Wednesday, 9 September 2009

Questioning the Basic Assumptions of Management Theories

After the great corporate scandals in the United States that we all know (e.g.: Enron) and after the consequent emanation of laws such as the famous Sarbanes-Oxley Act, Indian professor and management guru, S. Ghoshal (in the picture) wrote a sharp article entitled Bad Management Theories are Destroying Good Management Practices. In this interesting article he criticizes the scientific pretense of some of the most famous management theories (such as Transaction Cost Economics, Agency Theory, Game Theory, etc... ) and most of their basic, underlying assumptions. According to the Indian professor, the effects of these thoeries are already clear in the title, but I'll say more about that later.

First of all he starts by asserting that the fact of studying management as if it was a "natural science" (trying to discover patterns and laws) has lead to "the exclusion of any role for human intentionality or choice". Therefore little or no space is left, for example, to ethics and morality. Furthermore, he claims, this approach ignores some of the basic differences between different academic disciplines. The main distinction here is between natural sciences and humanities. Ghoshal claims that this "pretense of knowledge" has undoubtedly led to some benefits, but also that the costs have been to high.

He argues that theories in social sciences tend to be "self fulfilling": "A theory of subatomic particles or of the universe— right or wrong—does not change the behaviors of those particles or of the universe. [...] In contrast, a management theory—if it gains sufficient currency— changes the behaviors of managers who start acting in accordance with the theory. A theory that assumes that people can behave opportunistically and draws its conclusions for managing people based on that assumption can induce managerial actions that are likely to enhance opportunistic behavior among people".

After that he later attacks the "ideology-based, gloomy vision" of these theories. Basically all these theories have their departure point in negative assumptions about human beings and institutions. Our Homo Economicus is basically a rational, opportunistic, self-interested, greedy and benefit maximizer being. As Friedmann suggests, his last and foremost important goal as a manger is to create shareholders value. Nothing else. In this regards, Ghoshal writes: "Combine agency theory with transaction costs economics, add in standard versions of game theory and negotiation analysis, and the picture of the manager that emerges is one that is now very familiar in practice: the ruthlessly hard-driving, strictly top-down, command-and-control focused, shareholder- value-obsessed, win-at-any-cost business leader [...]". These assumptions are by now part of our common sense. But, are we really all like that?

The results of teaching such theories would be dramatic. Corporate scandals would have occurred mainly because of this dangerous "mental programming" that mangagers have received during their study years in business schools and because of the world view this way of thinking promotes.

Indeed the article makes some very strong statements. When I first read it, I was like "WOW! I had never thought about that!. Could it really be like Ghoshal writes?". Surely I am not sufficiently strong in the field to claim whether Ghoshal is right or wrong. Probably he is neither right nor wrong. I also think that some of the causal links between management thoeries and managers' behaviour have to be investigated. But, overall I think that his article is really interesting and engaging because it challenges most of the "great thoeries" that we have learned at school and that today are so embedded in managerial common sense. Moreover the mushrooming of disciplines such as "Business Ethics" and "Corporate Social Responsibility" in Business programmes is undoubtedly a symptom of the shared necessity to rethink business and business-related practices from a different perspective.

If you are interestend in the article, here is the bibliographic reference:
Ghoshal, S. (2005): Bad Management Theories Are Destroying Good Management Practices. Academy of Management Learning & Education, vol. 4/1: 75-91.