The value of an MBA
MY recent calculations show that in October this year the value of an MBA to an organisation ranged from 3.1 per cent to 19 per cent of its market capitalisation. I need to explain the precision of this puzzling statement. Veritas Software Corp. is a California-based company that makes storage software. Its Chief Financial Officer, Mr Kenneth Lonchar, was fired recent...ly after it was found that he had wrongly claimed to have an MBA degree (from Stanford University). When this news was revealed, the share price of Veritas (which means `truth' in Latin) fell by 19 per cent.
A second event also in October concerned Bausch & Lomb Inc. The company announced that Mr Ronald Zarrella, its Chief Executive, did not have an MBA (from New York University) as he had claimed in his resume. The company's share price fell by 3.1 per cent on receipt of that news.
Another specious way of viewing the same news items is to say that a Stanford University MBA is worth 19 per cent of a company's value while a New York University MBA is worth only 3.1 per cent of a company's value. However, I somehow doubt if either of those universities are rushing their new advertisements to the newspapers proclaiming these values. Which should be surprising since rankings of MBA programmes are of such value that universities promptly release new advertisements touting their new position. For example, the advertisement from Emory University says, "Ranked in the Top Ten programs by both Business Week and Financial Times ... '
Rankings are big business. Ranks are provided by several journals including the US News and World Report, Business Week, The Economist and the Wall Street Journal. These ranks are much-awaited and each publication prefaces its survey with a comment claiming how important its rankings are. For instance, the Wall Street Journal's editors proudly claim about their recently released set of ranks: "The impact was even greater than we could have imagined. Schools that typically do well in other rankings were stunned and dismayed by their poor showing in our survey. Schools that fared well reported a surge in students accepting admission offers.''
The MBA degree should be riding high. For the first time, a person with an MBA degree, Mr George Bush, is the President of the US or "leader of the free world'' as the local media likes to call him. In spite of this, all is not well in the MBA world. The fox was set upon the chickens recently when a Stanford University professor, Mr Jeffrey Pfeffer, co-authored an article (Academy of Management Learning & Education, September 2002) in which he claimed: ``There is little evidence that mastery of the knowledge acquired in business schools enhances people's careers, or that even attaining the MBA credential itself has much effect on graduates' salaries or career attainment.'' Coming from an institution that by my calculation contributes 19 per cent to corporate value, it is much food for thought. Lesser-known schools must be cowering in guilt.
In general, their paper argues that business schools are not very effective. They feel that neither possessing an MBA degree nor grades earned in courses correlate with career success. Where studies show that the MBA has had a positive impact (that is, they draw a higher salary), it could be because of the quality of the student body rather than the education provided. He further observes that academic management research has made very little impact on practice. (The fact that he has not yet quit his post as a business school professor as an outcome of his studies suggests that Mr Pfeffer probably believes things will turn around and there will be a bright future!)
Mr Henry Mintzberg, an iconoclastic professor from McGill University in Canada, is also a sceptic when it comes to the value of the general MBA programmes and their impact on society. He took a list of 19 MBAs from Harvard University who had made it to the top. Ten years after the listing, he found that 10 of the 19 ran into major difficulties, meaning that either the company went bankrupt or they were forced out of their job.
In response, there are many powerful voices who vehemently maintain that all is well with the MBA. The Graduate Management Admission Council, which administers a very popular entrance test, asserts that MBAs world-wide experience an average salary increase of 64 per cent compared to their previous job, and in the US the increase is 54 per cent. Perhaps, the cache value of an MBA ensures you get a job and move up faster than others move. After all, even Messrs Lonchar and Zarrella, thought an MBA was important in the business world, and were prepared to even lie that they had it. Is the fact that they rose to senior positions evidence that you do not need the knowledge and training but only the label? Hmm.
The US Federal Government is convinced that the MBA is worth it. They have launched "The MBA Outreach Program'' to attract to replace the many thousands of managers and senior staff that are due to retire over the next few years. According to the Labour Department: "MBAs are trained in key management skills — quantitative analysis, strategic planning, measuring objective and goals to outcomes — that are valuable in the changing world of public administration.'' The present market would be pleased to hear this.
The economy being what it is, graduating students are finding it hard to get a job, MBA or not. Only about 60-70 per cent of graduating students find a job by the time they finish, a drop of about 20 percentage points from more normal times. And if you are not from a name-brand institution, that figure is even worse. Moreover, every year, about 350 business schools that have accreditation produce about 100,000 MBAs in the US. If you add those that are not accredited, the number multiplies.
Much of the present discussion on whether the MBA is worth it is focussed on the individual and is measured by looking at salary gains. Thus, one could compare the salary received before and after an MBA degree. Or one could compare the salaries of an MBA and a non-MBA and then judge about the worth of the degree. More sophisticated studies take into account the investment involved (that is, tuition fees and loss of salary during the period of study) and calculate a rate of return on the investment and then conclude whether it is worth it.
But we must not forget that there are two customers for the education that institutions provide. One is the individual who studies and earns the degree. The other is the society that employs these individuals. I have not yet seen a study that looks at whether organisations are more profitable or better run because they have employed an MBA. My opening remarks in this column attempted to do that, albeit in a facetious way. But that is where research needs to be directed. Some would claim that it is unfair to focus on only the MBA. But the MBA programme does promise to provide you with the skills to be a better manager. So a true test would be to compare organisations run by those with MBAs and those without. Of course, since Mr Bill Gates of Microsoft does not even have a college degree, leave alone an MBA, he does not qualify to participate.
MY recent calculations show that in October this year the value of an MBA to an organisation ranged from 3.1 per cent to 19 per cent of its market capitalisation. I need to explain the precision of this puzzling statement. Veritas Software Corp. is a California-based company that makes storage software. Its Chief Financial Officer, Mr Kenneth Lonchar, was fired recent...ly after it was found that he had wrongly claimed to have an MBA degree (from Stanford University). When this news was revealed, the share price of Veritas (which means `truth' in Latin) fell by 19 per cent.
A second event also in October concerned Bausch & Lomb Inc. The company announced that Mr Ronald Zarrella, its Chief Executive, did not have an MBA (from New York University) as he had claimed in his resume. The company's share price fell by 3.1 per cent on receipt of that news.
Another specious way of viewing the same news items is to say that a Stanford University MBA is worth 19 per cent of a company's value while a New York University MBA is worth only 3.1 per cent of a company's value. However, I somehow doubt if either of those universities are rushing their new advertisements to the newspapers proclaiming these values. Which should be surprising since rankings of MBA programmes are of such value that universities promptly release new advertisements touting their new position. For example, the advertisement from Emory University says, "Ranked in the Top Ten programs by both Business Week and Financial Times ... '
Rankings are big business. Ranks are provided by several journals including the US News and World Report, Business Week, The Economist and the Wall Street Journal. These ranks are much-awaited and each publication prefaces its survey with a comment claiming how important its rankings are. For instance, the Wall Street Journal's editors proudly claim about their recently released set of ranks: "The impact was even greater than we could have imagined. Schools that typically do well in other rankings were stunned and dismayed by their poor showing in our survey. Schools that fared well reported a surge in students accepting admission offers.''
The MBA degree should be riding high. For the first time, a person with an MBA degree, Mr George Bush, is the President of the US or "leader of the free world'' as the local media likes to call him. In spite of this, all is not well in the MBA world. The fox was set upon the chickens recently when a Stanford University professor, Mr Jeffrey Pfeffer, co-authored an article (Academy of Management Learning & Education, September 2002) in which he claimed: ``There is little evidence that mastery of the knowledge acquired in business schools enhances people's careers, or that even attaining the MBA credential itself has much effect on graduates' salaries or career attainment.'' Coming from an institution that by my calculation contributes 19 per cent to corporate value, it is much food for thought. Lesser-known schools must be cowering in guilt.
In general, their paper argues that business schools are not very effective. They feel that neither possessing an MBA degree nor grades earned in courses correlate with career success. Where studies show that the MBA has had a positive impact (that is, they draw a higher salary), it could be because of the quality of the student body rather than the education provided. He further observes that academic management research has made very little impact on practice. (The fact that he has not yet quit his post as a business school professor as an outcome of his studies suggests that Mr Pfeffer probably believes things will turn around and there will be a bright future!)
Mr Henry Mintzberg, an iconoclastic professor from McGill University in Canada, is also a sceptic when it comes to the value of the general MBA programmes and their impact on society. He took a list of 19 MBAs from Harvard University who had made it to the top. Ten years after the listing, he found that 10 of the 19 ran into major difficulties, meaning that either the company went bankrupt or they were forced out of their job.
In response, there are many powerful voices who vehemently maintain that all is well with the MBA. The Graduate Management Admission Council, which administers a very popular entrance test, asserts that MBAs world-wide experience an average salary increase of 64 per cent compared to their previous job, and in the US the increase is 54 per cent. Perhaps, the cache value of an MBA ensures you get a job and move up faster than others move. After all, even Messrs Lonchar and Zarrella, thought an MBA was important in the business world, and were prepared to even lie that they had it. Is the fact that they rose to senior positions evidence that you do not need the knowledge and training but only the label? Hmm.
The US Federal Government is convinced that the MBA is worth it. They have launched "The MBA Outreach Program'' to attract to replace the many thousands of managers and senior staff that are due to retire over the next few years. According to the Labour Department: "MBAs are trained in key management skills — quantitative analysis, strategic planning, measuring objective and goals to outcomes — that are valuable in the changing world of public administration.'' The present market would be pleased to hear this.
The economy being what it is, graduating students are finding it hard to get a job, MBA or not. Only about 60-70 per cent of graduating students find a job by the time they finish, a drop of about 20 percentage points from more normal times. And if you are not from a name-brand institution, that figure is even worse. Moreover, every year, about 350 business schools that have accreditation produce about 100,000 MBAs in the US. If you add those that are not accredited, the number multiplies.
Much of the present discussion on whether the MBA is worth it is focussed on the individual and is measured by looking at salary gains. Thus, one could compare the salary received before and after an MBA degree. Or one could compare the salaries of an MBA and a non-MBA and then judge about the worth of the degree. More sophisticated studies take into account the investment involved (that is, tuition fees and loss of salary during the period of study) and calculate a rate of return on the investment and then conclude whether it is worth it.
But we must not forget that there are two customers for the education that institutions provide. One is the individual who studies and earns the degree. The other is the society that employs these individuals. I have not yet seen a study that looks at whether organisations are more profitable or better run because they have employed an MBA. My opening remarks in this column attempted to do that, albeit in a facetious way. But that is where research needs to be directed. Some would claim that it is unfair to focus on only the MBA. But the MBA programme does promise to provide you with the skills to be a better manager. So a true test would be to compare organisations run by those with MBAs and those without. Of course, since Mr Bill Gates of Microsoft does not even have a college degree, leave alone an MBA, he does not qualify to participate.
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