Going Public

It’s Time for Business Schools to Go Public

By Rich Lyons

October 27, 2015

Why it’s important to make public policy a more prominent part of the larger business school mission.

THERE ARE THOSE, INCLUDING ACADEMICS, who still believe that business schools should stay out of public policy. In a nutshell, they argue that the business of business schools is business, and that concerns about the broader public good are a distraction from our core mission. To my mind, this view always has been simplistic and is becoming more so all the time.

For-profit enterprises have never existed in isolation from the rest of society. Businesses require a thriving economy, an educated and motivated workforce, and consumers who can afford to buy their products. None of these conditions occur by accident. They all depend on sound public policy—on the “rules of the road,” so to speak—in areas that range from contract law and tax policy to employment law and securities regulation.

To be sure, public policy may not fit into every school’s mission. But public policy is germane to business and therefore presents great possibilities for many schools. Indeed, new forces in our economy are increasing both the need and the opportunity for business schools to engage with public policy— if we choose to take up the challenge.

PRIMARY RESPONSIBILITIES

For many prominent issues, it is impossible to untangle the “business” from the “public policy.” As a result, business schools can become natural sources of research and thought leadership for government representatives. At least three forces are driving many business schools to dive more deeply into public policy issues:

New technology. “Disruptive” technologies and radical new business models are creating new and urgent public policy challenges. Uber and Airbnb—ride- and home-sharing platforms, respectively, that have become two of the world’s fastest-growing companies—have sparked fierce political and regulatory battles over rules for transportation and public accommodation in cities around the world. Google is lobbying U.S. state governments to allow driverless cars on the road. Google, Apple, Facebook, and other tech companies are embroiled in tense discussions with U.S. Congress and the national security establishment over surveillance and online privacy. All of these issues have significant implications for businesses and individual citizens.


Politicians have big questions about what business needs, and business leaders depend heavily on getting the answers right. 


Fallout from the financial crash of 2008. Experts may disagree about the precise policy failures that led to the crash, but it’s clear that both the financial industry and government regulators lost their moorings to core principles and values. These failures didn’t just cause the collapse of the economy, as bad as that was. They also caused a collapse of trust and confidence in business and—let’s be honest—business schools. For many years, critics have accused business schools of fostering arrogance and prizing profits over principles. In response, business schools must fulfill two primary responsibilities. The first is to provide research that helps explain exactly what happened and how we can minimize exposure to a similar catastrophe in the future. The second is to instill in future business leaders a broader sense of values and responsibility that goes beyond increasing the next quarter’s profits.

The new science of leadership. It turns out that public officials from around the world are flocking to business schools for executive seminars, policy research, and coaching. Why? Because those officials are grappling with problems at the intersection of politics and business: how to combat corruption, how to pass laws and regulations that promote investor confidence, and how to balance economic growth with poverty reduction and environmental stability. Politicians have big questions about what business needs, and business leaders depend heavily on getting the answers right.

ILLUMINATING THE ISSUES

What does a beneficial relationship between a business school and government look like? It most often starts with research. Business schools can provide invaluable perspectives on important issues, translate their research into accessible language, and make it known that their professors are ready to help.

One example here at the Haas School of Business at the University of California, Berkeley, is the Energy Institute at Haas. Severin Borenstein, E.T. Grether Chair in Business Administration and Public Policy, led the institute from its inception in 1994 until 2014, focusing on the rigorous economic analysis of energy policy. Researchers at the institute have analyzed California’s ill-fated electricity-trading market, which in 2000 led to soaring spot-market prices and rolling blackouts. They’ve tackled issues such as efficient cap-and-trade policies for reducing greenhouse emissions, subsidies for renewable energy, and the economics of fuel efficiency.

Such projects lay the groundwork for a business school to be viewed by policymakers as a resource. For example, Borenstein and other institute faculty members have advised the state of California on several issues over the years. In 2014, advisors to California Governor Jerry Brown reached out to Borenstein for guidance on an aspect of the state’s complex cap-and-trade system. Borenstein pointed them to posts on the institute’s blog, which translate research on real-world policies into language that’s accessible to stakeholders such as legislators, regulators, environmental organizations, and journalists.

Once a business school establishes itself as a resource on a hot public policy topic, it can further its national, and even global, reputation. In our case, news organizations such as The New York Times, The Wall Street Journal, The Economist, and National Public Radio seek out the institute’s faculty for interviews. Last December, NBC reported on an article by several institute researchers, published in Science magazine, that assessed President Barack Obama’s clean-energy plan. This past April, another institute study by Haas professors Paul Gertler and Lucas Davis, which predicts explosive growth in carbon emissions tied to the rising use of air conditioners in developing nations, was mentioned in publications ranging from The Washington Post to The Times of India.

Many business schools are getting better at differentiating themselves by focusing on their individual strengths, and public policy offers them unique opportunities to collaborate across sectors, through their individual faculty and research centers. Through such initiatives, they can help shape government’s response to important social issues.

A NATURAL FIT

Some areas of public policy are natural fits for a business school. Researchers at our Fisher Center for Real Estate and Urban Economics, for example, are working with the U.S. Federal Reserve Board and the Treasury Department to better understand the warning signs that led to the mortgage and financial crisis of 2008. Nancy Wallace, the center’s co-faculty director, as well as the Lisle and Roslyn Payne Professor of Real Estate and Capital Markets, is currently serving on the Fed’s Model Validation Council to develop better models for stress-testing financial institutions. At the Treasury, Wallace serves on the Financial Research Advisory Council to help develop new strategies to measure aggregate risk in the mortgage market. She and her colleagues at the Fisher Center’s Real Estate and Financial Markets Laboratory are compiling and analyzing huge datasets on mortgages, employment, and house prices over the past 15 years; their goal is to create network-based risk metrics for the mortgage market, as well as a more effective housing-price index that can provide better warning of future bubbles. Such projects allow business school faculty to do more than simply explore policy challenges—they can work actively with policymakers to address them.


Shared values are central to defining a set of priorities.  


In some cases, business professors can even become important participants in major government investigations. In 2014, for example, the U.S. Commodity Futures Trading Commission (CFTC) received a tip from a whistleblower that a trader named Navinder Singh Sarao might have been responsible for the “flash crash” that roiled stock markets on May 6, 2010. To find out if that was true, the CFTC retained Haas finance professor Terry Hendershott, whose work focuses on high-frequency trading, to analyze Sarao’s trading activity. Hendershott found that Sarao had been placing huge buy and sell orders, up to US$200 million, only to cancel them as they got close to being executed. Hendershott showed that Sarao’s orders made no business sense and had the effect of spoofing the markets—in essence creating order imbalances that preceded the flash market crash. In April 2015, the CFTC announced that British authorities had arrested Sarao, at the request of the U.S. Department of Justice, for unlawful manipulation of the stock market.  

At the same time, many of the greatest social and global challenges of our time cannot be managed by one individual or even one institution. That’s why, for example, our Center for Social Impact Leadership is training MBA students to become multisector leaders who can move effectively between the worlds of corporations, nonprofits, government agencies, and social enterprises. And in the world of research, our Energy Institute recently launched a collaboration with the University of Chicago and MIT, with funding from the Alfred P. Sloan Foundation. Called E2e, the collaboration seeks to measure and enhance the impact of energy efficiency initiatives. We’ve found that, to have a chance of success, public policy solutions must work across sectors and institutions.

SECTORS BEYOND BUSINESS

While energy policy and financial regulation seem to fall naturally within the expertise of business schools, there are other important and highly relevant areas of public policy that, at first glance, might not seem to fit as neatly.

Consider the work of Ernesto Dal Bó, co-director of the Berkeley Center for Economics and Politics, who studies the economic and political interactions that affect governance, corruption, economic development, and social conflict. He and his colleagues have studied strategies to improve the quality of civil servants in Mexico, the impact of corruption on educational outcomes in Brazil, and the most accurate ways to measure religious and ideological fervor. Last summer, Dal Bó and assistant professor Frederico Finan led a workshop on corruption for senior government officials from India.

These topics may seem far afield from a business curriculum, but they are crucial to those who care about global economic prosperity. Just ask any CEO who is trying to do business in a nation that ranks high on Transparency International’s Corruption Perceptions Index. Ask any senior public official who is struggling to tame corruption. These are complex social and political challenges, with profound implications for business and society. 

HOW TO FOSTER PUBLIC POLICY?

Every business school has to allocate scarce resources to competing needs—adding a focus on public policy can seem like a drain on our mission to teach core business skills. Even faculty members, immersed in their disciplines, may view public policy as peripheral to their career success.

As a teacher of leadership, I strongly believe that shared values are central to defining a broader set of priorities. It’s important for business schools to develop cultures of engagement in the public good and to support initiatives related to public policy, such as corporate social responsibility and social-sector leadership. To engage effectively with public policy, a business school should make social service an important part of its mission.

At Berkeley-Haas, we have crystallized our commitment into four defining principles for our students: Beyond Yourself, Question the Status Quo, Confidence Without Attitude, and Students Always. By promoting these socially driven principles, we also ensure that our faculty know that public service is a true priority, not just window dressing. When they see the work of many of their colleagues, they know that initiatives in public policy can enhance their own career prospects. Our culture and our capabilities reinforce each other.

As an economist, however, I also believe that in the real world people are motivated by concrete incentives. One of the best incentives a business school can offer to faculty is flexibility, in both their schedules and their workloads. There’s a reason why most academics serve only two years on the White House Council of Economic Advisers: Most professors lose tenure after an absence of more than two years. If business schools want their faculty to take more active roles in government, they must provide greater leeway. For example, several of our professors—ranging from Janet Yellen, who is now chairman of the U.S. Federal Reserve Board, to Michael Katz, who served as chief economist for the U.S. Federal Communications Commission—were allowed either to reduce their workloads or even take several years off so that they could work in the public sector.

This flexibility comes with costs: When faculty members are absent, others must cover some or all of their responsibilities. But these costs can be a worthwhile investment in a school’s mission and have concrete and major impacts on policy. Stated principles will make no impact if professors aren’t given the encouragement and the flexibility to get involved in public service.

THE COMPLEXITY OF BUSINESS

Business schools that become more active in public policy also must manage other consequences of those efforts. Schools must resolve conflicts of interest and tensions that can arise between the priorities of academia and those of policymakers. Faculty need to be objective, academically independent, and intellectually honest in their research, knowing that an inconvenient research finding can lead to the loss of a financial sponsor. Furthermore, when faculty members take on public posts, it can create the perception that the school is tied to a particular school of thought or policy. For example, not everybody agrees that the Federal Reserve should have kept short-term interest rates in the U.S. near zero for so long after the financial crisis. The fact that Janet Yellen spent much of her career at Haas has linked that policy to the school more than one might expect. 

At Haas, another challenge involves the composition of our faculty—our engagement with public policy has tilted our faculty base toward economists, which means we have fewer psychologists, sociologists, and experts from other disciplines. A business school has to be mindful of this possibility and make sure its public policy teaching opportunities still mesh with the needs and demands of its students.

On a more personal level, faculty members who want to actively engage in public policy often need to adjust to demands that are very different from those of academia, particularly when it comes to building relationships outside their departments and even outside their universities. They also must be ready to interact—often with little or no advance notice—with policymakers and members of the media. This responsibility can be uncomfortable and sometimes unappealing for scholars who appreciate the quiet sanctuary of a pure research environment. It also can be frustrating to deal with deadline- and controversy-driven reporters who might not take the time to communicate the nuances of an issue. 

For all that, the connection between business schools and policymakers will likely become tighter over time. As business schools, we should make it our goal to build on this reality and to encourage our faculty to navigate smoothly across the public, civic, and private sectors. By incorporating public policy into its research and curriculum, a business school engages in the full complexity of training leaders, rather than simply managers. In contrast, by treating public policy as a side issue, a business school leaves students and faculty too far distanced from this essential domain—and risks being relegated to the sidelines of the business world.  

Rich Lyons is the dean of the Haas School of Business at the University of California, Berkeley.

 

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