Business Schools and Responsibility for Preventing Financial Crisis - Essay Example

Business schools and responsibility for preventing financial crisis Business schools are playing an important role in educating the basics of world economic situations, different business perspectives of the global business, structure and working nature of global business organisations and many more. But one of the major roles of the business schools is to provide possible and effective ways or measures in order to prevent the financial crises that the global economy is facing in modern times. Business schools are expected to provide solutions for preventing the brutal financial crises that the largest economies of the world like USA, European countries, Japan etc. are currently facing. But it has been argued by several observers that the business schools have failed to provide preventive measures for current global financial crises. These observers have argued that lack of relevance of these business schools, showing unethical behaviour of these business schools and creating negative impacts on the people and firms or business organisations are creating barriers for providing preventive measures in favour of prevention of current financial crises. Many observers have argued that managers after getting passed out from the best business schools do the same job in banking sectors or in the share markets which can be done by people having no background of studying in business schools (Canals, 2009, pp.42-43). These managers are adding nothing new in these sectors. Business schools bear a certain responsibility for (not preventing) the current financial crisis. Nature of current financial crises: Almost all the economies of the world are facing problems in regard to their economic growth process due to the prevalence of financial crises that these economies are facing mainly since 2006-07. These economies are getting worse off in terms of putting impetus in their economic growth paths and also in terms of creating positive impacts of monetary and fiscal policies which policymakers of these countries are taking. Current financial crises are creating adverse effects on the purchasing power of global and local consumers. Prices of necessary goods and services are increasing at rapid speed and global organisations are increasingly cutting off their labour force. These are resulting in further decline in global income and hence decline in people’s purchasing power. According to many researchers, including Noble laureate Paul Krugman, these global financial crises are results of poor and ineffective banking and financial system of the developed economies of the world like European economies and mainly American economy. According to Paul Krugman the banking and financial system of these economies has been largely dependent upon the free market forces. These banking and financial systems had no control over the funds or assets which are circulating in the global economy. They became more and more concerned about creating new funds and hence they have started to provide more and more loans to people and business organisations. But when one defaulter defaults to pay his loan, the entire system collapsed due to the fact that the structure of providing loans was dependent on multiple layers. When one lower level of layer collapsed, the entire structure first became unstable and then it collapsed. But the most notable impact has been realised when there occurred a significant reduction in Gross Domestic Product (GDP) in the major global economies of the world, mainly in the European countries. Between 2009 and 2010 rate of fall of GDP in the countries of the European Union has been estimated as 4%. This high rate of fall of GDP forces many countries of the European Union, such as Greece, Portugal, Italy and Spain, to take loans from International Monetary Fund (IMF) and World Bank. These nations are also forced by these international organisations to curb down their public spending on different goods and services, including production and consumption expenditures. In this context these countries cut down their absolute number of publicly employed people and all these again created adverse effects on the value of GDP and on the rate of growth of GDP (EUROPEAN ECONOMY: Impact of the current economic and financial crisis on potential output, 2009, pp.4-7). Business schools and financial crises: Business schools are expected to educate their students’ different methods or techniques to solve the problems in regard to the current financial crises. They are required to provide remedial measures in view of the current financial crises which are adversely affecting the global businesses and also future growth paths of these global business organisations, mainly the banking and financial companies and organisations. Business schools are expected to study the nature and structure of financial crises and also to rectify the reasons behind these crises from those studies. They are also expected to compare the nature of the present financial crisis with that of the previous financial crisis and to take preventive measures according to these comparisons (Canals, 2009, p.45). Business schools are expected to build up policies, institutions and beliefs in favour of providing preventive measures against these financial crises. In this regard business schools are required to create efficient managers who can provide more impetus to set policies to help the business organisations to get out from the crisis situation. These managers are required to take long-term policies that will be sustainable in terms of curing the global financial crises situations. These managers are required to set logical, ethical and moral measures to fight against these crises situations and to look in a different way at cases of crises and risky situations (Thomas and Wilson, 2008, p.2). Most of economic analysts, like Paul Krugman and Joseph Stiglitz, have agreed regarding the view that global businesses are facing most severe financial and economic crises since the Great Depression of 1930s. There are various reasons behind occurrence of these financial crises, but in this regard the role of business schools can never be ignored. Different ideas and methods like unusual financial instruments, weakly designed plans for providing compensations are taught by business schools of the world which are creating further adverse effects on the global capitalist system. These business schools are also creating business leaders who are completely unable to show their individual charisma to provide preventive solutions to financial problems (Preventing the Next Financial Crisis, 2008, pp.3-4). Business schools are focusing on delivering teaching procedures with ‘an uncritical embrace of laissez-faire models’ which are increasingly becoming inefficient in providing long-un impacts on the growth path of global business organisations and to help them to get rid of the current financial crises situations. In the face the current financial crises most of the business leaders and business executives are becoming so much self-interested in maintaining their status and position in the organisation, that they have failed considerably to solve the crises situation and accelerate the growth path of their organisation. Also the faculties of business schools have failed to create significant opportunities for these business leaders and business executives to contribute in the process of creation of a business culture that will serve the global financial system and will provide remedial measures to current and future financial crises situations (Lorsch and Khurana, n.d., p.1). Business schools and their curriculum incorporating financial crisis: The concepts of risk, regulation and restraint are very much common in global economic context in modern times due to the advent of financial or economic crisis of 2007-08. After the advent of severe financial crisis of 2007, most of the business schools of the world have started to incorporate recent global financial aspects into their curriculum and these aspects have been increasingly becoming the core concept of management study. Business schools are increasingly incorporating different economic and financial factors which are causing financial crisis. These factors include different macroeconomic policies taken by central banks and governments of different countries, such as the level of money supply, rate of interest rates on short-term and long-term loans; fiscal policies taken by governments of these countries, such as the level of government expenditure, the level of direct and indirect tax rates, the level of government borrowing from other public or private sources etc. These factors are very much important in explaining the reasons behind financial crisis because variations in these factors cause different financial and economic variables, such as interest rates and level of inflation (defined as the rate of change of price overtime), the rate of growth of GDP etc., to move out from the equilibrium level (Datar et al., 2010, p.162). Business schools in this time also incorporated aspects like current changes in these variables and comparisons of these variables with previous time periods. These comparative analyses help business schools to understand the nature of the current financial crises and current economic and financial situations compared to the past and to implement business policies in regard to changes which are observed after the analyses have been done. But the most important problem with these business schools are these schools did not have these economic and financial concepts before the prevalence of economic crises and these concepts and theoretical understanding regarding these concepts are causing teachers of these business management schools to invest lot of time in understand these new concepts at first and then to teach their students. This transition process is sometimes taking lot of time and hence is causing business leaders to implement business strategies too late. These aspects are not new to the business management schools. For many years, business schools are teaching their students various aspects and concepts related to these financial and economic topics, such as decision and choice under uncertainty, expected utility, level of risk aversion, relationship between risk associated with any investment project and the expected return from that project, capital pricing models, asset pricing models, and implications of these pricing models for portfolio diversification. These topics have been highly beneficial in developing the foundation of global business aspects for global business leaders. But these business schools have failed to incorporate regulations or regulatory measurements in favour of the preventing the economic and/or financial crisis situations into their curricula. Some courses have helped students to understand the origins of financial and economic instruments, reasons behind financial crisis, the behaviour and role of economic and financial factors in the presence of economic and financial crisis, the role of the governments and private business organisations to manage the crisis situation and to avoid the risk and externality. But other courses have focused mainly on role of public and private business houses and leaders in implementing policies in favour of the business development of the organisations. These policies are aimed at incorporating environmental factors, antitrust laws, public health policies, intellectual property rights, discrimination and equal opportunity regulations etc (Datar et al., 2010, pp.162-163). Business schools across the globe have been focused on developing the level of knowledge of their students in different economic and financial concepts and relationship of these concepts with financial crisis. But business schools have failed to incorporate those aspects which are needed to solve financial crisis situation like the role of the business leaders in the context of implementing policies in favour of the solution of the crisis situation like the monetary and business policies which can be implemented to tackle the crisis situation. Students of these business schools have learnt to make judgments regarding the implementation of different regulations and regulatory polices without knowing possible effects of these policy-implementations on the crisis situation. In this context the business schools a have failed considerably to help global business organisations to get rid of the current financial crises situations. Business schools have failed to incorporate all the behavioral aspects of investors, herd behaviours of global and local investors and different psychological aspects of global business organisations and cognitive biases which are increasingly affecting global businesses in modern times (Datar et al., 2010, pp.162-164). But people like Jonathan Slack, chief executive of the Association of Business Schools in UK, have argued that most of the business schools have played significant role in creating business leaders who are working successfully in high positions of different banks across the globe and these business leaders are involved in high risk-taking activities of global organisations. He argued that these business leaders have the ethic related to corporate social responsibility and this ethic is helping business organisations to acquire more profit and in increasing their growth paths and sustainability of businesses. But most of the academicians and business researchers have argued that business schools have failed to create business leaders to implement policies in favour of the prevention of current financial crises. For example, Stefano Harney, director of a business school of the University of London, said that “There has been absolutely no fundamental rethinking of the business curriculum as a result of this crisis”. According to these academicians and other business experts business schools did not incorporate impacts of different economic and financial factors on the global business perspectives into their curricula, mainly in to the curricula related to the study of finance. After the advent of financial crisis those students who have specialised in financial management studies have either lost their jobs or lost increment in salary compensations. That is why large number of management students has shifted their choices away from financial management studies (Schmidt, 2008, pp.1-2). Conclusion and recommendation: It has been argued by many researchers and academicians that business schools, including top most business schools of the world like Harvard Business Schools, London Business Schools, have failed to create significant impact on implementations of policies taken to prevent the current financial crises. This failure from business schools has caused many business leaders to lose their jobs and also caused large, globally recognised business organisations, such as Merrill Lynch, Lehman Brothers, to become bankrupted (Valente, 2011, p.1). This failure also caused global businesses, both private and public, to reduce their expenditures and investments in global projects. These reductions in global investments again reduced the rate of growth of these business organisations as well as the rate of growth of world economies. Experts have argued that business schools should modify their structure of curricula in order to incorporate financial concepts like mortgage crunch, capital crunch, which are main features of modern financial crises, to curb down the intensity of the financial crisis. Business schools are also required to relate these financial and economic concepts with features and functioning of modern businesses. John Kraft, dean of business school of the University of Florida, have argued that business schools should teach their students how to react in the face of an economic or financial crisis situation and how and what policies can be implemented in order to prevent that crisis situation. Business academician Carolyn Y. Woo has argued that business schools should focus more on teaching business ethics to their students as dishonest mortgage transactions were the major the reason for the occurrence of global financial crisis of 2007-08. These academicians and researchers have argued that unless and until business leaders understand the need for stricter and ethical business behaviours and policies and successful implementation of these policies, prevention of global financial crisis would not be possible (James, 2009, p.1). Business schools need to understand the fact government intervention can never alone prevent the occurrence of global financial crisis; business leaders should take responsibilities to show their charismatic business leadership skills to control the power of this crisis situation. References 1. Canals, J. (2009), REDISCOVERING THE ROLE OF BUSINE SS SCHOOLS: The current crisis has highlighted the need to redefine the role of senior managers in organizations, Alumni Magazine IESE, available at: http://www.ee-iese.com/115/ingles/pdf/crossroads.pdf (accessed on January 16, 2012) 2. Datar S. M. et al. (2010), Rethinking the MBA: business education at a crossroads, USA: Harvard Business Press 3. EUROPEAN ECONOMY: Impact of the current economic and financial crisis on potential output, (2009), European Communities, available at: http://ec.europa.eu/economy_finance/publications/publication15479_en.pdf (accessed on January 16, 2012) 4. James, A. (2009), Academies of the apocalypse? Business schools have, so far, escaped the wrath directed against bankers - but should they bear some blame?, The Guardian, available at: http://www.guardian.co.uk/education/2009/apr/07/mba-business-schools-credit-crunch (accessed on January 16, 2012) 5. Lorsch, J. and Khurana, R. (n.d.), Financial Crisis: Blame B-schools: Business schools are largely responsible for the U.S. financial crisis. Pro or con?, Bloomberg Businessweek, available at: http://www.businessweek.com/debateroom/archives/2008/11/us_financial_cr.html (accessed on January 16, 2012) 6. Preventing the Next Financial Crisis: Lessons for a New Framework of Financial Market Stabilization, (2008), The Sanford C. Bernstein & Co. Center for Leadership and Ethics, available at: http://www4.gsb.columbia.edu/null?&exclusive=filemgr.download&file_id=70150 (accessed on January 16, 2012) 7. Schmidt, P. (2008), Business Schools and Students React to Financial Crisis, The Chronicle of Higher Educations, available at: http://www.anokaramsey.edu/resources/pdf/strategic_planning/2009_2014_strategic_planning/Articles&%20Reports/Chronicle-Student%20Reactions%20to%20Financial%20Crisis%209%2008.pdf (accessed on January 16, 2012) 8. Thomas, H. and Wilson, A. (2008), Impactful Management Research: The Importance of Finding the Voice of Practice in Management Research, Global Foundation for Management Education (GFME), available at: http://www.gfme.org/pdf/complete_web.pdf (accessed on January 16, 2012) 9. Valente, M. (2011), The Role of Business Schools in the Financial Crisis, Sustainable Business Forum, available at: http://sustainablebusinessforum.com/mikevalente/50628/role-business-schools-financial-crisis (accessed on January 16, 2012) Read More