May 24, 2022

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Research shows CEOs with MBAs don’t make things better

What happens when people with an academic pedigree in management actually run a business?

Driving the news: Nothing great, according to new research that suggests that employees of firms run by people with a degree in business do worse — while the company as a whole doesn’t necessarily do better.

Why it matters: The era of professionalized corporate management may have merely shifted more of the economic pie away from workers and toward shareholders — not made the pie bigger.

The details: When a CEO with formal training in business management — either an undergraduate business major or an MBA — took over a U.S. company, its wages fell 6% over the ensuing five years and the share of its income paid out as wages fell 5%, according to a new working paper.

  • Meanwhile, revenue, investment and productivity showed no change compared to peers that were not taken over by a leader with business training.
  • The new NBER working paper is from Daron Acemoglu of MIT, Daniel le Maire of the University of Copenhagen, and Alex He of the University of Maryland.

Disclosure: Your newsletter writer has an MBA, but has not, to the best of his knowledge, reduced the labor share of national income.

The big picture: There is an entire theory of modern corporate governance that rests on hard-headed executives — frequently trained at business schools — taking the reins of companies and making them more efficient.

  • That’s the theory behind the financialization of American business, including the increase in private equity ownership of companies over the last few decades, and a more hard-headed approach to management by boards and executive teams at publicly-held firms.
  • In theory, this approach should create a more dynamic economy. Sure, some people might lose their jobs. But that just means reallocating resources to their highest and best use.

And yet, the last couple of decades have produced markedly lower productivity growth and economic dynamism than the earlier, stodgier era generated, when corporate leaders were less likely to have an MBA, and were more likely to have come up through the ranks managing the nuts and bolts of their industry.

  • A generation of killer MBA types have succeeded at shifting the economy in favor of management, but not delivering on the promise of a more dynamic economy.

Yes, but: Co-author He notes that the data on which this research is based only extends to 2014 in the U.S. and 2011 in Denmark (which showed similar trends). That means it’s unclear to what extent the changes in business education that have accelerated since then — like a focus on sustainability — might affect the results.

The bottom line: It’s time for more soul-searching about what people really learn in business school, and whether it makes the world better.

Editor’s note: This story has been corrected to state that the working paper showed a decline in wages (not employment) at companies led by a trained business manager.