2008 Financial Crisis: A Self-Inflicted Recession

Market crashes are not a new phenomenon but the most disturbing fact about the financial crisis of 2008, was that it was self-inflicted. What started as a credit crunch during the early 2006, turned into a fully-blown recession by mid-2008.The world’s financial system received a huge shock in September 2008, with the collapse of The Lehman Brothers, one of the biggest global investment banks [3]. The Global Financial Crisis of 2008, was undoubtedly the worst economic slump since the Great Depression of 1930. While the bankers and financers hold the responsibility for the global economic turmoil, the business schools have also, being partially responsible, faced criticism.

The crisis was preceded by a flood of irresponsible lending in the

United States. Loans were given to borrowers irrespective of their ability to repay. These risky loans were then pooled and used to back securities known as collateralised debt obligations (CDOs), which were further divided into safer tranches. These tranches were given triple-A ratings by agencies such as Standard & Poor’s, Moody’s and Fitch; which made them attractive to investors. It is clear that the agencies were very generous in their assessment.[10] While these were advertised as low-risk securities, it is evident that the bankers simply overlooked the associated risks and created a financial model which was doomed to collapse.

Although business schools cannot be held solely responsible for the crisis; due to their unique position as the knowledge providers to most international business leaders, it is right to say that they were definitely involved.

It is a fact, that most of those responsible for the chaos in the financial world were MBAs from the biggest business schools in the world. While the financial crisis was a result of the decisions taken by people who graduated years ago along with the younger MBAs; it has been rightfully pointed out by Hugh Willmott of Cardiff Business School, that the younger generation of bankers was the mind behind the complex financial models and practices which ultimately led to the economic meltdown [3]. This fact is reiterated by Tett (2009) when she says that “these financial hydrogen bombs were built on personal computers by twenty-six-year-olds with

MBAs.”[9]

The crisis was a result of lack of risk management and social responsibility, insufficient foresight and wide spread ethical bankruptcy. Apart from these, all warnings about the unsustainable nature of the financial system and the dangers of excessive borrowing were ignored. Sir Andrew Large, the deputy governor of the Bank of England, gave a strong warning about the coming crash at London School of Economics in 2004. However, his speech did not turn any heads. [7] This weak attitude was criticized in Lord Turner’s comment where he said that the crisis had to be viewed as a “fundamental intellectual failure”. [4] Schools have also been held guilty for teaching standard management practices which may not improve business performance with Dr. Stefano Harney saying that, “There has been no fundamental rethinking of the business curriculum as a result of this crisis.”[3]

Risk management and sustainability should be given increased importance among the MBA curriculum. An attempt should be made to make the management education more engaging which can encourage students to explore and understand the concepts of power, control and inequality. [2] The key is to emphasis on the concepts such economics, sociology and psychology in addition to the core management modules. The study of scandals of the past is an excellent source of information and will help the students to develop a deeper sense of social responsibility.[5] It is extremely crucial now to decide how the schools can train the students well, thus enabling them to face the ethical challenges of the future.

Another reason for business schools being criticised was that they had failed to instil a sense of corporate social responsibility into their graduates which resulted into them conducting unethical practices leading to the crisis. As per a study conducted by Aspen Institute in 2008, the longer a student was in the MBA program, the lesser he cared about making a positive impact on society.[6] This might have been the result of lesser importance being given to teaching CSR in schools. As the CSR module was an elective in most b-schools, the student could avoid it if he didn’t want to study that. However, CSR is not an option but a necessity to efficiently function in the business world. It is encouraging to see that many business schools have now made the CSR module compulsory. But a much better practice, than teaching a standalone module, would be to incorporate ethics and CSR within each of the other modules. Dr. Harney voices the same when he says that responsibility should be placed within technical modules like financial management and e-marketing. [3]

In fact, it is not just the MBAs but also the undergraduates, who should be introduced to CSR and ethics so as to give them a solid base for their business education.

MBAs look at profitability as the measurement of success and effective management. Hence, it is pertinent that business schools emphasize on the fact that CSR actually pays in the long run. A very good example of teaching CSR is Giving Voice to Values, a business curriculum aimed at teaching how to follow and preserve one’s values at workplace. It was created by the Aspen Institute with Yale School of Management. [8] In addition to corporate profitability, CSR principles need to be at the core of the management

education.

Business schools were not solely responsible for the crisis and similarly, they cannot prevent another one, single-handedly. However, as institutions which groom the business leaders of tomorrow, it is the onus of business schools to prepare their students to follow ethical guidelines and risk management principles. Schools should teach their students to reflect on their actions and to question theory as much as they need to question their practice. [1] Although this is no guarantee, it will provide young graduates with necessary tools to avoid of any future crisis of a similar magnitude.