When faculty meets felony

In a case that underscores business schools’ heightened focus on ethics and moral responsibility, a US district judge has upheld the decision by NYU Stern School of Business to deny an MBA to a student who hid his conviction for insider trading from school officials.

The decision comes as business schools are under fire for their role in the financial crisis. Critics have blamed business schools for shaping and perpetuating a business culture that not only embraces risky, exotic financial instruments and badly designed compensation plans, but that fosters greed and self-entitlement among their students.

In 2007, Ayal Rosenthal, the former student, pleaded guilty to conspiracy to commit securities fraud after he tipped off his brother to non-public information he became privy to while working at PwC, the accountancy firm, in 2005. At the time he was also pursuing a part-time MBA at Stern. As a sentence, he served 60 days in prison.

Mr Rosenthal had completed the degree requirements but he was denied his MBA for violating Stern’s Honor Code and Code of Conduct while enrolled at the school.

Following Stern’s internal decision in 2007, Mr Rosenthal brought an action against the school in the federal district court in New York for alleging that Stern’s decision was “fundamentally unfair”. But the judge upheld the university’s initial decision to withhold the degree.

“Rosenthal managed to complete his course requirements only by concealing his criminal investigation from Stern,” the judge ruled. “The authority and discretion to determine whether Rosenthal was qualified to receive an MBA degree from Stern properly rested with its faculty.”

According to John Fernandes, president and CEO of the Association to Advance Collegiate Schools of Business, this is the first time a business school has had to decide whether or not to grant a degree to an enrolled student convicted of a felony related to his professional dealings.

The ruling, he says, comes as: “business schools are increasingly sensitive to be seen as operating in a transparent environment”.

Mr Rosenthal’s attorney, Edward Hernstadt, said he believed the judge’s ruling was wrong because it created a “dangerous slippery slope” by giving the faculty full discretion “to decide who or who doesn’t deserve the benefit of MBA”.

However, ethics experts dispute the notion that by not granting a business degree to an enrolled student who has admitted to securities fraud, a faculty is going beyond its powers. “The conviction of a felony is a bright line between acceptable behaviour and unacceptable behaviour,” says Kirk Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University.

“It’s entirely within the rights of a …business school to set the criteria for graduation, and if it chooses to set the criteria to include moral qualities, it seems to me to be perfectly appropriate.”

In the wake of scandals such as Enron, WorldCom and HealthSouth, Prof Hanson says: “It’s critical for schools to communicate that integrity and ethics matter in business management.

“To tolerate the presence of an MBA who, while they were enrolled, has been convicted of a crime of dishonesty…sends the wrong message.”

The fact that Mr Rosenthal pleaded guilty while in business school is another key detail, say ethics experts. If he had committed a crime after graduation, it would be difficult for the school to rescind his degree because he had earned it at the time by fulfilling the requirements.

Disgraced executives from the Enron scandal – Jeff Skilling, former chief executive and Andrew Fastow, former chief financial officer – were sentenced to prison for their role in the 2001 demise of the energy company. Both have MBAs, Mr Skilling from Harvard Business School and Mr Fastow from Northwestern’s Kellogg School of Management.

Leigh Hafrey, a senior lecturer on ethics at MIT Sloan School of Management, notes that “if one of your graduates does something evil, it makes your school look bad, but it would be very difficult for that school to argue that anyone 15-20 years [after graduation] violated its honour code.”

The case, he says, could renew interest in devising an MBA honour code where graduates pledge to act ethically in business.

“This would effectively professionalise business,” he says.