“Who is to blame for the financial crisis?”
The question hung in the lecture hall for a few seconds before the answers came in rapid succession: “The Fed; rating agencies; predatory lenders; the government; investment banks; people who lived beyond their means,” students’ voices quickly called out. “The Chinese government.”
During the second week of orientation last fall, Wei Jiang, associate professor of finance and economics, gave a lecture to the School’s newest MBA students on the financial crisis. Their answers underscored Jiang’s lecture point: the crisis had no single culprit. Integrative may well be the key concept to emerge from this crisis, which has been felt in every sector of the finance industry, the economy and in business education.
Addressing the Crisis
“One of the challenges in business education is finding the right balance between responding to short-term changes in the business world and ensuring that the ideas we teach have lasting value,” says Paul Glasserman, the Jack R. Anderson Professor of Business. “Our goal is to use the crisis to ask questions about the future and not just provide answers about the past.”
Glasserman was appointed to lead the Crisis and the Curriculum Committee, which was formed last spring by Dean Glenn Hubbard to discuss the ways in which the curriculum should address the financial crisis. Comprising top scholars from across the School’s major academic disciplines, the committee agreed that the key takeaway from the crisis is that it must be used as a vehicle to “foster integrative thinking.”
“That way of thinking involves two things that are equally important. First, it is a technical approach where you can’t just look at your own activity without looking at larger consequences,” explains committee member Bruce Kogut, the Sanford C. Bernstein & Co. Professor of Leadership and Ethics.
“It is also an ethical approach: having an explicit set of values that form a coherent perspective on business practice and can be built into risk management tools and our values and attitudes towards risk,” he says.
Throughout the acute phase of the crisis — September 2008 through early 2009 — the financial industry and academia were presented with a complex, vast and fast-moving set of issues. Individual faculty members brought many of the lessons from the crisis into the classroom in real time. However, a pedagogical view on the crisis had yet to be formalized. Indeed, the specific details of the crisis— such as the debate over the structuring of collateralized debt obligations — featured prominently in discussions, even as the crisis’s systemic and interrelated issues needed to be addressed holistically.
The committee took on that task.
Meeting over the summer of 2009, they worked to identify the themes that defined the causes and consequences of the crisis— and which also had permanence for business education. They identified four: agency and governance; leverage and risk; bubbles and behavioral biases; regulation and the role of government in business.
Of those, the most important theme they identified was that of agency and governance, says Glasserman. The committee declared that “excessive complexity can become dangerous complexity” in their final report.
“The biggest problem in the securitization of subprime mortgages, in the credit ratings process, in a compensation system that rewards short-term gains, has been an agency problem,” Glasserman says.
Kogut says that the crisis was an ethical failure. “Ultimately firms were too leveraged and people working for them were too highly incentivized,” he says. The way the students can address many of these ethical issues, he says, is through the consideration of regulation.
In the Classroom: The Future of Regulation
The changing role of government and the future of regulation has emerged in the last year as the central challenge for business and finance. Dean Hubbard, who cochairs the Committee on Capital Markets Regulation (an independent research group), has said that changing the regulatory structure is key to economic recovery.
However, how that structure will change is still largely up for discussion. At the most basic level of debate, the balancing act pits regulation against the efficient market theory. While the future of regulation is yet to be determined, the reality is that business school graduates will operate under a new set of conditions as practitioners and, in the years to come, may even act as regulators as well. For that reason, Kogut has championed a political view of the crisis. He argues that business schools cannot turn a blind eye to politics, even though the discipline has not traditionally played a big part in management training.
“A natural instinct is to believe that the government will be a rational economic actor and will pursue a set of policies accordingly. It is equally easy to posit the contrary: regulators are ‘captured’ by industry, politicians are influenced by lobbyists and contributions,” Kogut says. “But there is a middle ground, and we have courses designed to help students think through when government regulation and intervention are sometimes desirable, requiring the cooperation of business.”
The regulatory loopholes that have been especially scrutinized in the crisis are connected to financial innovation. “The pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated,” Lawrence Summers and Timothy Geithner acknowledged in a Washington Post op-ed in June 2009.
Indeed, the exploitation of those unregulated markets supplied ammunition for the argument that the MBA pedagogy itself had created a culture of practitioners focused on extracting value, particularly through complex technical and financial innovation, rather than creating value.
Committee member Trevor Harris, the Arthur J. Samberg Professor of Professional Practice, speaks passionately about the dangers of giving students overly mechanical ways of measuring value and the importance of going deeper into business fundamentals in business education. Glasserman is also quick to point out that there are two types of financial innovation. “There are those that serve a legitimate purpose of sharing risk and information,” he says. “And there are those that are designed to circumvent a legal or accounting obstacle or to mislead investors. If we believe derivative securities and structured products serve a legitimate purpose — and I do — our teaching should address the difference.”
The goal then, in learning from the crisis, is for students to be able to untangle that which is useful and good for long-term economic and financial growth from that which is destructive to systemic security — and have the ethical basis to do the next right thing. That is central to the kind of integrative thinking the committee has stressed for the curriculum. “It is the ability to stand back from behaviors that have short-term possibilities but in the long run are not contributing to society at large,” Kogut says.
Professor Paul Glasserman
A Responsive Curriculum
The financial crisis served to underscore the value of a series of changes that were already under way in the curriculum. Starting in 2007, the School implemented a preterm module on corporate governance that is now required of all incoming students.
By making governance an essential part of the core curriculum, especially after a decade that witnessed such debacles as Enron and WorldCom, the School’s goal is to enhance students’ understanding of their duties and responsibilities as managers and directors of firms, as well as their appreciation of the role of corporate governance in their careers and society at large.
Flex-core options added in the 2007–08 academic year have fit well with lessons from the crisis. Those options include new courses such as Strategy, Structure and Incentives, which deals with agency issues, and Global Economic Environment, which includes an analysis of macroeconomic cycles and fluctuations and the impact on markets.
Many of the issues central to the crisis — from governance to the role of government in business to economic cycles — are featured prominently in a new integrative case on the U.S. auto industry, which was one of the main projects to emerge from the committee’s work. It will be taught across several core-curriculum courses and uses the collapse of GM and the future of the auto industry as a framework for thinking about a business problem from multiple perspectives. The case diversifies the way the crisis is incorporated into the curriculum beyond banking and Wall Street examples. “We are using lessons from the collapse and [exploring the] future direction of the U.S. auto industry to teach lessons on managing fundamental value creation,” says Glasserman.
Another outcome from the committee’s report is the creation of Future of Finance, a new team-taught course being taught this spring. The class covers issues from the origins of the crisis to how regulatory and accounting standards are evolving. The goal is two-fold: to provide students with an interdisciplinary understanding of the crisis and to serve as a template for future integrative courses on big issues. Faculty members are not exempt from the learning curve; Glasserman calls the crisis “the biggest challenge to a generation of business school faculty members.”
The Road Ahead
In the next few years, the School’s ongoing challenge will be to address the changing business environment with ideas that have a long life, while bringing immediate focus to integrative thinking within the curriculum.
Students already appear to be absorbing the lessons. Olivia Albrecht ’10, a dual-degree student with SIPA and the Business School and cochair of the Student Leadership and Ethics Board, reflected on how the crisis has changed her generation of MBA graduates. She says there has been a coming of age that is noticeable in the way colleagues approach making decisions.
“There was a maturing process that went on,” she says. “I don’t think people are making different choices, but I do think that they may be more cautious now. The perspective is different — it’s more mature and self-reflective.”
Akintomide Akingbade ’11 says the crisis has ushered in a different way of looking at business for him as well. With a background in chemical engineering and consulting in Nigeria and London, his goal after graduating from Columbia Business School is to establish a private equity fund for emerging market investment.
“You have to question things and not take them at face value,” he says. “You have to look at things from a systemic perspective.”
He is optimistic that this shift is occurring not just in the United States but also in emerging markets, where development capital is tied to funds and risk management practices that have been shaped by the crisis.
The multinationals in emerging markets “have a governance framework that incorporates the lessons learned from the last crisis,” he says.
In a presentation made to students last fall by Paul Calello ’87, CEO of the investment bank and member of the executive boards for Credit Suisse Group and Credit Suisse, he exhorted students to learn everything they could about the financial crisis, saying it will be the backbone to their future careers.
“You will be part of an era of reform,” he said. “We’re relying on you to not repeat mistakes that have been made, but to help restore trust and confidence in our industry.”
How today’s business education ultimately shapes the next generation of practitioners and enterprises may not be fully appreciated until today’s graduates assume decision-making leadership positions. Even as the future holds many uncertainties about how regulation will affect the financial industry, the MBA education at Columbia Business School, for example, is designed to prepare students for exactly that kind of unknown. In her orientation lecture at the end of August, Wei Jiang said that knowing how to handle uncertainty was the most important skill students could learn. The key to that, she added, was the capacity for integrative thinking.
“Look ahead as well as around you,” Jiang told students at the end of her presentation. “Think in terms of tradeoffs and equilibrium.”