A New Era for Executives

Posted By: Roger Martin
Filed Under: the economy, roger martin, executive compensation, business trends, financial trends, fixing the game

Comments (0)

Whether we see the Occupy Wall Street protests as a short-term blip or a harbinger of much bigger things, the movement does make clear that a segment of the American population is angry with business — very angry. And they have a point. The 2008 credit crisis wiped billions of dollars from pensions funds, IRAs and 401Ks. More than a few Americans will have to work past retirement age to compensate for it.

What's more, that crisis wasn't a stand-alone, once-in-a-generation correction. It is part of a 30-year pattern of increasing volatility, decreasing investor returns, and ongoing bad behavior by executives. And it's getting worse. Since the turn of the 21st century, we've seen two massive value-destroying market meltdowns and a string of ethics breaches, including accounting scandals, options-backdating schemes and the subprime mortgage debacle.

But is business entirely to blame? Are we doomed to be written off as morally bankrupt and irredeemable? Thankfully, no. While it is true that we've gotten ourselves into a serious mess, I don't believe it is one created principally by innate corruption of deep incompetence. Perversely, the seemingly benign theories we've embraced to underpin our capital markets are actually producing these crises.

In my new book Fixing the Game: Bubbles, Crashes and What Capitalism Can Learn from the NFL, I argue that the reason for American capitalism's decline is our deep and abiding commitment to shareholder value maximization as the purpose of the firm. This theory has led to a massive growth in stock-based compensation for executives and to a naive and wrongheaded linking of the real market — the business of designing, making and selling things — with the expectations market — the business of trading stocks, options and complex derivatives. This tight coupling has led to a single-minded focus on the expectations market that will continue driving us from crisis to crisis — unless we change our approach.

The good news is that it is possible to take a much more thoughtful and effective approach to the intersection of the real and the expectations markets and to governance in general. We can end the destructive cycle by:

Restructuring executive compensation to focus entirely on the real market, not the expectations market — which means, yes, banning all stock-based incentive compensation, just as the NFL bans all betting on football by players in the real game.
Dramatically reducing interactions between players in the real game and those in the expectations market by, for instance, banning company guidance to analysts and eliminating the safe harbor provision of the Private Securities Litigation Reform Act.
Rethinking the meaning of board governance and role of board members, shifting their attention from maximizing shareholder value to maximizing customer-value creation.
Reining in the power of hedge funds and monopoly pension funds, eliminating the ability of pension funds to invest in hedge funds that charge both a base fee and a percentage of the upside (the famous 2&20 formula).

| More

Roger Martin's avatar Roger Martin
Roger Martin has served as dean of the Rotman School of Management since 1998. His research work is in Integrative Thinking, Business Design, Corporate Social Responsibility and Country Competitiveness. He writes extensively on design and is a regular columnist for the BusinessWeek.com Innovation and Design Channel. He is also a regular contributor to: Washington Post's On Leadership blog: the Financial Times' Judgment Call column: and Harvard Business Review's The Conversation blog.

In 2010, he was named one of the 27 most influential designers in the world by BusinessWeek. In 2009, he was named by The Times (of London) and a BusinessWeek "B-School All-Star" for being one of the 10 most influential business professors in the world. BusinessWeek also named him one of seven "Innovation Gurus" in 2005, and in 2004, he won the Marshall McLuhan Visionary Leadership Award.