MBA: Means Being Aware to Short-Termism

It takes a commitment to business and a desire to better oneself that motivates earning a Master in Business Administration. The degree is seen as a passport to financial success and business leadership, a necessary piece of the puzzle should you want to attain keys to the executive suite.

Yet, a new study by Danny Miller, research professor at HEC Montreal and Xiaowei Xu, an assistant professor at the University of Rhode Island shows that for MBA-holders who go on to lead companies and achieve a level of recognition in mainstream media, self-interested behavior becomes more apparent and their firms can suffer as a result.

Acknowledging that earning an MBA does not cause people to be any less reliable, honest or ethical than others, Miller and Xu’s findings have implications for executive compensation, the dangers of short-termism and how the drive to be distinguished among peers may create a blind spot when thinking about other areas of the business.

The study analyzed a sample of 444 “celebrated CEOs” who have appeared on the cover of popular business magazines (Forbes, Fortune, and Business Week) and explored whether credentials as an MBA-holder among the sample had an impact on the performance of those companies and also on what the authors describe as self-serving behaviors, defined as “(1) success [that] is achieved via rapid, hazardous expedients, such as some acquisitions; (2) that success is especially short-lived; and (3) the executive gains personally from it through unusually steep compensation increases.”  

The main takeaway rests on what their research showed in the years after the appearance on a magazine cover of the CEOs that were part of this study:

In the three years afterwards, [the MBA-holder] firms saw a market value decline that was 20% greater than that of firms run by non-MBAs. This performance gap remained significant even seven years after a cover story.

As for the other aspects of self-serving behavior, Miller and Xu found that “On average, the MBAs saw their compensation rise about 15% faster than non-MBAs’ in the three years after a cover story ran, and they were paid about $1 million more each year”  Shockingly, this increase in compensation occurred despite their poorer performance.

Why is this the case? The authors  emphasize that their study only illuminates correlation in factors studied and does not identify whether MBA education causes self-serving behavior, but an interview of Professor Miller in a recent Harvard Business Review article highlights some potentially problematic tendencies of business school education:

Many MBA programs emphasize bottom-line performance, financial and accounting measures and levers, stock prices, competition, and personal economic success. They place less emphasis on creative and scientific skills, intrinsic job satisfaction, social contribution, and the ethical treatment of stakeholders. On the other hand, it might be not the curricula but self-selection that explains our findings. Perhaps people with self-serving proclivities are more inclined to go into business programs than, say, the arts or sciences.

In practice, this focus on short-term results can be incredibly damaging to long-term profits and reputation. As ES collaborator David Mayer stated in an Ethical Systems interview, “A bottom-line approach can lead to sacrificing ethics for short-term gain. Although this can lead to positive short-term outcomes, in the long run it can have a devastating effect on ethical conduct and ultimately company reputation and viability.”

The study, A Fleeting Glory: Self-Serving Behavior Among Celebrated MBA CEOs, also posits that “MBAs’ expenditures on acquisitions were almost twice those of non-MBAs, after factoring in all our control variables, such as firm size and leverage. And in the year prior to their cover stories, the MBAs’ firms had lower levels of cash flow and inferior returns on assets, which suggests that MBAs tended to pursue costly rapid growth.” The pursuit of prompt profits is also tied to short-termism, that puts the continued upward trending of the company stock price above a long-term outlook that dictates a more sustainable strategy for increasing revenue.

The rapid growth alluded to above can also come from a desire by the CEO to gain recognition for the immediate jump in stock prices as proof of their wisdom and business proficiency.

While the authors of the study are quick to point out that they only featured major, successful public companies, many of which are well known and that their findings may not apply to smaller, less prominent, or private companies, there is still much to learn. The consequences of ethical fading- where you fail to see the ethical considerations in a decision – can be brought to bear on the actions of CEO’s with MBAs. If a leader is interested in raising their own profile, or driving speedy solutions, the health of the company can suffer when results are measured solely by quarterly results or how much (or the quality of) press a leader receives.

As we have repeatedly stated, a strong, ethical culture is the solution- or preventative- for disreputable behavior. Culture dictates how boards will analyze CEO performance, the overall emphasis on ethics, and the ways in which deals get done. A strong ethical culture would consider factors such as whether deals are  completed without regard for the company’s values, whether the board incents a short term outlook, and if the CEO’s compensation / bonus is inadvertently tied to how much they can elevate their personal reputation.

Irrespective of their degree, any CEO would be commended by remaining focused on creating growth that can withstand long-term scrutiny, instead of being featured on the next 60 Minutes.

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