By Rakesh Khurana and Nitin Nohria*
The economic crisis has raised fundamental issues about corporate regulation, governance, and business culture. Today, our first priority has to be to get our financial system moving again and put in appropriate regulations. We trust our finance ministers are up to this task. But longer term, we believe that it is essential to take steps that put business on a path toward sustainable economic growth. This cannot be achieved through financial engineering or a continual transfer of public resources to the financial sector. Instead, it will require a significant departure from the managerial paradigm of shareholder maximization paradigm that has guided corporate boards and executives and also been the staple of business education over the past three decades.
To put our global economic system on a path toward sustainable long-term growth, business leaders must begin to embrace a way of looking at their role that goes beyond their narrow responsibility to the shareholder and includes a broader commitment to their duty as institutional custodians. We need to create a new set of global principles upon which sustainable economic performance can be constructed. One path we have suggested is to put management on the same footing as other professions in which societal interest is paramount to how the work is done. In other words, we need to make management a profession. True professions, like medicine or law, have codes of conduct and the importance of adhering to these codes is taught as part of the formal education required of their members. These professional codes come with an implicit social contract: trust us to control an important occupational category, and in return, we will conduct ourselves with high standards and integrity.
The idea of management as a profession is not new. It was launched in the United States with great hope a century ago with the founding of the United States’ first university-based business schools. The vision was the large corporation would be run in the interest of society by turning the occupation of management into a bonafide profession, like medicine or law, with the educational underpinning, certifications, and code of conduct that go along with it.
These were certainly lofty ideals, but the pressures of a growing economy soon put a strain on them. As demand for managers exploded after World War II, universities across the United States, and later in other parts of the world, responded by establishing new schools, more programs, and by diluting the content of their offerings. Courses in business ethics and the relationship between business and society were quietly abandoned, and the emphasis shifted from “professionalism” and “education” to “vocationalism” and “training.” Then, in 1959, both the Ford Foundation and the Carnegie Corporation criticized the purely vocational nature of business school curricula, and called for more emphasis on academic standards and rigorous research. Management, they believed, was an applied social science. This perspective had far reaching consequences on the way it was studied and taught. The foundation’s directives, along with the funding they provided, led to the recruitment of business school faculty from the social sciences, mathematics, and engineering in the 1960s and 1970s. Many of these new faculty members were trained in economics, and this period accelerated the development of the economic theories that form the staple fare of MBA courses today.
It was a perfect storm. For just around the time concepts such as agency theory and efficient-market theory found their way into the classroom in the 1980s, the system of manager-dominated capitalism was collapsing. Thus at the very moment that increasingly aggressive investors were taking advantage of the growing market for corporate control to extract greater value, MBA students were being taught that they were merely agents, bound by arms-length, contractual relationships to clients and shareholders. Long before the accounting scandals of 2001, let alone the crisis that is unfolding today, management had ceased to be guided by the ideals of a profession.
What would it take to return management to a professional footing and refocus managers on creating long-term sustainable performance in the interest of society? As a first step, we propose creating a code of conduct that orients managers towards their professional obligations and responsibilities. (We have written an example of a code in an article in the October, 2008 issue of Harvard Business Review.) The resolution of this code is inspired by the way doctors and lawyers, members of true professions, define their purpose. Doctors seek to further the health of their patients. In doing so, they not only honor the sanctity of each individual life; they also meet society’s need for healthy citizens. A society of unhealthy, infirm citizens would inevitably be a weak society. Similarly, in our adversary system of legal representation, lawyers seek to ensure their clients’ interests are protected. In doing so, they not only honor the rights of each individual to due process under the law; they also meet society’s need to prevent lawlessness.
What is the parallel for managers? Modern societies have a huge interest in creating organizations that enjoy the public trust and can mobilize resources to create economic value greater than the opportunity cost of all the resources used. Managers, in our view, must be agents of society’s interest in this endeavor. This formulation, explicitly affirms the importance of ensuring that the enterprise creates value; firms that destroy value hurt not only their shareholders, but also the broader social trust in firms’ ability to create value.
At the same time, we explicitly recognize that to ensure ongoing legitimacy, an enterprise must meet all the legitimate claims placed upon it. And by turning managers into agents of society’s interest in thriving economic enterprises, we break out of the futile debate that requires us to define managers as agents either of one narrowly defined master (shareholders) or of many masters (stakeholders) who have conflicting interests.
The Oath we propose for managers also explicitly emphasizes the importance of staying focused on creating long-term sustainable value; putting personal self-interest behind the interests of the business the manager is entrusted to serve; acting with utmost personal integrity and in accord with the letter and spirit of the laws that govern managerial behavior; promoting transparency and representing the performance and risks of their enterprises accurately and honestly; protecting the interests of all constituencies, including the natural environment, whose well-being depends upon a manager’s actions; applying the best available knowledge and judgment while making decisions; developing future managers who can also become standard bearers of the management profession; and acting in a manner that increases the honor and trust that mangers enjoy in society. These clauses may not be perfect or complete. However, they have served as a useful starting framework for many groups interested in restoring the trust that managers have lost (including the Young Global Leaders of the World Economic Forum, the Business and Society Program of the Aspen Institute, and a grassroots MBA Oath movement spearheaded by our own MBA students at Harvard Business School).
We know from social science that the behavior of human beings is greatly influenced by the expectations placed on them and the context within which they operate. If management were to be seen as a true profession guided by a broadly agreed upon and shared global code of business conduct, our expectations of the moral conduct of managers and their expectations of themselves would rise. This can be an important step in restoring the frayed trust in business and capitalism.
* Rakesh Khurana is the Marvin Bower Professor of Leadership Development at Harvard Business School and the author of From Higher Aims to Hired Hands: The Social Transformation of American Business Education the Unfulfilled Promise of Management as a Profession (Princeton: 2007). Nitin Nohria is the Richard P. Chapman Professor of Business Administration and the co-author of more than 10 books on human motivation, leadership, and corporate transformation and sustainable performance. This posting draws extensively on prior work they’ve done in this area.