Incomplete Education

At many business schools, finance instruction just doesn't make the grade.
Roy Harris and Stephen BarrApril 1, 1997

Cheryl Francis found the fast track at FMC Corp. soon after getting her MBA in finance from the University of Chicago in 1978. She started in the strategy office, installing a new performance measurement system for making decisions about capital allocations. After a spell in investor relations, she moved to the control side, managing a forecasting group that reported to the controller of the diversified chemicals and machinery concern. She was in the thick of FMC’s successful recapitalization in the mid-1980s, then ran the capital budgeting and planning department, before becoming controller of a global subsidiary.

Then six years ago, in search of a job that would allow her more time to care for her two infants, she applied for a finance teaching position at her prestigious alma mater. While it normally doesn’t let non-Ph.D.s teach, Chicago made an exception. It liked both her, and the new MBA course she proposed—on performance metrics, capital structure, and value creation; interacting with investors and the board; and how finance can influence strategy. In essence, she would teach her career.

The course title, “Finance as a Catalyst for Change,” could just as easily apply to the business school itself, historically the home of the most highly theoretical approach to studying finance. “It addressed exactly what Chicago was sometimes criticized for,” says Francis, who taught there for two years before eventually joining R.R. Donnelley & Sons Co., where she is chief financial officer.

At Chicago, the University of Pennsylvania’s Wharton School, Harvard Business School, Columbia Business School, and others among America’s top business schools, finance education has been at the heart of a six-year- long retooling of MBA instruction. Their curricula and their teaching styles still often differ. But at all of them, the main thrust reflects a learning process in which finance, marketing, and manufacturing or other operations become more intertwined. The new emphasis puts added focus on teamwork, interpersonal skills, and consulting-like group projects—and on understanding how complex business problems are solved. At the same time, schools are at least trying to apply the basic theoretical principles of finance to corporate realities.

“Our insistence is that whatever someone’s major, it has to fit within the broad business framework,” says Dan Dalton, dean of Indiana University’s Graduate School of Business. All first-semester MBA students there learn the essential tools of business in a 15-credit course, team-taught by faculty from the various functional areas and resulting in a single grade. “We’re trying to prepare people to appreciate that technical silos are not very effective in the workplace,” the dean says. The change in approach echoes through the more than 700 schools, both large and small, now offering MBA degrees around the country.

The revisions reflect sharp criticism leveled at schools in 1990 by the Graduate Management Admission Council. Its report said sweeping trends in the business world—from cross- functional managing to globalization to new technologies to cultural diversity in the workplace—had for the most part caught MBA programs napping. The charges hit hard among B- school administrators, already sensitized to public opinion by the popular annual magazine rankings that pit MBA programs against one another.


Suggestions that MBA programs were out of touch rang true with many executives, who often found themselves stuck with technical wizards who understood little about the functioning of the modern corporation. And an informal sampling by CFO of senior finance executives at large companies suggests that the problems haven’t disappeared, in the finance area at least. Some 60 percent in our survey, for example, say that newly minted MBAs learn too much finance theory, and not enough about practical finance management.

Recent grads “don’t come with practical knowledge,” says Nike Inc. CFO Bob Falcone, who hires only MBAs who have proved themselves in summer internships. One shortcoming he’s noticed: they may miss critical marketing angles while doing due diligence on acquisitions. In examining “whether building a gas plant is a good decision, they might look at the present value,” says John Carrig, vice president and treasurer of Phillips Petroleum Co., but they’re likely to miss “whether it’s dilutive of earnings, the economic value added, and the earnings above the cost of capital, which is how a project decision relates to the big picture.” Business schools don’t do well helping students “understand the relationship between project work and the financial statements,” he complains.

“All the theory and math formulas are important to learn, but that’s not the balance of what you do day to day,” says Bob Thompson, corporate vice president and controller of Whirlpool Corp., who received a University of Michigan MBA in 1977. He’s seen recent graduates so enamored of theory that they sometimes actually shirk their job responsibilities in favor of technical wizardry that may actually be hazardous to company health—such as, in one case he’s observed, pursuing improper derivatives positions.

Of greater concern to many executives are recruits’ poor communications skills. “A lot of what you have to do in finance, from entry level to CFO, is present your analysis in concise, readily understandable, and hopefully actionable ways,” Thompson says. New hires often fail to see that stacks of spreadsheets and rambling reports won’t pass muster. They can’t create simple charts, or present conclusions in bullet-point format. “You can be smart as a whip and know all the rocket science of finance, but if you can’t communicate well, you have no value,” he says. Adds Richard Wallman, senior vice president and CFO of AlliedSignal Inc., “The ability to communicate your thoughts, influence a team, and bring out the best in others is more important now than ever, and today these ‘soft skills’ can make or break an individual.”

When CFO’s survey asked executives to assign a grade to the personal communications skills MBA graduates display, fully 70 percent awarded a “C” or “D.”

Paul Lehman, a 1996 Columbia MBA graduate who joined the finance organization at Pfizer Inc. last summer, thinks many schools inflate students’ expectations of the job world. “You come off campus ready to be CFO. In every [business] case you play that role,” he says. “You don’t know how little you know until you get on the job.” Adds David Mendis, a finance veteran at Marriott International who recently moved into a general management job: “I get the sense that many new MBAs expect a more strategic role, rather than the nuts and bolts of financial analysis.” When they aren’t allowed to “pontificate on the merits of this or that project,” some recruits being paid big bucks out of top schools become unwilling to endure apprenticeship, get disillusioned, and leave the company.


Could I have your attention, please,” snaps David Beim, teaching Columbia’s “Introductory Corporate Finance” at 10:00 on a gray February morning. Every seat is filled, and the students quickly settle in and focus forward.

“Today we’re going to discuss financial ratios, which are key to seeing the character of a company,” begins Professor Beim. “Raw numbers make sense and gain interest only in relation to other numbers, and I want to sharpen your skills for using ratios to understand the true story of what’s going on.” The lesson is “an exercise in detection,” and he spends the next hour breezing through several dozen basic ratios, from gross margin to return on equity, and more. Then with 20 minutes left to go, the professor distributes a worksheet listing five sets of key financial ratios. He calls out five different industries, asking students to match each balance sheet to a corresponding business—a task requiring assumptions about the nature of different businesses. The last 10 minutes are spent discussing the answers.

Beim’s course content and teaching style are new, he explains afterwards, describing his approach to this MBA course as emblematic of the changes at Columbia. “We’ve tried to make this a much less textbooky, mechanical course,” says the professor, who spent 25 years as an investment banker before joining the faculty in 1991. “We’ve oriented it toward problem-solving and skills so that at the end of the course, students can take an unstructured situation, extract insight, and make projections.” The detective scenario, he says, along with the case-centered exercises that make up the other half of the course, employ what he calls “experiential education” as a framework for learning. “Instead of leading students through chapters in a textbook, I want them to do things and figure things out for themselves.”


Such thinking about teaching styles grows out of the great progress made in B-schools during the 1980s—a time of vast growth among MBA programs, a new acceptance of MBA graduates by Corporate America, and major enhancements in finance research. “The finance profession bloomed as an academic profession,” says Gautam Kaul, chair of the finance area at Michigan. Theories about capital structure flowed freely from academia to a grateful business world: efficient market theory, the capital asset-pricing model, derivative instruments for risk management, and other fixtures of modern finance.

In terms of teaching that theory, schools have made enormous strides converting it into practical applications, says Joel M. Stern of Stern Stewart & Co., the consulting firm that markets the Economic Value Added metric system. “There are an enormous number of courses focused on international finance and the specifics of capital markets, including derivatives and options, so that the students today are far more prepared to walk in and make a significant contribution in their first year.”

Still, he sees a “major split” continuing between the case-study techniques of Harvard, Stanford, and others, and the purer, theoretical “microeconomics” approach at schools like Chicago, Carnegie Mellon University, MIT’s Sloan School, and the University of Rochester. Students too heavily exposed to case studies often “don’t understand the theoretical underpinnings” of finance, says Stern.


Harvard’s Peter Tufano sees the split, too, though in a different light. The dedication to writing and using case studies keeps his school in touch with the corporate world, the associate finance professor says. Often, students find it “very difficult to apply formal finance theory in corporate settings.” This can be true also of professors, who “are not encouraged to draw tight links between abstract theories and the companies they study.” Says Tufano: “Finance is science at one level; it’s kind of like biology. To think that you’d study biology without looking at an animal is kind of crazy.”

Some insist that the theory-versus-practice dichotomy no longer exists. “It’s a false distinction,” says Stewart Myers, a Sloan finance professor and co-author of the popular textbook Principles of Corporate Finance. “That kind of polarization is not helpful, and it doesn’t ring true anymore at top business schools.” The real challenge is not tying theory and practice together, but getting “students to appreciate what a complex world it is.” Says Myers: “This is an exciting time to teach finance, because the finance industry is innovating and exploding.” (Over the years, he says, his book has dropped the chapter on pensions— “very important but nobody taught it”—and added material on global finance, competing theories of risk and return, and new tools for capital budgeting.)

Certainly, the distinctions have lessened as finance professors of all orientations struggle to teach students to understand corporations in an integrated way. A 1995 textbook co-authored by Harvard’s Krishna Palepu, Business Analysis and Valuation: Using Financial Statements, teaches financial- statement analysis in relation to creating value, not as a distinct exercise. “This is consistent with what CFOs are trying to do inside their companies and how investors are viewing companies from the outside,” Professor Palepu says. “We want students to link accounting to strategic variables so it’s seen as more than just a bunch of rules.”

Individual professors and schools are showing a similar willingness to alter their approach to fit new demands—as Cheryl Francis’s class at Chicago illustrates.

Chicago professor Steven Kaplan still uses 16 cases in teaching, as he has throughout his nine years teaching an advanced corporate finance course; today, though, only 3 are the same, and he now presents more difficult cases earlier. “The students are better; finance has gotten more sophisticated; and I push harder,” says Kaplan. Over the past decade, he has written for the course 2 cases derived from Viacom’s acquisition of Paramount Communications—one about valuation, the other concentrating on corporate gov- ernance issues relating to board behavior and the bidding process. Derivatives issues, important to the ultimate outcome, also come into play.

Bob Whaley, a finance professor at Duke University’s Fuqua School of Business, changed the way he taught his derivatives course in 1995—after seeing a “60 Minutes” segment on derivatives. I was “absolutely dumbfounded at the misrepresentations and mischaracterizations” about their supposed evils, he says. But after playing the video on the first day of class, he discovered that students bought into the news show’s views. Now at the end of the course, he says, students are “as dismayed as I was at the show’s lack of knowledge about derivatives and derivative markets.”

When Wharton’s John Percival covers shareholder-value concepts in corporate finance, he focuses both on such traditional elements as leverage levels and on marketing consequences of decisions. “We used to turn out an awful lot of people who were real good at calculating the cost of capital,” says Percival, “but if you asked them why, they’d be hard-pressed to explain it to you. Until now we’ve all acted as if integration will happen by some immaculate- conception process.”

A corporate takeover simulation called “Virtually Hostile” involves Internet- linked teams of MBA students from Eastern Washington University and Poughkeepsie, New York’s Marist College battling each other across the continent. Students in the early stages manage to value “Target Electric Co.,” which trades at $10 a share in the case, at anywhere from $2 to $120, note Eastern Washington’s Brian Grinder and Marist’s Dan Cooper, the professors who conduct the bicoastal program.

Many companies prefer shooting for candidates from the finance departments of schools that lack big national reputations. Phillips Petroleum, for example, fills its finance ranks mostly with students from a network of schools in the South and Midwest. “We have a greater likelihood of a dry hole if we recruit at Harvard, unless the person has a connection to Oklahoma,” says Phillips treasurer John Carrig, who adds that “my impression is that the people we get are no less qualified than their peers.” Of course, “we don’t discuss the theory of financial concepts in recruitment interviews; we discuss financial transactions we might be working on. That’s how we get a sense of the person.”

And, indeed, in CFO’s sampling of executives, 62 percent said that many less-well-known MBA programs provide at least as good a finance education as the top business schools do.

Companies recruiting at second-tier schools will often find gems, says Raj Aggarwal, a finance professor at John Carroll University in Cleveland and editor of Financial Practice and Education, a journal of the Financial Management Association. Surveys that rank the top schools “miss a lot of detail, which is unfortunate, because there are superb programs in finance that no one has heard about,” he says. He suggests that companies willing to explore second-tier schools can create solid long-term recruiting relationships—without the anguish of competing for talent that is much higher-priced, and still untried in the workplace.

How can corporate recruiters identify a good finance program outside the top tier? One tip offered by Harvard’s Peter Tufano: “I would ask finance professors, ‘When was the last time you talked to a CFO, a treasurer? How many companies have you visited in the last year?’”

Increasingly, professors are visiting a lot. Many are now involved with executive education- -and in particular the “customized” corporate programs heavily marketed by many universities. That has helped finance professors at numerous schools keep current with the fast-changing environment. “We’re constantly being antiqued,” says Donald Jacobs, dean of Northwestern University’s J.L. Kellogg School, who maintains that Kellogg’s finance professors frequently make changes in their courses to reflect lessons learned in executive education. “This is definitely a two- way learning system,” he says.

Many recruiters still prefer meeting their employment needs at the schools with the top reputations, of course. They know that those schools generally draw the brightest and best in larger numbers. John Hackett, former CFO of Cummins Engine Co. and onetime vice president of finance and administration at Indiana, credits the top schools with doing well in marketing their best people to companies.

“If I were going for an MBA today, I wouldn’t bother unless I could get into a Top-20 school,” says Hackett, who now works at CID Equity Partners, an Indianapolis venture capital firm. “I know it’s snotty, and I’m embarrassed to say it, but it’s true.”

But Calvin Baker, CFO and treasurer of Wisconsin Energy Corp. and a 1969 Chicago finance MBA, is realistic about what any mere degree can deliver. “There’s no way that a hotshot out of Chicago, or any other school, will be able to handle the complex nuances of dealing with the business world right away,” he says. The best they can hope for is to be “well-grounded in theory and financial applications like EVA, and what the payback period is for an investment. But running a finance organization and making sound management decisions comes with experience.”

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