In the past two years the topic that has reverberated most around business school corridors and conferences — and in the associated literature — has been the global financial crisis.
Queen Elizabeth, on a visit to the London School of Economics, inquired from the British Academy why no one had noticed that the credit crunch was on its way. After all, economists understand financial bubbles very well.
They know that although the causes differ, the anatomy is a sort of template: with the financial boom generated by some trigger event, new securities emerge, financial innovations abound and cheap credit drives inflation in asset prices. This is, however, the wrong question to be asking.
The end of the bubble was foreseen by many. I attended several public addresses by former Reserve Bank governor Tito Mboweni, where he warned South Africans that the good times were drawing to a close. As a national warning, the South African leading indicators predicted the downturn as early as 2006.
What was not foreseen was the form the crash would take, the timing of its origin and its ferocity. These should be the focus of any study trying to comprehend the crisis and the unique lessons flowing from the bubble bursting.
What was unique about the end of this period?
First, there was a certain disaster myopia present. The financial crisis was preceded by almost a decade of growth and increasing living standards stemming from a savings glut, inducing a global feel-good factor.
For many of us, the previous crises had faded into obscurity — and for many young professionals and consumers, they had become a myth. Those with good memories and nagging doubts found solace in the speed and ease with which the economy recovered after the dot.com bubble exploded.
Even if the feel-good factor is discounted, numerous quarters have shown that reliance on the normal curve for risk estimation leads to an underestimation of risk. Most market participants, however, appeared confident that future returns would resemble those of the past.
Financial sector risks are not the only risks the world faces. Consider the uncertainty of the outcomes and the enormous costs of the war in Iraq and Afghanistan, the threat of global warming, natural disasters and reputation risk.
However, by putting aside political differences and acting together in unison and with laudable speed, world leaders probably prevented a more disastrous outcome.
When it comes to systemic risk, the ferocity of the crash was vastly underestimated because some of the best mathematical minds in the world, employed to calculate risk for financial institutions, lost sight of the bigger picture and neglected or ignored the risk to the system as a whole, rather than any specific institution, instrument or exposure.
According to the British Academy, when answering the queen, everyone seemed to be doing his or her own job properly. According to the standard measures of success, he or she was often doing it well.
The failure was not seeing how collectively this added up to a series of interconnected imbalances over which no single autonomy had jurisdiction. This, combined with the psychology of herding and the mantra of financial policy goals, was a dangerous recipe.
Individual risks may rightly have been viewed as small, but the risks to the system as a whole were vast. Again, according to the British Academy, the failure to foresee the timing, extent and severity of the crisis, and to head it off, was principally a failure of the collective imagination of many bright people, both in Britain and abroad, to understand the risks of the system as a whole.
Turning to the consequences and the lessons, the University of Stellenbosch Business School has been working on the redesign of its MBA. In the new degree, which was designed before the crash, we embedded ethics that some of the top global schools are only now discovering because of the global crisis.
I have argued before that we have been sensitive to most of the issues that schools have been criticised for today — not by being clever or by having better foresight, but by being exposed to the unique challenges that we face in a developing society with massive income imbalances. There are more lessons to be learned from the crisis, both for ourselves and for the global business school community.
First, we have to rethink radically the way we deal with risk in our programmes. We have to move on from standard deviations and normal distributions and consider new risk models; we have to deal with systemic risk in financial markets as well as the risk exposure arising from global integration and the domino effect.
The global crash will have an influence on the future of business schools and the organisations they support. In summary, one may see the economic system evolve towards greater administrative authority and more complex regulations. One may see fewer MBAs becoming investment bankers.
The new workplace may not be Wall Street but entrepreneurial start-ups, for example, in the energy sector. Business schools may migrate closer to big business to learn and advise, while dissenting voices from business schools may become more audible in public economic debates of the future.
Do business schools plead guilty to the charge of being responsible for the financial crisis?
I think not: fingers can be pointed at numerous parties. And if MBAs were to blame for the burst bubble, they should also be praised for the growth achieved in the golden decade before the crisis.
For those 500 000 students around the world enrolling in MBA programmes, there is no crisis in business schools. It would be unwise, however, to close our eyes to the very prevalent lessons contained in this bleak history of an exploded bubble.
Professor Eon Smit is director of the University of Stellenbosch Business School. This is an edited version of his January 14 speech at the opening of the school’s academic year
About the business school
Established in 1964, the University of Stellenbosch Business School has more than 650 MBA students, about 150 students of two further master’s degrees, 26 PhD students and several thousand other students taking part in a range of shorter executive courses.
It has two international accreditations: EQUIS from the European Foundation for Management Development and AMBA from the Association of MBAs. Visit www.usb.ac.za