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The interface syndrome
While the number of consulting assignments undertaken by Indian B-school faculties are astonishingly low, US comes more towards the other end of the SPECTRUM. In fact, both extremes are potentially harmful
Issue Date - 08/12/2011
What started off as an experiment in modern business history – management education – has now become one of the most significant totem poles supporting the business community. From producing some of the best brains who became Fortune 500 CEOs to individuals whose theories have now become standard handbooks, management education as a discipline has come a long way. So much so that it is now increasingly getting complex. Take a look at B-school rankings in general and the picture becomes clear. While earlier, course content might have been the only factor making a B-school superior, today they are ranked on more exhaustive and wider range of parameters. One of them happens to be the number of consulting assignments undertaken by faculty members, or more commonly, the ‘industry interface of B-school faculties’.

Indian B-schools at large (apart from the elite ones of course) pathetically fall behind on this count. While a lot of B-school professors do have research papers to their credit, only a handful regularly undertake consulting assignments and projects with the industry. The lack of industry interface in the faculty of most Indian B-schools is one of the reasons why only 10% of Indian MBA graduates are employable. Prof. Praveen K. Kopalle, Tuck School of Business says that it is a synergistic relationship, as while companies look to bring top faculty research to practice, “interactions with managers and the problems they face are actually a source for research ideas for the faculty”. And ultimately, the learnings are of immense importance to students.

While countries like India are at one extreme of the spectrum, the situation in Western countries is at the other extreme, which is worrying. If left unchecked, excessive exposure of faculties to the industry and to the government there can end up in inflicting damage of catastrophic proportions. The US banking industry is a case in point. Since the 1980s, academic economists have been major advocates of deregulation and played a powerful role in shaping US government policies. Very few of these economic experts warned about the crisis. And even after the crisis, many of them opposed reforms!

Many prominent academics make a lot of money by helping the financial industry shape public debate and government policy. Consulting firms like The Analysis Group, Charles River Associates, Compass Lexicon and Law & Economics Consulting Group are in the business of managing a multi-billion dollar industry that provides academic experts for hire. Two bankers who used these services were Ralph Cioffi, Matthew Tannin – Bear Stearns Hedge fund managers prosecuted for securities fraud. After hiring the ‘Analysis Group’, both were cleared of fraud. Astonishingly, Glenn Hubbard, Dean, Columbia Business School (he was also the Chief Economic Advisor during the Bush administration) was paid $100,000 to testify in their defence (revealed in the Oscar winning documentary Inside Job). Hubbard makes $250,000 as a board member of Met Life and till 2008, he was on the board of Capmark Financial Corporation (major commercial mortgage lender during the bubble, which went bankrupt in 2009). He also advises a number of financial firms.

Similarly, Martin Feldstein, a Professor of Economics at Harvard and one of the world’s most prominent economists (who as Chief Economic Advisor under the Reagan administration, played a major role in deregulating the banking industry) was on the board of directors of both AIG and AIG Financial Products from 1988 to 2009, and received millions of dollars as compensation.

Another case in point is Laura Tyson. A professor at the University of California, Berkeley, she was the chair of the council of economic advisers and then director of the national economic council in the Clinton administration. Shortly after leaving government, she joined the board of Morgan Stanley, which paid her $350,000 a year. Ruth Simmons, the President of Brown University, makes around $300,000 a year as board member of Goldman Sachs. Larry Summers, who as Treasury Secretary, played a crucial role in the deregulation of derivatives, became President of Harvard in 2001. While at Harvard, he made millions consulting hedge funds that relied heavily on derivatives and millions more in speaking fees (again from investment banks). According to Summers’ public financial disclosure report (as of 2009), his net worth is between $16.5 million and $39.5 million.

Apart from consulting projects, a lot of these faculties also write research papers. However, their authenticity comes into question when you consider that many a times, they are paid to do the same. Consider Fredrick Mishkin, who has been a Professor at Columbia Business School since 1983. In 2006, he was appointed as a member of the Board of Governors of the Federal Reserve. He put in his papers at the height of the financial crisis in 2008 to resume teaching at Columbia. In 2006, Mishkin had also co-authored a paper titled Financial Stability in Iceland. The report claimed that “Iceland’s economy has adjusted to financial liberalisation and prudential regulation and supervision is generally strong”. Iceland suffered the collapse of its banking system within an year of the paper being published. Interestingly, Mishkin was paid $124,000 by the Icelandic Chamber of Commerce for co-authoring the report (which was not disclosed in the publication). This in fact, is very similar to a medical researcher writing an article stating that the use of ‘X’ drug is best suited to treat a particular disease. It later turns out that the researcher makes 80% of his income from the sales of that drug. Expressing his views on this issue during an interview, Charles Morris, author of ‘The two trillion dollar meltdown’, said, “B-school professors don’t live on faculty salary. They do very, very well.”

We are not of the opinion that faculties shouldn’t be involved in consulting and research. In fact, it is precisely because of this interface that management education has stayed relevant. What, however, is harmful is the monetary nature (and a meteoric one too) that creates a conflict of interests. So while Indian regulatory bodies need to bring in amendments making it mandatory for B-school faculties to be involved in a minimum number of consulting assignments per year, countries like US need to make disclosures pertaining to financial conflict of interests mandatory and/or create an active monitoring system to keep a check on how such an interface is affecting the business community.

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