Why is it generally required that professors at business schools have a Ph.D, but it is not required for them to have real business experience?

Professors at business schools don't teach "business." They teach a specific course, such as "Applied Probability Models in Marketing." What business experience would possibly offer a deep expertise in this comparable to what one would get by truly studying that specific field? Many courses are best taught by professors with specific focuses in that, as business experience rarely offers sufficient depth in a specific topic. Courses like Finance, Economic, or even specific marketing courses (e.g., "Applied Probability Models in Marketing") are not going to be areas that people learn on the job. At the top schools, a marketing professor will generally have a PhD in marketing, but also take on consulting projects on the side to keep their interests applicable. So they do, in fact, have business experience. In fact, they have a ton of exposure to a variety of fields of business. They're just getting this experience while teaching. There are some courses where a PhD is probably not necessary. For example, many entrepreneurship professors will come from the business world with entrepreneurial experience. A PhD would generally be less relevant.

It is not always that business professors are hired from Phds. I have had a few instructors who were previously working as partners at Mckinsey and BCG. That said, here are some advantages of Phds: Many great business people neither have the time nor have the patience to teach. It is one thing to do and another thing to methodically teach how to do. Many businesspeople are incapable of the latter. At business schools, you want to learn from a wide range of perspectives. Professors with Phds tend to analyze a lot of companies in an objective way. However, people with "real experience" are often tunneled into thinking what worked for them. Teaching is a specialized skill and Phd students spend a lot of time honing it. Bill Gates need not be necessarily a good teacher in a course on "Building your Software Company." Given that Mr. Gates has worked in only one and emotionally attached to it, his approach might not be the most idea. Ideally a professor should have both teaching and real world experience. In fact, in good schools most professors do have experience in both.

What is business experience? Having worked in an office?  If so, business experience is not a very stringent requirement: anyone can get some without much effort.   Or would you, maybe, expect schools to recruit people who have built companies and made a lot of money? Why would someone who is very good at building companies and making money come to work for a business school? Why would Bill Gates choose to go work for a business school? It seems that he is much better off doing other things. (Certainly, if Bill Gates did want to work at a business school, they would hire him... with or without a Ph.D.) However, having a Ph.D. shows that you have some basic scholarship skills. Most people with a Ph.D. know how to write decent prose. They know how to research an issue and how to make a point. They can also read difficult texts. These are all attributed you want in a professor. Moreover, people with Ph.D.s have an easier time getting research grants which bring the school money and prestige. Of course, the nice thing about having a Ph.D. is that you can also take part of a Ph.D. program. So there are definitively good reasons to mostly recruit candidates with Ph.D.s. Moreover, people with Ph.D.s have strong incentives to become professors. So it is an all around good match.

Some professors come from industry. But in most cases classroom instruction is focused on the research/theory behind things, even business/economics, which generally people who have PHDs are more qualified to defend under hard questioning.

1) Because any decent business school is going to bring in adjuncts and give you exposure to people that do have business experience. 2) Because it's all a political game, which is why people in business often have extremely low opinions of professors in business schools. They also have a very (justifiably) low opinion of most economic and business research. 3) Because academia has extremely low status and comparably low pay.  Anyone that has business experience would be highly incentized to do something else. Something that's important about business school, is that you absolutely, positively cannot learn how to do business in a business school.  That's not the purpose of a business school.  The purpose of a business school is to provide a minimum set of skills so that you need so that a company can make some use of you on the job, and then your real education begins. In getting hired for business, real world experience beats everything.  The trouble is that you end up with a chicken-egg problem.

While I agree with much of the professor's answer, I wanted to bring up the following points. Industry experience is usually provided through classes taught by lecturers, or by the inclusion of guest speakers. Regarding Bill Gates/Microsoft, many business people like to participate in the education system without a profit motive. Steve Sinofsky is teaching at Harvard business school for a stint. So influential schools can attract high profile business people without having to offer gigantic compensation packages.

This is a good question, and it encourages consideration of some of the fundamental problems facing business education: quality, relevancy and value. First, a disclaimer: My perspective is based on having been on both sides of the fence. First as a business school professor, with zero business experience and then as a Fortune 500 executive. I left the education profession because I didn’t believe in the value of the product delivered. After two decades of business experience, I recently taught an MBA course again. I earned my Ph.D. at age 27 at a highly-ranked university in the US, and joined the faculty at another highly-ranked university. I still remember a conversation on the first day of class, when the MBA students and I introduced ourselves to each other: Me: “I’m Sunil, and I blah, blah, blah” Student: How old are you? Me: (somewhat proudly): I’m 27 Student: “And we are supposed to learn something from you?” Based on my experience: My Ph.D. didn’t teach me how to “teach.” Yes, I taught several classes during my Ph.D. But I was essentially left to figure it out myself, through observation, trial, and error. My Ph.D. taught me essential critical thinking and analytical skills. I was able to apply these to solve the challenge of how to teach effectively. But not before many students suffered through my experimentation. My Ph.D. gave me deep knowledge of my subject area (marketing and consumer psychology). But I had to filter/re-package this knowledge into something an MBA student would value - again, through trial and error, since I had no business experience. Having worked in corporate marketing and product management roles for many years after I left academia, I sorely wish I had the benefit of this business experience when teaching. I agree with other posts in this thread when they say that business experience can result in tunneling (i.e. teaching what made me successful in business). But, combining my Ph.D. training with my business experience makes me at least twice as good a teacher, as I recently learned when I taught again. One last point: at most business schools, being a great teacher is the least rewarded accomplishment. If tenure, promotion and recognition are important to you, then you are better off spending the bulk of your time on research and bringing in money.

All the other answers here are correct.  Let me question, however, the two most fundamental assumptions in your question, both of which are incorrect: It is generally required that professors at business schools have a PhD.  The percentage and "quality" of doctorates is a function of the accreditation body and varies.  (You'd be surprised--and it's actually often inverse of what you expect.)  Supply and demand factors in, but the economic floor is defined by the various Department of Education proxies.  Professors can come from any academic rank or specialty anywhere in the college--what is required is the percentage of people with a PhD.  That is why you see major universities have courses taught by celebrities or executives or politicians--as long as they balance them out with a bunch of PhDs, they'll still pass accreditation.  And because a doctorate in "business" is a rare thing, most all professors in business school have doctorates in tangentially related fields.  (Yes, there is such thing as a DBA, but it's rare.)  So I had a professor, for example, that was a famous law school professor with his PhD in Law but not a JD--that's a rare creature and there's no way a law school could find enough of those to staff a college.  Others had PhDs in Economics or Psychology, each teaching their specialty.  For exactly this reason, MBA schools are filled with PhDs in various ancillary fields, but also related is that many accreditation bodies consider an MBA terminal.  I've seen many job listings that say "requires a PhD or an MBA."  It's just like a law school hiring a JD or an art school hiring an MFA. It is not required for them to have real business experience.  This is also not true in my experience.  Or maybe true in the "required" sense, because how do you quantify that, but I've rarely seen someone hired at the graduate level who wasn't the envy of the students.  Some worked in giant corporations, some started tiny things, but most of my professors were rich and easily-Googleable by the time they got a job teaching.  Suffice to say that it's rare to see someone held forth by a university as teaching about money who is teaching for the money! Neither of those are correct.  

Universities are not supposed to be handicraft schools. Ie. they are not places where smiths teach their apprentices to forge the perfect sword, instead tehy are places to learn a framework on which to build your own thoughts. For a business degree universities are supposed to give you that framework by teaching you various abstract things such as the effects of micro and macro economics on your business etc.etc. That way, leaving business school you should have the means to learn any business, not just a sword-making business, quickly.