Why an MBA May Not Shield You From Racial Bias in Corporate Management [Update]

For those who assume that a top B-school education levels quaint notions of racial bias in managerial ranks, think again. Discrimination is alive and well among financial analysts, according to some recent social-science experiments. And if you look at the nature of the experimental set-ups, you could reasonably wonder whether bias against African-American executives exists not only among financial analysts, but in corporate management as a whole.

Apparently an advanced degree from a prestigious university is frequently discounted by other MBAs when the holder is African-American, according to recent work by researchers Stephen Sauer of Clarkson University, Melissa Thomas-Hunt of the University of Virginia, and Patrick Morris of the May Group Family Fund and published in the journal Organization Science. In one study, 104 current MBA program students and alumni played the part of financial analysts for venture capital firms. Of the group, 76 percent were male and 64 percent were white. A hypothetical CEO had an MD and a master's in public health administration, while the COO had an MBA. [Update: Originally I had said that the CEO also had an MBA, but that was incorrect.]

We gave each participant a 10-page "pitch book" that included a brief description of the industry and the company, its financial performance, projections prepared by the management team, and biographical information about the management team. We also provided an industry range for Price to Earnings ratio and a simple spreadsheet valuation tool. After reviewing the pitch book, participants entered a Price to Earnings multiple into the spreadsheet valuation tool, and the tool returned an estimate for the current price per share of stock.

For average educational prestige, there was no statistical difference between the valuations of white- and African-American-led management teams. However, when the school prestige was high, race showed a significant negative effect for the African-American-led teams. In fact, the white/high prestige teams received the highest stock price valuations, while the African-American/high prestige teams received the lowest valuations -- lower even than the pitch books with managerial average education.

Furthermore, the researchers tested responses when a school was either explicitly described as having no preferential admissions policy or if the existence of an affirmative action plan was left ambiguous. For no preferential admissions, African-American-led management teams received about the same stock price as white-led. When affirmative action was ambiguous, there was a large difference in the valuations.

In short, the researchers concluded that people with MBAs who analyzed companies from the outside -- a pretty good description of financial analysts -- will likely allow race to trump a prestigious business education when evaluating a business. There are some limitations to the study. Even with over 100 people, the sample seems small and not necessarily randomly. Also, testing with MBAs in general is not the same as testing with a population of professional financial analysts, so in the real world, analysts might not show the same bias. But I wouldn't want to bet on it.

There are additional implications. Given that the study participants weren't all white, there is likely either a societal or institutional influence that causes a subconscious bias. That would suggest a pervasive and tenacious issue that unfairly affects corporations looking for funding.

Furthermore, a group of MBAs might better describe managers in general. Unlike analysts, most will be inside a company and not trying to determine its worth from the outside. However, managers are also likely to be involved in looking at other corporations as potential business partners, to say nothing of hiring other managers. In either case, they would view someone's background as an outsider and possibly display similar bias.

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