Educated Fools

In the volumes written about the cause of the current financial crisis, very little has been said about what the nation's business schools did to prepare the leaders involved in creating the crisis.   Michael Jacobs, a professor at the University of North Carolina Kenan-Flagler Business School, had this to say in an op-ed column written in today's Wall Street Journal.  

There are three profound failures of sound business practices at the root of the economic crisis, and none of them have been adequately addressed by our business schools.  Just about everyone agrees that misaligned incentive programs are at the core of what brought our financial system to its knees. Secondly, as Washington scrambles to restructure the financial regulatory system, those who still believe in the private sector are asking why corporate boards were AWOL as institution after institution crumbled. 

The third breakdown came in the investment community.  Nationally, finance departments at business schools offer hundreds of courses in asset securitization and portfolio diversification. They have taught a generation of financial leaders that risk can be diversified away. But in their B-school days, few investment bankers examined the notion of "agency costs." That concept explains that as the gulf between the provider and the user of capital widens, the risks involved with selecting and monitoring the participants in the portfolio increase. It should come as no surprise that financial institutions amassed securities that consist of a diversified portfolio of deadbeats.  

By failing to teach the principles of corporate governance, our business schools have failed our students. And 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.

Mr. Jacobs is spot-on and should know more than anyone since he is a professor at a leading business school. As we begin to emerge from the current crisis and re-build our foundations of business, our business schools must re-tool their programs to develop competent business leaders.