The other day a leader at one of the world’s most prestigious business schools revealed an unexpected development.
“We are past peak MBA,” Julian Birkinshaw, vice-dean at the London Business School told the FT. It turns out that people worldwide want shorter courses than the traditional two-year MBA, which is unsurprising considering how much these qualifications can now cost. The London Business School version requires £115,000 for fees alone, up from around £80,000 in 2018, and that is before living expenses and lost earnings.
For reasons I am not proud of I found this news of the MBA’s fall from past glory pleasing.
This is partly because of puerile jealousy. The galactic cost of a top-ranked MBA makes it as unaffordable as a Hermès handbag, yet few luxury goods offer anything like its networking prospects. Look no further than the UK’s prime minister. Rishi Sunak was doing an MBA at Stanford when he met classmate Akshata Murty, the billionaire’s daughter who is now his wife.
Also I still remember the friend who many years ago showed me what he was studying for his MBA as he explained why he did not think it was something for me. It was true I did not then know a volatility model from a nonparametric function estimation, and probably never will. But nor did I need to have this fact shoved in my face.
As it happens he was an outlier. Other friends who did an MBA never boasted about the skill – or the sacrifices – it took, and many did it for sensible reasons. They were scientists or political advisers or writers who wanted to learn about business so they could switch careers or run their own firms. Likewise, an MBA can make sense for, say, a healthcare executive or an engineer trying to manage more effectively.
But as time has gone on a minor industry of academic detractors has emerged to argue that MBAs are generally less useful than their hefty price tags suggest, and might even be a cause for concern.
An early blow was delivered more than 20 years ago by Canadian management thinker, professor Henry Mintzberg, who has called MBA graduates “a menace to society”. When he and a colleague tracked 19 Harvard Business School graduates to see how they had fared since being dubbed US business superstars in 1990, they found 10 had suffered serious setbacks, such as bankruptcy or the boot, and the records of another four were “questionable”.
More troubling results emerged in bigger studies, such as a 2015 paper by Danny Miller of HEC Montreal business school and the University of Rhode Island’s Xiaowei Xu.
Xu and Miller, who has an MBA himself, had initially planned to study the effects of hubris on 444 US chief executives who had scored an admiring cover story in a top US business magazine between 1970 and 2008. But they discovered something far more interesting: the cover story CEOs with an MBA were noticeably worse at sustaining superior performance than the MBA-free ones.
MBA graduates were also more likely to expand their companies with acquisitions rather than organic growth, sacrificing earnings and cash flow in the process, yet their own pay rose at a faster rate than that of their counterparts who had outperformed them.
When the two researchers then did an even larger study of 5,000 CEOs they confirmed that those with an MBA degree operated quite differently to the non-MBA bosses, spending less on R&D, say, and using accounting techniques to flatter their firm’s earnings. These ploys prompted a swift jump in profits, followed by a decline that led to a bigger fall in their company’s market value compared with outfits run by CEOs without an MBA – whose pay was again less impressive.
As the academics repeatedly cautioned, none of this proves an MBA causes these results. Self-serving short-termists might be more drawn to MBAs, and boards seeking quick profits might be keener to hire them. It’s also worth remembering Harvard MBA grads range from disgraced Enron boss Jeffrey Skilling, to Wall Street superstar Jamie Dimon.
Still, as Danny Miller said when I spoke to him last week, the research suggested chief executives with MBAs were often more short-term-oriented individuals whose companies “didn’t do quite as well as they did themselves”.
In other words, if demand for top MBAs has peaked it might not be a tragedy at all. – Copyright The Financial Times Limited 2024
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