Soft Factors in Management Can Produce Hard Knocks, Say Business Veterans

Originally published in May 2000.

Ethical integrity, company culture and other “soft” aspects of corporate governance are often more critical to success than bottom line factors, industry veterans agreed during a forum on business school research. The toughest management decisions are often non-economic in nature and failures can frequently be traced back to problems such as ethical lapses and cultural mismatches.

“Business leaders are desperate to have templates they can work from to deal with the soft side of these issues,” said Herbert Allison, MBA ‘71 who retired last year as president of Merrill Lynch. “We need more research and more ways to get it out to business leaders.”

Allison, who chairs Stanford GSB’s advisory council, was part of a panel of faculty and alumni who discussed the role of research during a three-day celebration of Stanford GSB’s 75th anniversary. The May 19 forum was attended by more than 1,100 alumni and faculty and some 2,700 guests attended events during the three-day celebration that ended with a gala dinner dance May 20.

Allison observed that many of the financial sector’s spectacular failures in the ’80s and ’90s, for example, were not due to trading losses as such, but to ethical lapses. “How you create a culture of high integrity is critical to the survival of any company,” he asked.

In mergers and acquisitions, he added, the compatibility of the two firms’ cultures and values was the single most important determinant of success or failure. “The best M&A bankers I have ever seen are more psychologists than they are financial wizards,” he said.

Kurt Lauk, MBA ‘77, who had run a division with 90,000 staff and more than 40 factories in his former role as deputy chairman of DaimlerChrysler, agreed that there was much more to management than the creation of profit.

“There are many instances when you have to maintain a company that hasn’t been making a profit for many years,” he said, stressing the community obligations that arise when operating in developing countries. Managers had models for taking care of shareholders’ interests, but “we need a better framework when it comes to stakeholders,” said Lauk, who is now a venture capitalist and teaches at Stanford GSB.

He added that although his economics doctorate gave him access to clear answers, these answers very often could not be implemented, and he found himself reaching back to his initial academic training in history and theology.

Underlining the importance of “soft factors,” he added: “As a practitioner of business, it’s amazing to me how it’s possible for the same group of people (when faced with new management or some other corporate change) to turn around and make a profit when for years they were making losses.”

The panelists also roundly endorsed Stanford GSB’s commitment to pursuing knowledge for knowledge’s sake, rather than confining faculty research to the immediate needs of the market. Only with an environment of academic freedom could Stanford attract top-notch professors, who in turn drew the best students and helped to establish it as an outstanding business school, they said.

“Students who come here want to be taught by the best faculty in the world. Who are these faculty? They are people who are totally committed to learning and to thought,” said Allison. “They would not be attracted to work at Stanford unless the school was committed to scholarly research,” he added.

Professor Garth Saloner estimated research takes up between one-fifth and one-third of his colleagues’ time, since all of them also teach. With a faculty of 70 to 80, that works out to about 20 person-years devoted annually to research, less than the resources that investment banks, consulting firms and other large corporations devote to research into management issues. But despite its relatively small staff, the school had made a remarkably big impact, developing various key theories and authoring major texts, he added.

Noting that private corporations’ research is targeted at problems of immediate managerial relevance and market value, Saloner said: “Our precious resources should be devoted to precisely the things that industry does not.”

Agreeing, emeritus Professor James G. March argued that while industry research seeks immediate payoff, scholars have the unique responsibility of looking out for the long term. “Scholarship is not a job but a calling to follow ideas wherever they go,” he added.

Allison urged the audience to respect the long-term time frame of scholarly research. The best research sometimes has no impact for 20 to 30 years, he noted.

Condoleezza Rice, former Stanford University provost, said that the question of market relevance tends to come up in all professional schools. Although researchers seek validation for their ideas in the form of real-world application, interesting ideas can take a long time to gestate. The model of “idea-first, problem-later” is not a bad approach, she said.