A Closer Look

at Business Education


JULY 2006


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
■ 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?

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, let’s 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 manager’s 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 firm cannot maximize value if it ignores the interest of its stakeholders.A Closer Look at Business Education _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ make purposeful decisions. How to deal effectively with the non-rational behavior of people. Finance. Law. or b) clarifying that shareholders are the “real owners” of the firm (a legal stance that appears to be untrue) -2- . 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.” On the most promising areas of future CG research: “How to resolve the agency problems of overvalued equity. . Organizational Behavior. in the United States. most define CG explicitly as a) making sure that boards and managers don’t lie. The choice of value maximization as the corporate scorecard must be complemented by a corporate vision. cheat and steal. where firms must be governed for the exclusive financial benefit of shareholders The primary. and Strategy There are few explicit legal situations. .” THE BOTTOM LINE: ■ ■ ■ ■ Issues of corporate governance are found in many disciplines at the MBA level. CSR/Ethics. . value maximization is not likely to tap into the energy and enthusiasm of employees and managers to create value. Entrepreneurship. strategy and tactics that unite participants in the organization in its struggle for dominance in its competitive arena. stakeholder theory makes managers unaccountable for their actions. . With no way to keep score. As a statement of corporate purpose or vision. [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. including Accounting.

a research survey conducted biennially by the Aspen Institute.A. and Europe. . Corporate Governance in Russia Asian Institute of Management. as occurred in the corporate crisis of 2002 and 2003 in the U. Corporate Governance: Wealth. Corporate Governance (Elective Course) “Greater investor protection lowers the cost of capital and results in greater financial development and economic growth. raises some of the key issues and dilemmas of our time. ■ ■ ■ ■ ■ ■ ■ University of Cambridge.” NOTABLE CENTERS*: The following center descriptions are drawn exclusively from Beyond Grey Pinstripes. Unfortunately. this general perception is totally wrong. what weight should be given to the interests of directors. and therefore] more government control is required. Corporate Governance (Elective Course) “Corporate Governance only receives broad attention when it fails. Corporate Governance (Elective Course) “In this course. [as the flaw is in] mistaken design of the organizational architecture.” ESADE Business School. Current Issues in U. Power and Responsibility (Elective Course) “This course examines how corporations are governed and to whom they should be responsible. Corporate Governance and Ethics (Core Course) “Corporate governance . Center for Corporate Governance and Performance Southern Methodist University. . Corporate Governance Institute EM Lyon.” The University of Texas at Austin.” Duke University. and how precisely can these interests be expressed. and effects of legislation on corporate governance. ■ ■ ■ ■ ■ ■ ■ Yale University. The transition from a bourgeois capitalism to a popular capitalism is almost complete.S. Centre for Corporate Governance University of Alberta. aligned and reconciled?” Dartmouth College. French Corporate Governance Institute -3- . we examine the causes of the U. KPMG Institute for Corporate Governance York University. Hills Governance Center at the Asian Institute of Management University of Cambridge.A Closer Look at Business Education _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ NOTABLE COURSEWORK: The following course descriptions are drawn exclusively from Beyond Grey Pinstripes. re-aggregation of shareholder power due to concentrated institutional holdings. Topics include the role of the board of directors. and an appropriate control of the company affects many citizens through institutional investors. Economia de la Organizacion (Elective Course) “The general perception is that unethical behavior by managers caused the [financial scandals. corporate governance system's recent failures and the actions undertaken to address these failures.” The University of Michigan.S. employees and other stakeholders. In the context of a particular corporation. a research survey conducted biennially by the Aspen Institute. 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.” ITESM. shareholders.S.

A Closer Look at Business Education _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ NOTABLE CASE STUDIES / TEACHING MATERIALS: With substantial support from the Sloan Foundation. including 6 Featured Collections (teaching modules) on Corporate Governance. including detailed records on 1. and 216 research articles at 128 schools on six continents.Leimsider@aspeninstitute. and Transparent Financial Reporting Edited by Professor Steven Mintz.672 courses. 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. 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. _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ A Closer Look is an occasional series of briefing papers on topical issues in MBA education. -4- . Mary Gentile. online library of business school case studies. Æ Contact Rich. ■ ■ ■ ■ ■ ■ Earnings Management: Causes.730 extracurriculars. Each teaching module is accompanied by an explanatory note. Tufts University (35 cases and 42 background readings) Maximizing Shareholder Value: What Are Shareholders' Interests? Edited by Professor Maureen Scully.. al.org to order reprints or to offer feedback. UMass-Boston (6 cases and 13 background readings) Market Failures Edited by Dr. Techniques. the Aspen Institute’s CasePlace. and environmental impacts of the private sector. social. 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. 1.org – Free. UMass-Boston (2 cases and 5 background readings) Sarbanes-Oxley Act: How Did We Get Here? Edited by Professor Elizabeth Keating. Aspen Institute and Professor Maureen Scully. Mary Gentile. 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. 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.org – World’s biggest MBA database. Neva Goodwin et. Harvard University (11 cases and 12 background readings) What the Law Allows Edited by Dr.

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