Reflections on Ghoshal

Just finished reading Sumatra Ghoshal’s posthumously published article “Bad Management Theories are Destroying Good Management Practices” (Academy of Managing Learning & Education, vol 4 no 1, pp. 75-91). I thought it brilliant, and was surprised when The Economist misunderstood it and started chewing him up for blaming Enron, Tyco and Global Crossing on bad MBA teaching.
The interesting conclusion in Ghoshal’s article is not in the topicality, but in the principle – his questioning of the dictum that maximizing shareholder returns is the sine qua non. He attributes the overemphasis on this to the fact that the organizational economics perspective has clear and coherent models – and the counterarguments are verbal and less precise. His argument incorporates risk, arguing that other stakeholders (such as employees in the short term and the society in the long term) carries more risk with their involvement in an enterprise than do the shareholders, who can get out at relatively short notice. (And a side note: I like the use of Elster’s framework of theoretical models a lot.)
When I took one of Michael Jensen’s courses on organizational economics at Harvard, ages ago, this was the one “terse” and economical argument against the organizational economics theories (which are extremely appealing from a purely intellectual viewpoint). One of the cases discussed was that of Safeway, which had undergone a cost-cutting and downsizing excercise, in order for the owners to extract value. It seemed to me that what was happening was that many people who lost their jobs really were exposed to the rough and tumble of market economics without being prepared for it – and that society somehow has an obligation to prepare people, or at least make them aware, of the risks of a market based system. Landes makes a similar argument (admittedly only in a footnote in Wealth and Powerty of Nations) when he talks about “[t]he contest [..] between lowbrow vested interests on the one hand, highbrow economic reasoning on the other.” (p. 266)
One way to take this argument forward might be to somehow weight the influence of stakeholder in a company based on the amount of risk they take. Though hard to do in practice, the many laws and regulations of worker participation in Europe have this effect, though I suspect that they are not underpinned by that theoretical viewpoint (and that they increase systemic risk, that is, undermine the competitiveness of the region they cover). A basis in risk adjustment would at least meet the conciseness criteria, since it probably could be shaped into a coherent theory. And there is the paradox of perverse incentives – the more risk you take, the more influence you gain.
Hmmmm… Have to think more about this – particularly as there is a new theory of the firm needed for knowledge based companies operating in a global setting, enabled by information technology.

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