The overarching goal of most business schools is to train future leaders to lead. But how well schools meet this goal, and to what extent their teaching influences their students’ leadership, is an open question. Does business school education really shape students’ minds and behaviors many years later, when they’ve reached decision-making positions at major corporations and financial institutions?
We explore this question by looking at CEOs’ decisions about corporate diversification over the last three decades. We chose to study diversification because business scholars drastically changed their views about it during this period, which allows us to see if students changed their minds as a result of what they learned.
Up until the 1960s, scholars viewed diversification as a valuable strategy. Kenneth Andrews, who popularized the concept of business strategy at Harvard Business School, was one of them. In 1951 he wrote in HBR, “The purposeful diversification of American corporate enterprise has been accomplished with the hope of attaining greater stability in organization and earnings, greater efficiency in the use of company resources, greater economy in marketing operations, or greater returns from the exploitation of unexpected opportunity and peculiar economic conditions.”
The thinking on diversification later changed, turning into skepticism in the 1970s and outright criticism in the 1980s. This reflected a broader shift in business education, as Rakesh Khurana meticulously described in From Higher Aims to Hired Hands, as financial economics became the dominant discipline in business schools in the 1970s. Agency theory, in particular, became a mainstream paradigm that dominated both academia and practice.
In highly cited articles in HBR, Michael Jensen, a faculty member at HBS, and arguably the most prominent agency theorist, put forth a harsh criticism of diversification as a main example of managerial opportunism at the expense of shareholders’ wealth. Through his academic research and teaching at HBS, Jensen promulgated a new financial orthodoxy that corporate managers should avoid diversification and instead focus on the firm’s core competencies.
While theories and evidence against diversification emerged in the 1970s, many firms remained diversified well into the 1980s. Our research sought to explain why the decline in corporate diversifications among U.S. corporations was so slow. We believe it was because corporate strategy reflects the views of top decision makers, and therefore change in strategy follows from changes in these views or from a new crop of decision makers — both of which can lag behind business schools’ teachings.
Think about it: It took 20 to 30 years for those MBA students who absorbed a skeptical view on diversification in the 1970s and the ‘80s to climb up corporate hierarchies, replace CEOs at major U.S. firms, and put the brakes on diversification.
To test our argument, we collected data on 2,031 CEOs who ran 640 large U.S. corporations from 1985 to 2015. From various archival sources, including the Marquis Who’s Who and Bloomberg’s Executive Profile & Biography, we gathered information on their educational background, such as the school they attended for an MBA and their year of graduation.
In our sample, about 20% of CEOs in the 1980s had an MBA, and throughout the 1980s and the 1990s the percentage steadily increased to 33%, where it remained during the 2000s. We split our sample into three cohorts — CEOs who earned an MBA before 1970, those who matriculated in the 1970s, and those who did so after 1980 — and examined whether these groups made different strategic choices about diversification.
Here’s what we found: Compared with CEOs without an MBA, CEOs who earned an MBA before the 1970s were 17% more likely to pursue diversification at some point during their tenure. The later cohorts of CEOs, those who earned an MBA in the 1970s and those who did so afterward, were less likely to do so than their non-MBA counterparts by 24% and 30%, respectively.
Let’s look at one example from our data. The case of Bristol-Myers Squibb illustrates the connection between business school views on diversification and CEOs’ later diversification decisions. As chief executive from 1972 to 1994, Richard Gelb (HBS, 1950) orchestrated Bristol-Myers’ acquisition of Squibb and transformed the firm from a personal care company to a diversified pharmaceutical giant. This changed after Peter Dolan (Dartmouth, 1980) took the helm in 2001. As chief executive, Dolan followed the agency-theoretic prescription that was taught in business schools in the late 1970s, refocusing his company’s business almost exclusively on pharmaceuticals.
Although we statistically control for many confounding factors, such as characteristics of the firm, attributes of the CEO, and industry-level factors, we can’t be sure that our results capture the exact causal effect of MBA education. There could be unknown factors that both lead a firm to hire an MBA CEO and drive the CEO’s diversification decisions. So it would be difficult to argue unequivocally that MBA education alone determines the CEO’s decisions.
To address this concern, we conducted a supplementary analysis. In our data, one-quarter of CEOs with an MBA graduated from HBS, where Jensen taught agency theory beginning in 1985. Given his elevated role in popularizing agency theory, we expected that being exposed to his teaching had an enduring effect on students’ views of diversification. Using only the cases of HBS graduates, we found that CEOs who attended HBS after Jensen joined the school were nearly 83% less likely to engage in diversification than those who went to HBS before. We also compared HBS-educated CEOs with the CEOs who had MBAs from other schools or who didn’t have an MBA. HBS education still had a strong negative effect on diversification only after Jensen’s arrival.