Critical Review Of Sumantra Ghoshal's Article - Essay Example

Critical Review Essay: From Theory to Practice Introduction The global financial crisis of 2008 had cast a long shadow on effectiveness of businessmanagement theories that had been dominating ways in which businesses should act. Giving a new direction to these ways, the article published by Sumantra Ghoshal has incorporated formidable insights. The article published by Ghoshal has spurred a wide range of literature, which mainly criticizes dominance of the economic theories like, agency theory, game theory and transaction cost theory, which has been dominating the management theories. The main argument that is advocated against the economic theory is that economics relies on the past experiences to predict ways in which the business corporations should act. I think the “scientific treatment” of business, which most management theories propagate, is indeed an inappropriate approach as has been indicated by Ghoshal (Ghoshal, 2005). According to my opinion, Ghoshal’s article is unique in the sense that it provides a critique of not only business practices alone, but also of ideas that shape those practices. This implies that Ghoshal has blamed faculty of the business schools for failing to teach students ways in which managers should not be trusted. This approach has been heavily criticized by Ghoshal. The purpose of my paper is to explore rationale of the article, “Bad management practices are destroying good management practices” by Sumantra Ghoshal and link it with the critique of agency theory so as to realize whether this was responsible in aggravating the global financial crisis. I think until now, there have been a number of explanations for the crisis of 2008. In this paper, however, I want to examine whether or not the agency theory propagated by economics has been a major cause of the crisis. Literature Review There have been extensive debates about good practices in the theory of management. In this regard, the article published by Sumantra Ghoshal had provided quite a valuable insight. The surge in corporate scandals in the past has brought management practices taught in the management schools under attack. The article published by Ghoshal (2005) had stated that academic research, which is done in the field of business and management, has led to certain detrimental practices in the field of management. According to Ghoshal, most of these negative influences can be attributed to incorporation of a set of ideas that has gained more dominance in the theory of management for organizations. Ghoshal has strongly criticized the business schools of propagating ideas based on amoral practices, which have made students free of any type of social and ethical concerns (Gapper, 2005). Hayek had criticized the scientific model adopted by business schools by commenting that it is “pretence of knowledge” (Ghoshal and Moran, 1996). I think both of these authors had a major complaint against dehumanization of humans in business. According to me, most business practices that are adopted by organisations are regarded from a capitalist view point, which does not take ethical considerations of decisions into account. The paper published by Ghoshal is unique according to me because it points out not only to the flaws of organizations per se, but also to flaw in which knowledge is imparted by individuals in the academic field, including him. Ever since the publication of this article, a wide range of study have been conducted in this field by eminent scholars, like, Pfeffer, Kanter, Gapper, Donaldson and Mintzberg (Kahneman, 2003). According to Pfeffer, views expressed by Ghoshal is quite correct as he shared a similar opinion that economics had taken over business and management theories in a similar way of that of political science. My personal opinion regarding these views is that both of them have a common understanding, which comes from a pessimistic view regarding economics. They harbour a strong belief that economics being a “dismal science” treats humans as creatures of self-interest and opportunism. I think that point of view of managers is highlighted in the core of these articles. For instance, both of these eminent scholars have recognized the role of managers in maximizing value of the shareholders. In doing so, large corporate organizations apply apparently “scientific” simple principle-agent models to more complex social, economic and ethical issues that are present in these organizations (Adler, 2002). I think that the voice of employees is completely muted in this approach as has been correctly pointed out by Ghoshal. This is because shareholders can always sell their stocks in the company during times of economic distress; but, employees cannot easily find a new job when the organization faces bankruptcy. Even so, economics is only concerned with the benefit of shareholders. The theories of modern economics, like, game theory, agency theory and transaction cost theories, are indeed polarized compared to those of management (Osterloh and Frost, 2009). Though this view has received strong support, some academicians like, Kanter, have expressed doubts regarding plausibility of the theory proposed by Ghoshal. He is of the view that management is the complex art of managing needs of the ones associated with an organization and is very difficult to measure in a practical world. Economic theories of profit maximization, on the other hand, are more reliable and success-driven; these are essential for organizational as well as employee growth (Ghoshal, 1996). In his work, Kanter had cited works of the researchers who had shown that financial performance of an organization over time depends on importance given to shareholders. I think his work implies that good theories are always important and it has stood the test of time. The research work conducted by Adler (2002) and Osterloh and Frey (2005) had clearly demonstrated the link between transaction cost view and principal agent problem with the surge in corporate scandals in Europe and U.S.A (Ferraro, Pfeffer and Sutton, 2005). Though traditional economists considers opportunism as the worst-case outcome, yet works of Milgrom and Roberts (1992) and Williamson (1996) had demonstrated that it is opportunism that is considered as an acceptable practice in corporate governance of multinational organizations. Transaction cost economics as developed by Williamson is a theoretical approach, which has become one of the most important theoretical anchors for guiding the management practices of large corporations. Ghoshal’s main argument against this view is that organizations cannot be equated directly with markets and cannot be substituted as institutions to carry out efficient transactions when markets fail (Pfeffer, 2005). My personal opinion is that knowledge that is imparted in elite business schools in the contemporary times indeed makes students more opportunistic and selfish, which can later culminate in severe forms of crisis. An empirical research that has been done by Aspen Institute in this regard validates this claim as it has shown that MBA students undergo a massive change in their values after joining their curriculum and become more likely to cheat. Ferraro, Pfeffer and Sutton (2005) indicate that nature of social sciences is not similar to that of physical sciences like, physics and chemistry. This signifies that a theory that is proposed in social sciences turns into a normative guidance in the way an individual should act. These authors have shown that higher reliance on these theories in real life leads to more negativity in results obtained. I think this tries to highlight that application of theories of social sciences in business practices is nothing less of a self-fulfilling prophecy. In the view of Gapper, a clear support for the article of Ghoshal can be witnessed. In his article, he had clearly stated that attitude of managers to maximize profits of the shareholders is not only unethical, but also dangerous (Richardson and Thompson, 1999). One thing that the existing literature tries to suggest is that economics as a social science cannot be blindly accepted as the driving force that propels organizations in a growth trajectory. Yet, I have noticed that most of these arguments that are developed in defence of economics are largely theoretical in nature and most of them have not been empirically tested. Assumptions, on which these arguments are made, are mostly psychological and behavioural in nature and are not tested by data. These theories have a political essence at their core, which will not find proper support, unless collective action is taken against them. Implications of the literature Bad practices in management have been evident in a lot of cases, where over-dependence on the theory has led to severe consequences in management practices. In this regard, it can be said that implications that the literature has been trying to point out is quite robust. I think the controversial development of Russia is an example that can be directly related to bad practices in the management, which are primarily guide by bad theories. Economists like, Kogut and Spicer (2005), point out that excessive dependence on economic theories overlooks other complex social and psychological factors and this has resulted in failure of Russia compared to other countries of developing economies. In can be implied from the existing theories proposed by Pfeffer and Ghoshal that; if organizations do not treat their employees in a proper manner, then long-term developmental prospects of the organization are likely to suffer. I can argue in this sense that importance of human resource management has been at the heart of arguments made by the scholars. I think that Ghoshal had profoundly revealed that disbelief that is incorporated in minds of the management students about their managers is outright wrong. This disbelief of the students regarding behaviour of managers makes these students, who later become professionals, distrust each other; this in turn results in unfair practices in business. According to the view originally proposed by Ghoshal and later supported by Pfeffer, Gapper and Sutton, business cannot be treated like science, which is done in organizations nowadays. This is because business involves human beings and not machines, who should be guided by ethical as well as moral considerations. So, if business is treated like science that is guided by laws of economics, psychology and statistics, then the more important human aspect present in business is overlooked. My personal opinion is that business cannot always solely rely on the past decisions taken because the market is very dynamic. The weighing of options, pertaining to what was done in the past and what is about to happen if an alternative course of action is taken, is to be considered in details before the actions are taken. Implication of the self-fulfilling prophecy that has been pointed out by Ferraro, Pfeffer and Sutton is also very important. For instance, as the science of business has pointed out that importance of shareholders is primary and managers of a company should only be concerned about them is not sustainable in the long-run. This is because if interest of employees is undermined and those of the shareholders are particularly emphasized, then the organization will suffer. Despite being incorrect, this practice has been embraced by most business organizations, which in turn leads to their global acceptance. Another very important observation that has been made by Ghoshal is the gloomy assumption about nature of human beings in the management theories based on ideology. I think that Ghoshal and his supporters have suggested that this assumption about nature of human beings that is directly embedded in the theories of management has given rise to most of the destructive practices in modern day business management. Though this negative view about the top management that is being proposed by management theories may find real life examples like, Dennis Kozlowski of Tyco who had dealt in unfair business practices to maximize business profits, yet this cannot be taken as a representative of the entire business community. Practice Relevance I have already pointed out that the agency theory and transaction cost theory has greatly guided the theory of management over past few decades. In this part of the essay, I wish to explain the link between arguments of Ghoshal and the agency theory and try to establish their connection with the global financial crisis. Agency theory has particularly been a very controversial yet powerful theory. This is because I have consulted quite a large number of researches, which has pointed out that the agency problem that has been described is real and has been widely evidenced (Heracleous and Lan, 2012). Yet, there are other empirical evidences that points out to the opposite. The study that has been conducted by Ghoshal has revealed that influence of independent directors on the board of a company is not related to performance of the company. The proponents of the agency theory like, Wisean, et al. (2002), believe that the theory should be slightly modified to improve its applicability. This theory has been considered good in paper because it has been accepted as universal, coherent and logical. I have gathered from scholarly articles that the problem can be comprehended if a slight distinction is made between the agency theory and the agency problem. Although agency problem can be accepted as one that is universal, the agency theory is not so. My personal opinion is that it is this agenda that has formed root of analysis of the article as well as the views of Ghoshal. Ghoshal and his proponents later had come up with reasons that could question the very assumptions of current state of the agency theory. The research work that has been conducted by Dalton, et al. has pointed out that analysis of the empirical research fails to provide a strong support to the fact that the agency theory is successful in solving the agency problem (Dalton, et al., 2003). The various factors that act as impediment to the problem are independent directors, ownership of equity and corporate control market. Particularly, the notion of self-interest has been under radar of the critics, including Ghoshal himself (Wiseman, Cuevas-Rodriguez and Gomez-Mejia, 2012). I have noticed that a considerable amount of literature suggest that structure of corporate governance, which is characterized by collaborative behaviour, is not consistent with assumptions of the agency theory. The research conducted by McCarthy and Puffer (2008) states that in different market structures, dissimilar theories may be more suitable and the agency theory cannot be accepted as universal. The study conducted by Lubatkin (2005) has criticized the agency theory on grounds that the real world is more complicated than can be explained by linear approach of the agency theory. He had also pointed out that organizational behaviour of agents is not consistent with the self-interest assumption of the agency theory. My opinion about the reason for the global financial crisis of 2008 is excessive greed of organizations. The existing literature indicates that prescriptions of the agency theory in corporate governance can be definitely considered as a reason for the global financial crisis. The research that has been done to establish link between the agency theory and the financial crisis has shown that company managers who are financially literate had primarily used share-based remuneration, which can be directly related to the rise in risk taken by managers. I think in case of financial markets, it is not enough to align interests of the shareholders with that of the management; instead, a deeper analysis is required. This was exactly the point of the article that has been written by Ghoshal (Dobbin and Jung, 2011). I think it is also important to take into consideration interests of customers and employees along with that of management and the shareholders. Though this proposition is not unique and has been suggested by other academicians, yet the main hindrance in obtaining this result is prevalence of imperfect information in markets, which often prevents customers from taking the right decision. Some scholars have mentioned that the agency theory is not wrong in itself. However, it is the misapplication of this theory that can lead to disastrous outcomes. The extreme financial profit driven motive of firms had led to high compensation of the key decision makers of the economy for raising value of the stock of market organizations (Dobbin and Jung, 2011). As a student of economics, I am of the opinion that this short-term gains of organizations overlooks the collapse of share prices in the medium-term. The excessively high risk-taking attitude of organizations to maximize value of the shareholders culminated in the collapse, when the default of payment started. Conclusion After a close analysis on the subject, I have found a formidable connection of the article “Bad management practices are destroying good management practices” with the global financial crisis. The existing literature points out that the voice that was raised by Ghoshal has found resonance among other academicians and role of business schools are being increasingly questioned in the light of big corporate scandals during the recent financial crisis. The critique on the agency theory has helped me to conclude that the economic theory is not quite appropriate for running management practices of large organizations (Brouwer, 2012). My personal opinion is that consideration of business as a scientific process cannot capture complexities of organizations in a real-world scenario. In addition, financial greed of business organizations to maximize returns of the shareholders greatly undermines interest of employees and society as a whole. The application of the agency theory in a business organization is largely driven by financial greed, which undermines welfare of the society. So, I think the issue raised by Ghoshal, that economic theories are not appropriate for governing the management theories, is quite right and misapplication of the agency theory has a direct link with the global financial crisis, as has been suggested. Reference List Adler, P.S., 2002. Corporate scandals: It’s time for reflections in business schools. Academy of Management Executive, 16(3), pp. 148-149. Brouwer, M., 2012. Organizations, individualism and economic theory. London: Routledge. use in conclusion Dalton, D. R., Daily, C. M., Certo, S. T. and Roengpitya, R., 2003. Meta-analyses of financial performance and equity: fusion or confusion. Academy of Management Journal, 46, pp. 13–26. Dobbin, F. and Jung, J., 2011. The misapplication of Mr. Michael Jensen: How agency theory brought down the economy and how it might again. [pdf] The Emerald Group. Available at: [Accessed 31 March 2014]. Ferraro, F., Pfeffer, J. and Sutton, R. I., 2005. Economics language and assumptions: How theories can become self-fulfilling. Academy of Management Review, 30, pp. 8-24. Gapper, J., 2005. Comment on Sumantra Ghoshals “Bad Management Theories Are Destroying Good Management Practices”. Academy of Management Learning and Education, 4(1), pp. 101-105. Ghoshal, S. and Moran, P., 1996. Bad for practice: A critique of the transaction cost theory. Academy of Management Review, 21(1), pp. 13-47. Ghoshal, S., 1996. Bad for practice: A critique of the transaction cost theory. Academy of Management Review, 14(4), pp. 19-36. 3 Ghoshal, S., 2005. Bad management theories are destroying good management practices. Academy of Management Learning & Education, 4(1), pp. 75-84. Heracleous, L. and Lan, L. L., 2012. Agency theory, institutional sensitivity, and inductivereasoning: towards a legal perspective. 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