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By Selling Power

Do Economists Breed Greed and Guile?

By Bob Sutton

One of the root problems with business schools is that too many are infected with assumptions that reinforce and bring out the worst in human-beings. In particular, the logic and discipline of economics usually rules the roost at business schools.

In my experience, most economists at top business schools are clueless about the nitty-gritty of management, which can't be captured in elegant mathematical models. They treat any teaching remotely related to what leaders actually do on their jobs as a low status activity; at faculty meetings, I've seen economists and their followers dismiss and ridicule professors who teach "soft" skills. Those who speak in simple language and use words instead of numbers are often screened out, expelled or sentenced to spend their days at the bottom of the pecking order. And even faculty who bring rigorous evidence that challenges economic assumptions are badly treated.

Although some economists will quarrel with this view, most of the models and assumptions they pass on to their students reflect a fundamental belief about human beings: We are hard-wired to be selfish. They assume, like Alan Greenspan's mentor Ayn Rand, that it's a dog-eat-dog world, and that humans want and take as much for themselves as possible and to stomp on others along the way. As an example, "agency theory" remains one of the most influential theories among economists and business-school finance professors. Major proponents of this theory not only assume that human beings pursue their narrow self-interest; they also assume that people do so with guile ("treacherous cunning; skillful deceit"). If you travel through life believing that all human beings behave this way, you will look to screw people at every turn and assume that they will do it to you given the chance. And if you act as if this true of every human interaction, and treat everyone around you as if they too are always looking for only short-term and selfish wins, you will create a self-fulfilling prophecy.

Human beings are wired for empathy as well as selfishness. We are social animals, and selfish (as well as altruistic) behavior is infectious. A host of studies show that people with stronger training in economics are more self-seeking, less charitable, and more corruptible than people trained in other subjects. Moreover, negative behaviors can be provoked by just reminding people of the business world. For example, experiments have found that merely thinking about the concept of "money" makes them behave more selfishly. If MBAs are already attracted to business schools for the money, and are reinforced in the belief that that self-interest and greed (perhaps along with lying and backstabbing) are natural and inevitable, then no wonder we're in trouble.

I am not saying that economics is the only cause or even the root cause of the selfishness against which Joel Podolny rails. Deans, recruiters, faculty from other disciplines, and development officers who are willing to sell out when a donor waives a huge check certainly deserve their fair share of blame. But, I propose that that the current meltdown provides a great opportunity to reduce the influence, stature, and numbers of economists in business schools and challenge their strong (if often wrong and dangerous) assumptions about human nature.

P.S. Many of these ideas are based on this 2005 article that I co-authored with Fabrizio Ferraro and Jeffrey Pfeffer: "Economic language and assumptions: How theory can become self-fulfilling, Academy of Management Review, 30:8-24"

A Low Cost Way to Improve Engagement — Give ‘Em Goose Bumps

By Tammy Erickson

A number of years ago I received an unusual request from the AARP, an association headquartered in Washington, DC, dedicated initially to serving retirees and now (as fewer retire), older Americans broadly. Deeply committed to being an employer of choice, to having top-tier human resource practices, AARP's progressive HR leaders asked me to audit their current employment policies.

They began by making a presentation to me, outlining their excellent, best-practice approaches to compensation, benefits, and so on. Soon, to be honest, I was bored out of my mind.

I interrupted. "Why do you work here?"

Instantly the mood and energy in the room changed. One person described her passion for helping older individuals live better lives. Everyone nodded and chimed in with enthusiasm.

"How often do you feel that way? How frequently are you reminded that that's what you do here?"

One person described a time she had been invited to go to Capitol Hill to watch while a piece of legislation that AARP had worked to support was signed into law. Remembering the day, she added, "It gave me goose bumps!"

"Fantastic! How many of your colleagues have that type of experience?"

Hmm. Not many, it turned out.

"And how often do you get to do things like that — have experiences that make you feel that way?"

Not often, it turned out.

"Okay. That's what we should be talking about."

I strongly believe that the essence of a great employee experience — one that deepens our commitment and heightens our engagement — are those moments that give us goose bumps — the moments that remind us why we chose to work for this particular organization in the first place.

One trick is that we don't all value the same thing. Some of us live for the adrenaline rush of the next big sale — or the intellectual satisfaction of discovering something new. Others of us cherish the camaraderie of friends and sense of belonging within a warm and family-oriented organization. Some love the steady and predictable rhythm of weekly checks and regular promotions — or perhaps the sense of freedom that comes from having control over the hours and places in which we work. Happily, as I've discussed in past posts, successful companies tend to attract people who value similar things because prospective employees all perceive (hopefully correctly) that the employee experience will include things they care about. In other words, the company's image, reputation and legends lead intelligent people to surmise that the employee experience will be congruent with their personal preferences and values.

For many who chose to join a mission-driven organization like AARP, being reminded of the mission — having an opportunity to see the benefits of the organization's work — is important. AARP has created a unique "Signature Process," one perfectly suited to their employees' values, the company's fundamental purpose, and their location. Once a year, they invite any and all employees who want to participate to don a special tee shirt and march en mass up to Capitol Hill to show support for a legislative initiative that is important that year. This program undoubtedly furthers the organization's work, but, perhaps more importantly, it reminds every employee — including those who spend most of the year working far away from the constituents the AARP serves — of why they chose to work there. It gives them goose bumps.

Johnson & Johnson is another example of an organization that is good at goose bumps. The first time I spoke at one of their internal meetings, I was scheduled second on the agenda. The meeting was a large gathering of the company's IT staff. I was set to deliver what I hoped would be a highly engaging, provocative and entertaining look at the changing workforce. I needed an audience in an upbeat mood!

But as I waited back stage, I realized the gentleman on before me was a physician who was telling some extremely sad stories of nearly-dying babies, along with the role that J&J's products had played in saving lives. He had my audience in tears. Oh, great.

I learned later that most large meetings at J&J start this way — with someone from the company's key constituencies, a doctor, nurse, or parent, talking about the impact of the work done at J&J on an important human health issue. This practice, while not perhaps ideal for the speakers who follow, is a wonderful and highly effective way to give everyone goose bumps — to remind people who probably never come in direct contact with patients what it means to work at J&J.

In this difficult year, it's important to understand why people joined your organization and reinforce those values. In most cases, these steps don't cost a lot of money, but they can have a huge impact on employee engagement and commitment.

Find the authentic core of work at your organization and create ways to amplify and extend the experience to all employees. Give 'em goose bumps.

How are you reminding employees what it means to work in your organization?

The HBR Debate: Round 1

By Bronwyn Fryer

Have a few bad-apple business school alumni spoiled the economic barrel? Or is the problem more systemic -- have schools themselves contributed to the global financial crisis by selecting the wrong kinds of students and teaching them the wrong things?

Business schools, including Harvard's, are in a self-reflective mood these days. That's why HBR is conducting a weeks-long debate among business school professors, business leaders, MBAs, HBR readers and the public at large on the subject. As of this writing, the debate has attracted 85 thoughtful comments since it kicked off last Monday, March 30th. .

In the kick-off Joel Podolny of Apple University (and former dean of Yale's business school) argues that the MBA curriculum is too abstract and unconnected to the real world; that students have been too motivated by the prospect of high salaries, and that the business schools still show no contrition for the deeds of their progeny.

On the other side, Steve Kerr of Goldman Sachs counters that we should thank MBAs for the booming economy of past years; that schools are indeed incorporating ethics training into their curriculum; and that corporate training programs, such as those at G.E., have a bigger impact on business than MBA programs do.

Meanwhile, Henry Mintzberg of McGill University, a longtime a critic of the MBA curriculum, argues management can only be taught by managing.

Some comments from those contributing to the first round of the debate:

"I'm afraid, this time around the overwhelming evidence is against business schools." -- Angel Cabrera, President, Thunderbird Business School

"Only a fraction of the wrongdoers hold MBA degrees....the degree attracts slightly idealistic people who want to develop careers for the long term." -- Daisy Wademan Dowling, author, Remember Who You Are

"The failed leaders in this crisis are products of MBA curriculums offered 20 or 30 years ago. Much has changed since then." -- Carl Kester, Deputy Dean, Harvard Business School

"How much is enough? How will you measure success? Until we answer these questions differently than we have, what we see in business school education and what we see in the world of business merely reflects our desires and expectations from education and the world of business -- a world of sales(wo)men, not states(wo)men." -- Mark Albion, author, Making a Life Worth Living:

"It's now clear that economists are no more able to understand and manage our economy than philosophers." -- HBR author Tom Davenport

"Business schools will continue to attract talent and continue to train people to be better managers. They will continue to be places where a wide variety of ideas are generated. They should not be convenient scapegoats for today's financial problems." -- Andrew Likierman, Dean, London Business School

"I see problematic behavior early in MBA's careers, as they look for their position, benefits, and importance in a firm. Privilege is the silent partner of greed." -- James Champy, co-author, Reengineering the Corporation

"We need to teach our students that a failure to exercise responsible self-restraint will lead to heavy-fisted rules that are, in fact, inefficient and misguided." -- Constance E. Bagley, HBS

"The current economic crisis properly provides a stimulus for re-evaluating MBA education. However, business school curricula have long failed to address numerous aspects of our changing world, in particular the ambition of women to obtain executive roles in business organizations." -- Alice Eagly, author, Through the Labyrinth

Next week, Stanford's Bob Sutton takes up the question of whether the focus on economics reinforces selfish impulses among students. He is countered by Steve Kaplan, a finance professor at the University of Chicago's Booth School. Expect a lively discussion!

The full text of these and dozens of comments from thoughtful readers around the world appear in the debate threads. We hope that you will read the blogs and add your own comments to all of them as they develop, and participate in this discussion over the next several weeks.

Do You Really Know Where You Make Your Money?

By Anthony K. Tjan

This second conversation with former Thomson Corporation CEO Dick Harrington looks at why small businesses need to understand their product line profitability. When Harrington was CEO of Thomson Corporation, now Thomson Reuters, cash flow grew by 4x.

Tony Tjan (TT): This is one of those common sense, not commonly done things...but remind readers why it's so important to understand exactly where their profits come from?

Dick Harrington (DH): You need to understand exactly where you make your money because that means you understand your business model well, and that's going to let you make the best decisions for growth.

TT: Could you use Thomson as an example?

DH: At Thomson, we had a business model with high fixed cost and very low marginal costs, so once you covered that fixed cost, every additional dollar of revenue was highly profitable. At that point you have as much an "EBITDA model" as a "revenue model" - and that is a good day. Understanding that what we were about was fixed cost leverage combined with recurring revenue that ultimately created very strong cash flow growth, was key to our success.

In terms of determining exactly which businesses were doing this well and where we were really making our money, we did a portfolio break down of income by product lines. If one wasn't making money, we wanted to know why. Perhaps it was just a loss leader, driving some other product, but we could also be underpricing it. On the flip side, for the ones that were really making money you wanted to be careful to make the right on-going investments and not be overpricing them.

TT: How would a small business act on this kind of information?

DH: For small businesses, you should know the cost structure for top products and be able to know if you made money or not just by looking at the revenue for each every month.

TT: So, do you think that most people today know that?

DH: I don't, because most small businesses bundle all the products into one big ball. Very few people are looking at product line profitability.

TT: But isn't that because product line profitability is hellish to measure? Do you really need to measure every SKU's revenue and profit and work through allocating fixed costs?

DH: Not quite; you can categorize products. And if you're small, you can estimate and be approximately correct. For example, if one product is consuming all your customer support resources, you want to account for it. But for small changes in floor space usage, for example, you probably don't need to factor that in. Being approximately correct is good enough; you don't need to have perfect information to make the right decision.

TT: How about a concrete example of how a small shop could apply this lesson? If they allocate a lot of time to product X or Y, should they account for that?

DH: Break down operating income or EBITDA by product line, and allocate any fixed costs that are consumed in different degrees. So if 50% of the floor space is for one product line, charge that product line the appropriate cost. If one product is a few more square feet than another, though, don't worry about it.

TT: How frequently should a small business be doing this?

DH: If you have sophisticated systems, you want to look at this quarterly. If not, do this kind of report every four to six months in order to confirm your own thoughts about where profit it is.

TT: Why do you think small businesses have a hard time with this?

DH: Small businesses start with a good idea, but eventually the business gets more sophisticated. The entrepreneur then tries to focus on what he knows best. So the engineer looks at engineering costs, the sales guy at sales costs, etc. No one is looking at the operation holistically.

You need to continuously think and assess if you are getting the right profitability information, especially in the context of competitors.

TT: How can you get profitability data for competitors at the product line level?

DH: Well, if you are a small business, the best you may be able to do is price comparisons. And be smart about this. If you think you get business because you charge 10% less, but everyone else is still busy, then you're probably leaving 10 cents of every dollar on the table.

TT: How much do you prioritize the cost side over the revenue size?

DH: Looking at costs should be a continuous process, but it's not going to drive profitability. If you are in the early stages of a business, focus out demand generation - the revenue side -- and then focus on optimizing costs. The first priority for a small business is always, always, always to get customers. Never forget that.