From capital budgeting to customer analytics to how to work effectively in teams, skills developed in business school are useful both as tools for graduates (re)entering the workplace and as mechanisms for growth as responsibilities evolve over the course of a career. Beneath these proficiencies lies the critical thinking ability that drives graduates’ decisions and those of the companies they eventually lead. This ability, however, is laden with two outdated assumptions acquired during their graduate education: the notion of shareholder primacy and its attendant short-term profit maximization.
Recent research emphasizes the perils of this orientation as well as the benefits of an alternative focused on winning the hearts and minds of stakeholders. A number of current examples highlight that the relative costs of these assumptions are not abstract but tangible, and have the power to affect a large number of industries. In this sense, the current approach of shareholder-value maximization fails to consider the impact of decisions on employees, customers, communities, and the environment, as well as the value that these stakeholders add to the firm.
The ways in which business schools instill the assumptions of shareholder primacy and short-term orientation are both direct and subtle. We professors focus almost exclusively on maximization of profits in finance, marketing, operations, and strategy, and often evaluate strategic alternatives using discount rates for net present value (NPV) that have the effect of heavily weighting short- over long-term returns. Less direct, but equally influential, is how students are taught to evaluate business cases. A vast majority of students typically make recommendations for illustrative businesses on the basis of relatively short-run profit projections that, by virtue of the exclusive focus on a shorter-term timeframe, prioritize returns to shareholders over other stakeholders. Surveys of MBA graduates have shown that, by the time our students graduate, they believe that the primary responsibility of a company is to maximize profits for shareholders.
Following this logic, it is defensible for oil and gas companies such as ExxonMobil to fund research that casts doubt on climate change or that links energy taxes to lost jobs. Similarly, seemingly grassroots organizations (such as Americans Against Food Taxes, funded by Coca-Cola, Pepsi, and agribusinesses) work to defeat sugar taxes with campaigns claiming that such taxation disproportionately harms poor minorities, while casting doubt on scientific evidence demonstrating the social costs of obesity. To sell more cars, Volkswagen designs automobiles that evade air emissions standards. Pharmaceutical companies increase profits by pushing for greater access to highly addictive opioids. Internet giants secure and resell consumer information without the informed consent of consumers. Firms across industries fight against higher minimum wages, family-leave policies, and worker-safety regulations. For multinationals, add the pushback against policies designed to spotlight bribes paid for market entry or securing government contracts.
If a firm’s primary obligation is to its shareholders, why wouldn’t it engage in these actions, when they maximize profits in the short term? Too often, we leave any substantive discussion of the social or environmental implications to our ethics classes, overlook any damage to the value created by firm stakeholders that aren’t shareholders, and proceed with our NPV models.
A more comprehensive analysis might look more favorably on investments in alternative energy, healthier food production, lower emissions, less addictive medicine, individual rights to personal information, stronger worker and human rights standards, and more transparent contracting. Redesigned management education would confront the gap between the models we teach, which assume that the underlying negative externalities of social problems are addressed by policy, and the stark reality. Ideally, this more holistic approach would go even further to consider whether the tradeoff of private profits for social costs is a contributing factor in the decline of popular support for capitalism and free markets and the rise of populism, seen in countries such as Turkey, Thailand, Brazil, Italy, France, Germany, Hungary, Poland, Sweden, Great Britain, and the United States.
Our approach to redesigning management education is more pragmatic and immediate. We propose simple tactics and methods for evaluation that directly engage multiple stakeholders to improve workplaces and communities, as well as benefit shareholders, but without requiring significant curricular changes. By ensuring greater sensitivity to all relevant stakeholders, this approach also ensures that business schools stay relevant in society and staves off the increasing populism that threatens to worsen conditions for all. Notably, our suggested redesign can be implemented either top-down, by curricular-reform committees or individual professors seeking to address gaps in the current approach, or bottom-up, by students.
We propose to change how we teach business cases and evaluation of strategic alternatives in two ways. First, students should evaluate not only short-term impacts of decision alternatives but also the medium-to-longer-term impacts. This implies projecting the impact of decisions beyond a one-to-three-year horizon. While there is greater uncertainty with longer-range projections, this expanded evaluation process simply requires checking in on progress and adjusting course over time.
Second, students should evaluate how different decision alternatives affect all relevant stakeholders. This second recommendation is connected to the first, since decisions made necessarily influence multiple stakeholder groups in the long term, with feedback loops that ultimately affect financial performance. Consider, for example, the decision to outsource. In the short term it is often profitable to slim down the firm by outsourcing. However, rarely are attempts made to measure the full costs of such decisions, including effects on employee morale, retention, and productivity, or on the ability to iterate new product design quickly, which is often most effective when firms co-locate manufacturing and design. These feedback loops are real, even if not measured, and have very significant implications for firm performance, not to mention for all stakeholders.
These two proposals require some effort to measure the impact of decisions on all stakeholders and to evaluate implications under the greater uncertainty that results from extending timeframes. Some assessments are relatively easy to come by, such as data on employee retention and productivity, while others, such as rising supply chain risk from the choice to use non-renewable resources, are more challenging. But even if measurements are imprecise or not immediately available, second-order and longer-term effects of a decision can and should be considered via a series of questions that would prompt both broader and longer-term evaluations in the classroom, including:
- What are the long-term implications of the decision you are making?
- How does your decision affect different stakeholders, such as employees, customers, communities, and the natural environment?
- How would you determine the effects of your decision on these stakeholders?
- What implications follow from such stakeholder impacts for long-term firm performance (e.g., are any negative externalities likely to generate a social or political backlash that could undermine the long-term sustainability of the strategy)?
- What would a longer-term strategy that considered the impact on the broader group of stakeholders look like in this context?
- How would you evaluate progress towards the implementation of such a long-term strategy over time?
One advantage of this approach is that it does not require injecting significant new content into syllabi, nor does it require new electives. A different approach to decision-making allows integration into the core, which we view as essential to effective management-education reform. While many schools have dedicated classes that adopt more holistic approaches to strategic decision-making, they are usually electives, which means that many students are never exposed to these ideas and gives the not-too-subtle message that multi-stakeholder evaluation and consideration of longer time horizons are peripheral instead of central to firm strategy. When we instead integrate these decision-making tools into core classes, long-term strategic thinking permeates the curriculum and becomes foundational to how our graduates think and make decisions.
Another advantage of this approach is that it can be implemented in either a top-down or bottom-up manner. Progressive deans and professors may adopt the set of questions and adopt them in classes or, if such change is opposed (whether due to inertia or prevailing ideology), students can initiate this change by asking these questions of their peers and faculty. We encourage students who wish to confront these broader societal challenges in their training to ask these questions.
A third advantage of this approach is that it leverages an important comparative advantage of business schools relative to competing providers of management education (such as consulting firms): cutting-edge academic research illustrating the importance of long-term orientation and stakeholder opinions for firm financial performance. Recent research demonstrates that:
- firms with a short-term perspective invest less in capital equipment and R&D than firms with longer-term horizons (Sampson & Shi, 2018);
- the market capitalization of firms increases with their stakeholder support (Henisz, Dorobantu & Nartey, 2014), particularly in times when peer stakeholders criticize or attack firm operations (Dorobantu, Henisz & Nartey, 2017);
- employee productivity increases 142 to 406 percent when those employees are personally connected with the stakeholders who benefit from their activity (Grant 2007, 2008);
- a portfolio of firms with high employee satisfaction outperforms its peers by 2.3 percent to 3.8 percent per annum or a cumulative 89 percent to 184 percent over 28 years (Edmans, 2011, 2012);
- taking account of material, environmental, social, and governance (ESG) factors can markedly improve equity returns (Khan, Serafeim & Yoon, 2016) and form the basis for long-term sustainable performance (Eccles, Ioannou & Serafeim, 2014);
- ESG performance also reduces spreads on credit default swaps (Lundqvist & Vilhelmssson, 2018, Nguyen-Taylor, Naranjo & Roy, 2018; Landry, Castillo-Lorenzo & Lee, 2017; Reznick & Viehs, 2017) and the underlying bonds that they track (Bauer & Hann, 2010; Polbennikov, Desclee, Dynkin & Maitra, 2016; Clubb, Takahashi & Tiburzio, 2016). Similar benefits are found in yield spreads attached to loans (Goss & Roberts, 2011; Chava, 2014; Bae, Chung & Yi, 2016, 2018).
These links between stakeholders and firm performance make the business case for more holistic, long-term strategic evaluation and justify bringing the questions outlined above into the classroom. By using research to motivate these questions and help students evaluate the broader implications of their decisions, business professors also capitalize on one of the greatest advantages of university-based business schools: the ability to conduct deep, large-scale research both within and across industries. Translating this growing body of work into practice and pedagogy further ensures the ongoing relevance of business schools and the ability of their graduates to create more resilient organizations and communities.
Bae, Sung C., Kiyoung Chang, & Ha-Chin Yi (2018) “Corporate Social Responsibility, Credit Rating, and Private Debt Contracting: New Evidence from Syndicated Loan Market” Review Quantitative Finance and Accounting (2018) 50: 261-299.
Bae, Sung C. Kiyoung Chang & Ha-Chin Yi (2016) “The Impact of Corporate Social Responsibility Activities on Corporate Financing: A Case of Bank Loan Covenants, Applied Economics Letters, 23:17, 1234-1237
Bauer, Rob and Daniel Hann (2010) “Corporate Environmental Management and Credit Risk” Available at SSRN: https://ssrn.com/abstract=1660470
Chava, Sudheer (2014) “Environmental Externalities and the Cost of Capital” Management Science 60(9):2223-47.
Clubb, Riley, Yoshi Takahashi and Pete Tuburzio (2016). “Evaluating the Relationship Between ESG and Corporate Fixed Income” MIT Sloan School of Management and Breckinridge Capital Advisors Report.
Dorobantu, Sinziana, Witold J. Henisz, and Lite Nartey (2017) “Not All Sparks Light a Fire: Stakeholder and Shareholder Reactions to Critical Events in Contested Markets.” Administrative Science Quarterly 62(3):561-97.
Eccles, Robert G., Ioannis Ioannou, and George Serafeim (2014) “The Impact of Corporate Sustainability on Organizational Processes and Performance.” Management Science 60(11): 2835-2857.
Edmans, Alex (2011) “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices.” Journal of Financial Economics 101(3): 621-640.
Edmans, Alex (2012) “The Link Between Job Satisfaction and Firm Value, with Implications for Corporate Social Responsibility.” Academy of Management Perspectives 26(4): 1-19.
Goss, Allen and Roberts, Gordon S., (2011) “The Impact of Corporate Social Responsibility on the Cost of Bank Loans, Journal of Banking & Finance, 35(7):1794-1810.
Grant, Adam M. (2007) “Relational Job Design and the Motivation to Make a Prosocial Difference.” Academy of Management Review 32(2): 393-417.
Grant, Adam M. (2008) “Does Intrinsic Motivation Fuel the Prosocial Fire? Motivational Synergy in Predicting Persistence, Performance, and Productivity.” Journal of Applied Psychology 93(1): 48.
Henisz, W. J., Dorobantu, S. and Nartey, L. J. (2014), Spinning Gold: The Financial Returns to Stakeholder Engagement. Strategic Management Journal, 35: 1727-1748.
Khan, Mozaffar, George Serafeim, and Aaron Yoon (2016) “Corporate Sustainability: First Evidence on Materiality.” The Accounting Review 91(6): 1697-1724.
Landry, Erik, Mariana Castillo-Lazaro and Anna Lee. (2017) “Connecting ESG and Corporate Bond Performance” MIT Sloan Management School & Breckinridge Capital Advisors Report
Lundqvist, Sara A, and Anders Vilhelmsson (2018) “Enterprise Risk Management and Default Risk: Evidence from the Banking Industry.” Journal of Risk and Insurance 85(1):127-57.
Polbennikov, Simon Albert Desclée, Lev Dynkin, Anando Maitra (2016) “ESG Ratings and Performance of Corporate Bonds” The Journal of Fixed Income, 26 (1) 21-41
Reznick, Mitch and Michael Viehs (2017) “Pricing ESG Risk in Credit Markets” Hermes Investment Management Report.
Sampson, Rachelle C. and Yuan Shi (2018) “Are US Firms and Markets Becoming More Short-Term Oriented? Evidence of shifting firm and investor time horizons, 1980-2013,” SSRN working paper: https://ssrn.com/abstract=2837524.