocator, Negotiator } .

Enron Before its bankruptcyLargest transmission gas system of the USA. 38,000-mile

pipeline network.

Largest seller of gas in North America (1992).

7th largest company in the USA.

Employed 20,000 staff.

One of the world’s leading electricity, natural gas, communications and pulp and paper companies.

Revenues of nearly $101 billion in 2000.

Stock price record at $90 (2000).

Enron Before its bankruptcy• Fortune magazine chose Enron

as it’s “Best Managed and

Most Innovative company”

• #1 – Quality of Management

• #2 – Employee Talent

• Chosen “the most innovative company”

• for 6 years in a row.

TYCOSCANDAL

Company Overview• It participates in several different industries:

– Electronics

– Fire & Security

– Healthcare

– Plastics & Adhesives

– Engineered Products & Services

• It employs over 267,000 people

• Its services and products are provided worldwide

Where the Money Went• Over 600 million was stolen from Tyco

• 9 million dollar home in Boca Raton, Fl and Park Avenue apartment in Manhattan for Kozlowski

• Bonuses of 56 million and 28 million to Kozlowski and Swartz respectively

• 15,000 dollar umbrella stand, 6,300 sewing basket, coat hangers for 2,900, and a 1,650 dollar appointment book

• A variety of expensive paintings

• A bonus of 17 million to Belnick

“Pres Monte Carlos” by Monet from Kozlowski’s personal collection.

The Charges• They were charged with civil fraud and theft

• Other charges against Kozlowski and Swartz included corruption, conspiracy, grand larceny, and falsifying records

• The maximum sentence for the two would be 30 years each

• Belnick would only receive a maximum sentence of 4 years

• All three pleaded innocent in court

"Messrs. Kozlowski, Swartz and Belnick treated Tyco as their private bank, taking out hundreds of millions of dollars of loans and compensation without ever telling investors. Defendants put their own interests above those of Tyco's shareholders. Those shareholders deserved better than to be betrayed by the management of the company they owned.“ - Stephen M. Cutler (SEC Director of Enforcement)

Outcomes• The trial of Kozlowski and Swartz was declared a mistrial on

April 2, 2004

• They will be tried again in 2005

• Belnick was proven innocent on July 15, 2004

Implications• The company re-structured their management, firing a total of

9 executives on their board

• Most notably, Edward Breen was hired as the new CEO and David FitzPatrick was hired as the new CFO

• On May 6, 2003 a new ethical guide was distributed to all employees

• “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood,” wrote John Maynard Keynes (1953: 306).

• “Indeed the world is run by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist. . . . It is ideas, not vested interests, which are dangerous for good or evil” Keynes (1953: 306).

THE PROBLEM STATEMENT• Faculty in USA is aspiring to introduce new courses on

business ethics and CSR to help prevent cases like Enron and Tyco. Which is not required; they only need to understand their role in creating Enrons and simply stop teaching some old courses.

• The management theories that have developed over last 30 years have had a negative effect on our business culture. 

• Business schools, specifically, have freed their students  from any sense of moral responsibility.

 

Agency theory and “Five forces” framework …… Examples

• Courses are grounded in Agency theory which states that managers cannot be trusted because their interests are directly in line with those of the shareholders.

• To prevent manager’s “opportunistic behavior”, strict monitoring is the best way to run an organization from a cost standpoint.

• To overcome “agency problems,” managers’ incentives must be aligned with those of shareholders by, e.g., making stock options a part of their pay.

• Porter’s “Five forces” model; companies must not only compete with their competitors but with their suppliers, customers, employees, and regulators as well.  

Only two things are infinite……• MBA students and even those who never attended a business school

have learned to think in these ways because these theories have been in the air, legitimizing some actions and behaviors & delegitimizing others; shaping intellectual and normative order within which all day-to-day decisions were made.

‘’Academic research related to the conduct of business and management has had some very significant and negative influences on the practice of management’’

“Our theories and ideas have done much to strengthen the management practices that we are all now so loudly condemning.”

S. Ghoshal

Two major causes for this phenomenon:

• The pretense of knowledge

• Ideology-based gloomy vision

The pretense of knowledge • Transition from Romanticism to Scientific approach: The pretense of knowledge is

the scientific approach of trying to discover patterns and laws that has replaced all notions of human intentions with a firm belief that past occurrences can explain all aspects of corporate performance. 

• It Is an error to pretend that the methods of the physical sciences can be indiscriminately applied to business studies

• Basically, what this means is that business is a science that is determined by the economic, social, and psychological laws that inevitably shape people’s actions. 

• This trend takes away any ethical or moral debates that may arise when a decision has to be made by CEOs.  They have to make decisions simply to satisfy the shareholders and do not care about the plight of the other stakeholders involved. 

• Distinguish between the natural science and the humanities: Business should not be treated as a science and that we should use more common sense that combines information on “what is” with the imagination of  “what ought to be” to develop an understanding of what corporate governance and decision-making represents. 

The pretense of knowledge

The pretense of knowledge

• Nowadays management theories are causal or functional in their modes of explanation

• Intentional – for example moral and ethics are ignored from management practices

The pretense of knowledge

• Agency theory: support shareholders value maximization

– Expand the number and influence of independent directors on corporate boards, split the roles of chairman and CEO, pay managers in stock…bla bla bla

– A review of 54 studies on performance of boards composition shows that the proportion of directors has no effect on corporate performance.

– 31 studies about the effects of separating leadership roles demonstrates that there is no affect on corporate performance.

Ideology-based gloomy vision

• Pessimistic view of human nature

• Based essentially on an ideology – The roots of the ideology lie in the philosophy of radical individualism

• Importance of Human Nature: – Herbert Simon observed, “Nothing is more fundamental in setting our

research agenda and informing our research methods than our view of the nature of human beings whose behaviours we are studying. . . It makes a difference to research, but it also makes a difference for the proper design of . . . institutions” (1985: 293)

Ideology-based gloomy vision

• Impact of Economics– Taking humans as machines

– To ensure coordination, managers must know what everyone ought to be doing, give them strict instructions, monitor them, reward - punishment system to ensure that everyone is doing what is told to do.

– Consequences: The dilemma of the supervisor

– The situation when the use of surveillance, monitoring, and authority leads to managements distrust of employees, decreases its intrinsic motivation, damages self-perception.

– Solution: focus on positive Psychology

Reverse the Trend

• Delightful Organizations

• Focus on both the negative and the positive problems

• Reverse the management theory

• Reshape the context of business schools – Deans have to take leadership by building the positive agenda

• Avoid the pessimistic, deterministic theories – Researchers and teachers have to define and adopt a different path

Reverse the Trend

• The role of business schools governors should be more stewardship involved– Supporting and challenging rather than detached and controlling

• Institutions such as the Academy of management will also have to play a key role– Leaders of academy can ensure that all the academy journals dedicate

special issues to legitimize the new intellectual agenda

‘’A theory must illuminate and explain and, if it cannot do those things, it is not a theory - neither good nor bad’’ - GHOSHAL

Why Do Bad Management Theories Persist? A Comment on Ghoshal by Jeffrey Pfeffer

• Ghoshal is right.

• He is right in the sense that economics is indeed taking over management and organization science, just as it has taken over political science and law and is making inroads into sociology and psychology--trends that have been occasionally documented and could, and should be, empirically studied.

• The field of economics has more and more tended to dominate the formulation of curricula and research agendas in all of the social and policy sciences and, in some cases, even in the humanities.

Why Do Bad Management Theories Persist? A Comment on Ghoshal by Jeffrey Pfeffer (Cont….)

• Ghoshal is right that this takeover matters, because social theories matter.

• The theories that come to be believed and accepted affect both public and organizational policies and practices.

• As Ghoshal notes, theories, once accepted, set into motion processes that tend to ensure they become self-fulfilling.

• Ghoshal is certainly right when he reiterates that the assumptions of much of economic theory and the effects of these assumptions on people and institutions can be harmful.

How Inspiring. How Sad. Comment on Sumantra Ghoshal's Paper- Mintzberg• Ghoshal was: profound, responsible, dedicated, and yet playful.

• In style too, it is so much Sumantra: His voice is so clear here, the voice that the author personally cherished, in both his writings and his friendship.

• Starting with management theory and then back to what influenced it and out to what it influences, Ghoshal takes on dominant negative trends in the social sciences, and economics in particular, as well as broad behavior in current societies.

• One of the things that separated Ghoshal from many of his colleagues is his responsive and eminently practical energy.

• It is ironic that such a positive, energetic human being should have to write about the prevalence of negativity.

• His only real quarrel in the article is with the influence Ghoshal gives the theories in the social discourse.

Questions and your comments