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GFME: Global Foundation for Management Education


AACSB International


Business Education and the Current Economic Crisis: An Institutional Perspective

Michel Patry: Director, HEC Montréal

Image: Michel PatryIn this essay, dedicated to the role business schools played in the development of the current economic and financial crisis and to the impact that the crisis might have on management education, I make three propositions: (a) that business schools are not responsible in any significant way for the crisis; (b) that business schools will not be significantly impacted in their programs and functioning by the crisis; and (c) that they might play a role in restoring the confidence of the public in business in general and in the efficiency of market economies, as well as the confidence of employees in the organizations that hire them – but that this is far from certain.

Business schools are not responsible for the crisis!

I believe that criticisms directed at business education and business schools in recent months by many observers and even members of the business education community are largely unfounded.

The current economic crisis, as with those which preceded it, is unfortunately a distinctive feature of capitalism. As Marx, Schumpeter, Keynes and many others have pointed out; market economies are fundamentally dynamic and evolving. Most of the time, adjustments to market processes are fairly smooth and, aided by appropriate macroeconomic policies, generate growth and overall prosperity. But, from time to time, expectations by consumers, firms and financiers get misaligned and a recession or a depression (such as those from 1893-1897 or that of the 1930s) occurs.

Detailed post analyses of the causes of such depressions or crises generally reveal that a combination of factors were at play, triggering some sort of  perfect storm: the expectations of investors, consumers and business suddenly changed directions, generally amid a crisis of confidence, and the free functioning of markets entered an implosive cycle… As Taleb's Black Swan, these occurrences are very rare, have a very profound impact and, a posteriori, are seen to have been unavoidable.

So, where does business education fit into this picture? Have business schools made things worse? On the whole, I think not. To begin with, serious recessions and depressions occurred long before business schools came into being. Furthermore, the global economy went through a phase of rapid growth from the middle of the 1980s: should business schools have been commended for that? Not anymore than they should be blamed now.

The criticisms directed at business education generally revolve around two claims: first, that the crisis was brought about by managers educated in business schools which do not pay enough attention to social responsibility, ethics and governance; and, second, that some theories or models we teach could be held responsible for the crisis, such as the principal-agent model or the portfolio model in finance. 

Yet the root causes of the current economic crisis, as in the past, are many: insufficient regulation of banking activities, complexity of certain financial products and a lack of transparency in the market about these products, serious errors in risk assessment, and the sub-prime crisis in the housing market, to name the most obvious. This cocktail of causes led financial institutions to take undue risks.

Clearly, the managers of many (not all) financial institutions have a responsibility in this story. Many took huge risks to maximize their short-term remuneration and a classic case ensued of the internalization of benefits and the externalization of costs and risks.

However, the question is: what role did business education play in the unfolding of this crisis? Are an insufficient concern for ethics and the increasing complexity of financial products to blame?  If so, business schools have to amend their programs and approaches. I will argue to the contrary, although this does not imply that business schools should not learn from the crisis and introduce socially desirable innovations.

Let me briefly respond to those who claim business schools are responsible.  To the first point, concerning the unethical behavior of some managers, I contest that today’s managers are not, on the whole, more greedy or narrow-minded than their predecessors because of what they learned in business schools. I can find no evidence to support this view. Think of the landowners in ancient Rome, of the bankers and traders in medieval times, and of the industrial barons of the nineteenth century.

At the core of this criticism we find a denunciation of greed and antisocial behavior. Naturally, I agree with those who think that business education should fully encourage and stress the importance of socially responsible and honest conduct. Yet, as the moderns taught us, humans are imperfect creatures.

Actually, this is the cornerstone of modern political philosophy and economics, as the works of Machiavelli and Smith make clear. The fundamental lesson is that one should not design institutions that require the highest moral qualities from all. As Leo Strauss famously put it "The moderns built on low, but solid ground."

Consequently, if we are to understand human behavior and influence it, we must recognize self-interest and, unfortunately at times, greed and opportunism.  Managers should be asked and strongly encouraged to conform to the highest ethical standards (some will; but, alas not all) and, simultaneously, to be prepared to deal with departures from this standard. I concede that this is a tragic, but realistic, view.

One should not hold it against business schools that their teachings and models give a lot of attention to self-interest. They should, as they should also focus on the common good and the connections between the individuals, business, and society. This brings us back to the design of institutions and to the role of managers: to influence morally imperfect individuals to cooperate (this was Chester Barnard’s injunction) and to generate socially desirable outcomes for the organization and for society.

Furthermore, the claim that business education is morally questionable is most surprising given the changes in curriculum, particularly in MBA programs, most schools have introduced in recent years to cover ethics, governance, sustainability and corporate social responsibility. While more could certainly be done to further the integration of those issues with the functional areas, they are at the core of our curriculum and research as mirrored by the importance allocated to those issues at AACSB and EQUIS meetings.

Finally, the second claim questions theorizing that occurs in business schools. Are the models and representations that we find in business education adequate or lacking? All models are essentially lacking and imperfect. We all know that. We also know that a theory is not rejected because it is faulty; it is rejected when a better one is developed.

Yet business schools have a serious responsibility to critically assess the models and representations that are central to business education and practice. It is also their responsibility to critically assess the “knowledge” and the “models” that are developed by industry and civil society. This is particularly important during a period of rapid innovation.
Financial theories are currently criticized because they presumably allowed the development of financial products, the values of which are now being questioned; or because they possibly relied too heavily on the Gaussian normal distribution for explaining stock market behavior.

Should business schools be blamed in this way? This is, in my opinion, far from certain. Take the financial products argument: I would suggest that many innovations for pricing and evaluating complex financial products have been developed by private commercial organizations and, had business school professors been able to access the data and replicate the valuation and pricing decisions of these organizations, the market for these products would have been more robust and efficient. (I shall return to this point later in the essay.)  I also conjecture that many of these innovations, once polished and properly reassessed, will prove to be valuable tools to manage risks in the long run.

In other words, I think that research in our business schools has never been so strong. At the same time, the importance of the research and of its transfer to the public domain has never been so great. This is because our economies are increasingly knowledge-based and ever more dependent on intellectual innovations, the values of which should be ascertained by the universities, and particularly by researchers in business schools.

To conclude my first proposition, more could certainly be done about ethics and socially responsible leadership and behavior, but I doubt that it would have any serious impact on the likelihood or severity of the next crisis. On the other hand, better incentives, regulations, and organizational design could certainly contribute to eliminating the main defects of the existing state of affairs. Again, work on this issue is already well under way in many areas of our schools.

The problem, however, is that we don't know what the next wave of innovations will be made of, nor do we know if institutions and organizational routines will adjust fast enough to prevent other crises. For these reasons, managers should be trained to be forward- looking, to have an approach to problems as holistic as possible and to be analytical. What worked yesterday and what works today may not produce the same results tomorrow:  this is the real challenge facing business education today.

In short, I argued that we should not deceive ourselves into believing that we have a greater social importance than we really have. If business education and business schools cannot be totally absolved from blame for the current mess, they are not, in my mind, significant contributors to the crisis.

Do not expect a major impact on the MBA curriculum

What will the impact of the crisis be on what we teach in our schools? And on how we teach? Those who argue that some elements at the core of business education are to blame for the eruption of the current crisis should be calling for major reforms in our curriculum and programs.

I do not share this belief, but I nonetheless think that the present state of affairs could entail interesting developments. Although I do not believe that the MBA curriculum will be substantially impacted by the ongoing crisis. A review of the importance given to ethics and corporate governance; a re-examination of the interfaces between accounting and finance; and a re-evaluation of what is taught in risk management, are certainly going to take place. In fact, this is taking place right now. Many schools have already introduced new courses on financial crises (we have), with some schools considering reintroducing a speck of economic history to give future managers a better perspective, etc.

Concerning the MBA, I think that the structure and the curriculum of the program will be marginally impacted. In fact, many of the relevant issues, in terms of changes, have been debated in business schools for some time. After all, there is only so much you can do in one or two years in a general management program. And there will always be a need to cover the fundamentals of accounting, marketing, finance, strategy, and so on.  There is certainly room to stress integrative thinking, the importance of a global perspective and the development of responsible leaders. But the balancing act has its limits. Those are the limits of the program itself.

Other more consequential changes inspired by the current crisis could affect executive education and the development of specialized masters programs. Even undergraduate programs might be impacted. Essentially, I conjecture that the complexity of financial markets, coupled with the dynamics of globalization and the demands for socially and environmentally responsible behavior will, together, lead to a number of interesting new programs and specializations at both the undergraduate and graduate levels.

To conclude, if pressed to make a prediction, I would speculate that most of the issues surfacing because of the current economic crisis have been largely anticipated by business schools, which is a comforting thought. I would also expect the MBA to be marginally impacted. And, finally, I surmise that the real innovations might pop up in other areas: in the development of specialized masters programs or of "advanced executive education programs" on the one hand, and in innovative multidisciplinary collaborations on the other.

Business schools as institutions and institution builders

Finally, I wish to advance a third proposition, one that goes to the heart of the crisis. It concerns the window of opportunity that this crisis is opening up for business schools to contribute to the development of better organizations and institutions, and thus to serve society for the greater good.

There are two strands to this argument. The first one concerns the contribution that research and teaching can make to remedy a number of deficiencies in recent market innovations and to influence the reshaping of the regulatory framework that will follow the crisis. The second one concerns trust, which is fundamental to both the functioning of markets and the efficient development of cooperation within organizations. How can business schools place the development of trust, the central importance of fairness, and the role of leadership in fostering trust at the core of their activities?

Let me briefly consider the first issue. Our economies need innovations. Our financial systems need innovations. Yet, as is evident, those innovations sometimes outpace the rate at which the institutions and the players can adjust in a socially desirable way.

This is but one explanation for what happened in the financial markets over the last two years. The rapid development of new financial products (mainly "structured finance") including advanced and complex contracts used to refinance and hedge activities, such as collateral debt obligations (CDOs) and special investment vehicles (SIVs), is probably one of the main causes of the recent debacle in financial markets.

Today, experts in the field, academics, and regulators point to a number of defects in the market for these sophisticated products. Inadequate risk management by banks, moral hazard issues, the existence of poor standards, the lack of market transparency, and inadequate regulation by government are frequently cited as being at the origins of the current mess.

It is very doubtful that business schools could significantly curb the temptations of (some) individual agents or investors to realize enormous gains at the expense of the well-being of their organizations and of society (even if it is immoral or even illegal). Business schools can, however, contribute to the design of better financial contracts, better rating methodologies, better pricing techniques and better regulations.

In fact, business school experts in finance, economics, statistics, accounting, law and regulation, governance, strategy, and so forth, are in a unique position to serve society if they can combine efforts. They could significantly improve the efficiency and transparency of financial markets. Actually, it is our social mission to do so and we should even be blamed if we do not offer a neutral, critical, enlightened environment to assess those innovations. This is one contribution that universities are expected to make to society.

This, in turn, requires more in-depth research into these areas; it supposes the encouragement of innovative, cross-disciplinary collaborations between experts from different fields and a genuine concern for the efficient transfer of the knowledge to society, to governments and to organizations.  Notice the last point: advances in research ought to be transferred to the public domain if they are to influence policies. If business schools meet that challenge, they will make a very important contribution socially.

Finally, let me address the trust issue, which is truly fundamental. Every time a crisis such as the current one happens, some of the social capital of society, in Coleman’s sense, is destroyed. The instability of the markets, the destruction of wealth, the unfortunate but all too real cases of fraud, abuse and perceived unfairness in organizations seriously undermine the morale of employees, shareholders and investors and their confidence in markets and business firms. And confidence in business schools is eroded too, not surprisingly.

Hence, one major task that confronts business schools today consists in weaving the building of trust into business education. This essay cannot identify what innovations business schools should introduce to do so. My contention is simply that business schools are singularly well positioned to introduce these innovations.

Advances in sociology, anthropology, psychology, socio-economics, experimental economics and philosophy offer interesting avenues for research and teaching on the interfaces between cooperation, fairness and trust.

Business is embedded in society. Business education should stress this embedment and its consequences for managers. At our school, for instance, all our specialized masters programs have one compulsory course in common; it is team-taught by professors in economics, management and sociology and it is concerned with the factors that promote cooperation in organizations and society.


I have argued that business schools are important institutions in knowledge-based economies. As such, they share responsibility in the development of the current financial and economic crisis.

Yet, I have suggested that cycles, booms and busts are inherent to the functioning of capitalism and that business schools, fundamentally, are not responsible for the current crisis. Again, the fundamental factors that precipitated this financial crisis are now fairly well identified and point towards inadequate regulation, market inefficiency (e.g. the lack of transparency of rating and pricing techniques) and governance issues. I have also argued that it is unrealistic to expect business schools to be able to curb self-serving, antisocial behavior. However, I have stressed the important role that business school teaching, research and knowledge transfer can have on the design of better institutions.

This is why I have contended that business schools today find themselves in a position to make a very significant and very socially valuable contribution to society, inasmuch as they can improve the efficiency of markets and the confidence of the public in markets and organizations.