What Business School is Missing

0:01We are now altering systems of the earth. These aren't environmental issues, these are systems breakdowns. To fix a systems breakdown, you have to fix the system that's causing it. That's capitalism. That's the market. And so I am arguing that we need to start to rethink some of the tenets of the market. I'm not arguing for socialism. Don't worry. But I'm arguing that, you know, my sphere of influence is business education. And so we need to teach business students to be stewards of the market, to recognize this is how the market works. This is what it does. This is where it may not work quite so well.

0:36And this is how you can play a role in getting it in the right direction.

0:46That was Andy Hoffman, professor at University of Michigan's Ross School of Business and School of Sustainability. He's the author of 14 books, including his most recent, Business School and the Noble Purpose of the Market. Now, recently, Motley Fool contributor Rich Lumelo and Motley Fool analyst Dave Meyer talked with Hoffman about sustainability in business. Rich kicked things off by asking Hoffman about his background.

1:19obviously there's a lot of ground to cover here but i thought what we'd do is open things up maybe give us a little bit on your background including your career path and you know kind of how that led to this focus on sustainability um and you know and then obviously how it impacts business and the environment oh boy how do i make that a short story yeah take as much time as you need. You don't. I mean, I got interested in environmental issues when I was an undergrad. It's interesting because I was a chemical engineering undergrad and environmental issues really weren't a thing. And so I said I want to do an environmental minor, which basically meant wastewater engineering.

1:58The concerns we have today just didn't exist then. I did that. I worked for the EPA for a couple of years, didn't really like it, became a house builder. And I built custom homes for five years, some very large custom homes, the largest was 29 ,000 square feet. Went back to grad school, environmental issues were starting to get much more interesting. Business was doing it because they saw a reason to do it. And they were an ally in it rather than an opponent. When I was at the EPA, I was an inspector. I just showed up at people's doors and ruined their day by doing an inspection. And now companies are actually focusing on these issues in a constructive way because at the end of the day, something that animates my work is that if we're going to solve these problems, they have to be solved by the market.

2:45The market is the most powerful institution on earth, business is the most powerful entity within it. If they're not solving it, they won't be solved. And so that's why I focus on business and sustainability. and I got my PhD in 1995 at a time where, again, this really wasn't a central aspect. I love to tell people that when I was trying to get business school professors to be on my committee, most of them, almost all of them, told me, what do you do in the area? It has nothing to do with business. Go to a school of government. And now those very same professors list sustainability as one of their areas of expertise and the schools that I went to and many others with sustainability as a central focus.

3:26So the world has changed a lot. And I cannot say that I caused it, but I can say I was just lucky enough to be right at the wave as it was starting to take off. I thought we would maybe jump into the book. And I thought we would do it like this. So I came from, before I joined the Motley Fool, I was an engineer and I was working up, doing more business related work at General Electric, the titan of corporate, of corporations, right? And I got my MBA because they said, hey, you're doing a good job. Would you like to do it? I said, sure. In 2000 and 2002. Where have I gone wrong? Use the book and tell me where, where, where did they fail me?

4:11and you will not hurt my feelings because i actually think i've grown a little bit since then okay well first of all just to find a little anecdote the the first house i was a carpenter on was jack welsh's on nantucket so oh wow yeah you might find that back in the 80s he's an interesting character i'll say that he certainly was um uh but you know i think what i would say to you is that The MBA you got in 2002 probably didn't differ a lot from the MBA you couldn't have gotten in 82, 92, 2012, or even 2022. The degree is ossified. And so you'll learn a lot about the how of business, but very little coverage of the why of business.

4:55Why are you doing this? What is the role of business in society? And while that may not have been a hugely pressing concern then, it is today. And so I just think that students need to be taught more about what is the role of business society? What is their role as manager? How are they going to address the issues that society faces? Because at the end of the day, the original purpose of business school, Rakesh Karana from Harvard University has a book called From Higher Aims to Higher Hands. And he likes to point out that when business schools were first proposed in the early 1900s, universities said, no, this isn't an area of academic inquiry.

5:36They said, no, we're going to teach the titans of industry how to run commerce and service to society. We're going to teach them like we teach doctors to serve society. And the point of his book is that we've lost that mandate. Yeah. So my book is a call to say, let's get it back. As a podcaster, my voice is heard by thousands of people. And now with Vanguard Investor Choice, I can be heard by the companies I invest in too. Vanguard Investor Choice makes it easy for eligible Vanguard fund investors to have a say in how their funds vote at company shareholder meetings. With just a few clicks, you can set your proxy voting preference and make your voice heard on topics like executive pay, board director elections, and more.

6:15Investor participation is the heartbeat of a healthy corporate governance ecosystem. You have a voice. Let it be heard. Visit vanguard.com slash investor choice to learn more. Vanguard investors own shares of Vanguard index funds and those funds own shares of the companies they invest in. Available for Vanguard index funds that participate in investor choice. Vanguard Marketing Corporation Distributor. One of the fortunes that I've had working with The Motley Fool is I actually worked in our asset management business, manage money for clients as opposed to in a publishing way. And one of the things that I saw about 10 years ago was the rise in popularity of ESG-type funds.

7:06Not only was there a framework to say, hey, you can actually evaluate a management team this way, but there were people who were raising capital, right, to put it in a fund structure. One, how did that impact the way you were thinking about things? And two, was that a good sign, meaning that capitalism was actually starting to facilitate this? Maybe, you know, how has it gone from, based on your experience and what you've researched, how has it gone from there? Well, certainly monetizing it is the way to get it into the market. And so investing, finance is certainly one way to do it. We can talk about the stumbling that's happened since then.

7:50But I would add one thing, and we can talk about this more, but another avenue through which these issues are getting monetized is insurance. And that's happening right now. Insurance rates in this country are going up. Sure. across the board and not just LA where there's a wildfire or Florida where there's a hurricane, but the Midwest where what they call secondary perils, just ordinary events that are now extraordinary. We now have a new vocabulary for atmospheric rivers. These cost insurance companies a lot of money. And so they're reducing coverage. They're raising deductibles. They're limiting coverage.

8:25They're even withdrawing from some markets. And that will ripple through the economy. that will change real estate markets. So back to finance, ESG became a lightning rod because - Sure did. Yeah, perceiving this as favoring some companies more than others and not serving their clients well, BlackRock and State Street and others. And there was some, what was Alan Greenspan's term, irrational exuberance. that, you know, a lot of the mantra that, you know, doing good by doing well, I think is the way it was phrased. And some people weren't as critical. I would also add, though, that a lot of the pushback, particularly from state attorney generals, is coming from states where their domestic industries are going to be harmed by a shift, for example, away from fossil fuels.

9:20And so that is part of the push. you know do we have to get off fossil fuels if we're going to address climate change yes is it going to cost certain economies on a local scale money yes are they going to push back yes and so that's what we're dealing with but i just think that we need to become much more sophisticated in how we think about sustainability in finance when does it actually impact your investments think about it carefully don't just make a bottom line assumption that if it's good for the environment, it's good for my bottom line. Because I would also add the pendulum has swung because now you've got some investment funds that are anti-woke investment funds, and they are doing the same thing on the other end of the spectrum.

10:09The Wall Street Journal just had a story about this last week saying some of these anti-woke funds, like one of them they looked at, it was 85 % S &P 500, and they're charging huge management fees, and they're really not doing anything. special. So really think carefully about how issues like climate change impact certain sectors. If you rely on water, if you're on the coast, if you're in agriculture, climate change is something you better be focusing on very, very carefully. That's a very good point because I moved from the Northern Virginia area to the coast. I live just south of Myrtle Beach.

10:48And my latest escrow assessment said, Hey, you're paying about$200 a month more. And I'm like, what's going on? And sure enough, it was because my insurance for my house went up because it's near, near to the coast. And so I, I totally get it. And that can bring up opportunities for innovation. Um, uh, building codes have been very slow to change, but in Florida, there's a development called Babcock Ranch that actually became a haven during the last hurricane because it was designed to withstand the storms that were coming that used to be 100-year storms that are now happening with much more frequency.

11:31They have a lot of wetlands to absorb the storm blow. They kept buildings low. They made them stronger. They buried all the utilities. This is smart investing. They say leadership isn't just about where you're going. It's about the conviction it takes to get there. For those who demand the world and possess the drive to claim it, there's a vehicle of equal distinction. Dynamic by design and engineered for pure impact, the Range Rover Sport rises to meet you the moment you take the lead. This is the most advanced Range Rover Sport yet, a master class in uncompromised performance and unbridled agility.

12:09Inside, the innovation is seamless. You'll find an elegant 13.1-inch touchscreen that puts total control of the vehicle's systems right at your fingertips, but it's the refinement that sets it apart. Sculpted 22-way heated seating with built-in massage function ensures every journey is defined by peerless comfort. Whether it's through unique interior finishes or custom wheel options, the ways to personalize your Range Rover Sport are nearly unlimited. Command attention and experience ultimate luxury in motion. Exclusive offers are available now. Explore further at RangeRover.com. Andy, as I mentioned at the outset, you have written 14 books, countless articles, been referenced thousands of times.

12:52You were writing about this back in the early 2000s from Heresy to Dogma. You talked about, you know, kind of how environmentalism entered, you know, kind of corporate America. I don't know if you would consider that sustainability 1.0 back then or 0.1 or whatever you want to call it. But how are things kind of evolved? What did things look like then versus what they look like now? Well, you know, for your listeners, the metaphor of heresy to dogma comes from, I did my dissertation, part of it was at the Amoco Corporation. Remember the Amoco Corporation? And the vice president for EH &S, Environmental Health and Safety, told me a story where he was at a senior director's meeting and the CEO at the time said, we expect environmental constraints to become more stringent both here and abroad.

13:44And so an environmentally progressive company like Amico, we expect this to provide strategic advantage. And the head of UK operations leaned over to a gentleman's name is Wally Kwanstrom. I hope he's listening. And he said, how does it feel to hear your heresy become dogma? And so that was the metaphor of issues of the environment in particular, entering the market and influencing corporate strategy in a way that companies thought in their interests to address these kinds of problems. And so that I see as sustainability 1.0. I would teach this. I would give talks at business audiences saying, you don't even need to see that climate change is real.

14:23If your insurance companies care about it, if your investors care about it, your customers, government, you reframe it in the language of business. It's regulatory compliance. It's consumer demand. It's operational efficiency. and you will address it. In sustainability 2.0, it's recognizing that while this is good, it will not solve the problem. It will slow down the velocity at which we're running into a brick ball, but it won't reverse course. We are now at a place where, without getting too existential about this, a place where human beings have not been before. When we start to think about issues like climate change or other issues of the Anthropocene, whether it's species extinction, ocean acidification, freshwater availability, nitrogen, phosphorus in the natural environment, we are now altering systems of the earth.

15:18These aren't environmental issues. These are systems breakdowns. To fix a systems breakdown, you have to fix the system that's causing it. That's capitalism. That's the market. and so I am arguing that we need to start to rethink some of the tenets of the market. I'm not arguing for socialism, don't worry, but I'm arguing that my sphere of influence is business education and so we need to teach business students to be stewards of the market, to recognize this is how the market works, this is what it does, this is where it may not work quite so well and this is how you can play a role in getting it in the right direction.

16:01That was University of Michigan professor Andy Hoffman. His book again is Business School and the Noble Purpose of the Market. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Money team, I'm Matt Greer.

16:40Thanks for listening and see you tomorrow.

16:55Thank you.