B-School Grade: F

In a 4/24/09 WSJ op-ed, Michael Jacobs, a business school professor who formerly worked at the Treasury, takes business schools, “B-schools”, to task.

Management compensation should emphasize the long term value of a company. Yet there is no systematic study of the design of management compensation systems at most business schools. A shareholder should be wary when he or she reads assurances from CEOs that their compensation is designed to align management compensation with the interests of the shareholders.

Few business schools cover the topic of board structure – what it does and how it should do it. Citigroup, one of the largest financial companies in the world, had few directors on their board with any experience in financial markets. GE has a large financial division, GE Capital, but has only one board member with experience in a financial instution.

B-Schools offer comprehensive teaching in securitizing assets and diversifying risk. Those skills were well exercised in developing the mortgage backed securities (MBS) and collaterized debt securities (CDS) that crippled the financial world in 2008. In B-Schools, there is little examination of the increase in risk as the providers of capital grow further away from the users of that capital.

Half of Americans have some investment in the stock market but the majority of that investment is through pension and mutual funds. At the financial institutions that handle these investments and own almost 70% of the shares of American corporations, the MBAs have had little training in shareholder rights and duties as owners. Because of this, there is little shareholder input into the governance of America’s corporations.

The author concludes with an assessment: “by not internalizing sound principles of governance and accountability, B-school graduates have matured into executives and investment bankers who have failed American workers and retirees who have witnessed their jobs and savings vanish.”

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