A Closer Look

at Business Education

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JULY 2006

: CORPORATE GOVERNANCE
INTRODUCTION:

Corporate governance (CG) is one of the most talked about topics in business, indeed in society, today. A
Google search revealed 513 news citations during a single week in June 2006. Most academics, business
professionals, and lay observers would agree that CG is defined as the general set of customs, regulations,
habits, and laws that determine to what end a firm should be run. Much more fraught, however, is the
question: what defines good corporate governance?
It is clear that CG exists at a complex intersection of law, morality, and economic efficiency. Less clear,
however, is the extent to which current MBA education reflects that complexity. CG is usually not a
distinct academic discipline, but integrated into other courses. Considering that issues of executive
compensation, financial scandals, and shareholder activism are all tied up with CG, its teaching is a topic
worth investigation.
This Closer Look takes a broad view of the topic, with the goal of addressing the following questions:
What are the key issues in CG, as regards business social and environmental impacts and
opportunities?
How do leading thinkers perceive the issue?
What is the current state of practice on MBA campuses?
What teaching resources are available to business school faculty?
A FACULTY POINT OF VIEW:

Michael C. Jensen is an Emeritus Professor at Harvard Business School. In 1973 he founded the Journal
of Financial Economics and in 1994 he co-founded the SSRN website. Dr. Jensen has published
prolifically, received numerous awards, and is widely considered to be a leading scholar in the field of
corporate governance and control. His papers have been downloaded from SSRN 245,196 times.
On current problems in worldwide corporate governance:
There will always be a problem in the sense that we will never get a perfect solution to governance in
the sense that there will be no defects. The optimal governance system will be one that just balances the
benefits of reducing malfeasance with the added costs of more stringent governance. So there will still be
[two] types of costs being incurred: costs due to malfeasance and costs created by the governance and
control systems themselves.
I do believe we can create governance systems that perform much better in western capitalism than we
currently have. And, lets be careful to recognize that western capitalism governance systems have proven
themselves to be far superior to any other system we know or have known. A brief look back at the failure
of socialist and communist systems is sufficient to illustrate the point.
On whether a managers end goal should be to maximize shareholder value:
No. And I have said this many, many times in the past. See my paper [excerpted below]:
I argue that since it is logically impossible to maximize in more than one dimension, purposeful
behavior requires a single valued objective function. Two hundred years of work in economics and finance
implies that in the absence of externalities and monopoly (and when all goods are priced), social welfare is
maximized when each firm in an economy maximizes its total market value. . .
Because the advocates of stakeholder theory refuse to specify how to make the necessary tradeoffs
among these competing interests they leave managers with a theory that makes it impossible for them to

A Closer Look

at Business Education

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make purposeful decisions. With no way to keep score, stakeholder theory makes managers unaccountable
for their actions. . .
As a statement of corporate purpose or vision, value maximization is not likely to tap into the energy
and enthusiasm of employees and managers to create value. The choice of value maximization as the
corporate scorecard must be complemented by a corporate vision, strategy and tactics that unite participants
in the organization in its struggle for dominance in its competitive arena. . .
A firm cannot maximize value if it ignores the interest of its stakeholders. [What I call] enlightened
value maximization utilizes much of the structure of stakeholder theory but accepts maximization of the
long run value of the firm as the criterion for making the requisite tradeoffs among its stakeholders.

On the most promising areas of future CG research:

How to resolve the agency problems of overvalued equity. How to deal effectively with the non-rational
behavior of people.
THE BOTTOM LINE:

Issues of corporate governance are found in many disciplines at the MBA level, including
Accounting, CSR/Ethics, Entrepreneurship, Law, Finance, Organizational Behavior, and Strategy
There are few explicit legal situations, in the United States, where firms must be governed for the
exclusive financial benefit of shareholders
The primary, unresolved debate is whether:
a) appropriate societal goals for the corporation include equitable distribution of value as well as
maximum creation of value
b) either goal is better served by granting primary attention to shareholders-only or a broader
group of stakeholders
While a few MBA programs engage students in this fundamental debate, most define CG explicitly as
a) making sure that boards and managers dont lie, cheat and steal, or
b) clarifying that shareholders are the real owners of the firm (a legal stance that appears to be
untrue)

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A Closer Look

at Business Education

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NOTABLE COURSEWORK:

The following course descriptions are drawn exclusively from Beyond Grey Pinstripes, a research survey
conducted biennially by the Aspen Institute.

University of Cambridge, Corporate Governance and Ethics (Core Course)

Corporate governance . . . raises some of the key issues and dilemmas of our time. In the context of
a particular corporation, what weight should be given to the interests of directors, shareholders,
employees and other stakeholders, and how precisely can these interests be expressed, aligned and
reconciled?
Dartmouth College, Corporate Governance (Elective Course)
Greater investor protection lowers the cost of capital and results in greater financial development
and economic growth.
Duke University, Current Issues in U.S. Corporate Governance (Elective Course)
In this course, we examine the causes of the U.S. corporate governance system's recent failures and
the actions undertaken to address these failures.
ESADE Business School, Corporate Governance (Elective Course)
Corporate Governance only receives broad attention when it fails, as occurred in the corporate crisis
of 2002 and 2003 in the U.S.A. and Europe. The transition from a bourgeois capitalism to a popular
capitalism is almost complete, and an appropriate control of the company affects many citizens
through institutional investors.
ITESM, Economia de la Organizacion (Elective Course)
The general perception is that unethical behavior by managers caused the [financial scandals, and
therefore] more government control is required. Unfortunately, this general perception is totally
wrong, [as the flaw is in] mistaken design of the organizational architecture.
The University of Michigan, Corporate Governance: Wealth, Power and Responsibility (Elective
Course)
This course examines how corporations are governed and to whom they should be responsible.
Topics include the role of the board of directors, re-aggregation of shareholder power due to
concentrated institutional holdings, and effects of legislation on corporate governance.
The University of Texas at Austin, Corporate Governance (Elective Course)
Senior executives must consistently balance their time between achieving quarterly performance
targets and building strong companies that can sustain above market financial performance in the
future.

NOTABLE CENTERS*:

The following center descriptions are drawn exclusively from Beyond Grey Pinstripes, a research survey
conducted biennially by the Aspen Institute.

Yale University, Center for Corporate Governance and Performance

Southern Methodist University, KPMG Institute for Corporate Governance
York University, Corporate Governance in Russia
Asian Institute of Management, Hills Governance Center at the Asian Institute of Management
University of Cambridge, Centre for Corporate Governance
University of Alberta, Corporate Governance Institute
EM Lyon, French Corporate Governance Institute

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A Closer Look

at Business Education

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NOTABLE CASE STUDIES / TEACHING MATERIALS:

With substantial support from the Sloan Foundation, the Aspen Institutes CasePlace.org has drawn
together an impressive collection of MBA teaching materials that prepare students for the social and
environmental implications of Corporate Governance issues. Each teaching module is accompanied by an
explanatory note.

Earnings Management: Causes, Techniques, and Transparent Financial Reporting

Edited by Professor Steven Mintz, Cal Poly-San Luis Obispo (5 cases and 4 background readings)
Investments and Returns: Who has legitimate claim on the returns of the firm?
Edited by Dr. Mary Gentile, Aspen Institute and Professor Maureen Scully, UMass-Boston (6 cases
and 13 background readings)
Market Failures
Edited by Dr. Neva Goodwin et. al., Tufts University (35 cases and 42 background readings)
Maximizing Shareholder Value: What Are Shareholders' Interests?
Edited by Professor Maureen Scully, UMass-Boston (2 cases and 5 background readings)
Sarbanes-Oxley Act: How Did We Get Here?
Edited by Professor Elizabeth Keating, Harvard University (11 cases and 12 background readings)
What the Law Allows
Edited by Dr. Mary Gentile, Aspen Institute (2 cases and 25 background readings)

ONGOING QUESTIONS:

Is it possible to resolve the debates around the definition of CG?

In the absence of such a resolution, how should these issues be presented to MBA students?
How can (or should) MBA faculty from different disciplines work together to improve CG education?

RESOURCES:

BeyondGreyPinstripes.org Worlds biggest MBA database, including detailed records on 1,672 courses,
1,730 extracurriculars, and 216 research articles at 128 schools on six continents.
CasePlace.org Free, online library of business school case studies, including 6 Featured Collections
(teaching modules) on Corporate Governance.

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A Closer Look is an occasional series of briefing papers on topical issues in MBA education, based on the research and programs of the
Aspen Institute. The Aspen Institute Business and Society Program works with senior corporate executives and MBA educators to
prepare business leaders who will effectively manage the financial, social, and environmental impacts of the private sector.

Contact Rich.Leimsider@aspeninstitute.org to order reprints or to offer feedback.

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