Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL [Englisch] [Gebundene Ausgabe]

Most business books are excruciatingly boring for anyone with even a rudimentary social science background. Business authors value clever turns of phrase over deep argumentation; platitudes masquerade as insights; there are lists, lists, lists everywhere. Read against the background noise of recent business books, Martin's "Fixing the Game" is a welcome departure that harkens back to Peter Drucker's classic works. Most importantly (to me at least) Martin sticks close to the data. Ideas are great; we need ideas, and everyone should have at least one. Martin puts his and other people's ideas to the test using real data on the performance of US companies and the US economy over the past half-century, and Martin's ideas come out on top -- and no, not because he fixes the game!

Martin's title, "Fixing the Game," is a double-entendre: he wants to fix the game of the American economy by making it work better for shareholders, employees, and communities, and he shows how CEOs have instead "fixed" the game to ensure they take the bulk of company profits for themselves. What Martin wants is for government to take a greater role in ensuring that public companies are run for public, not private gain. Square in his sights is the "shareholder value" theory of management, which, Martin shows, is anything but. In implementing strategies that have supposedly been designed to enhance shareholder value, American CEOs have actually destroyed enormous shareholder value while enriching themselves.

A major focus of Martin's analyses is executive compensation. Executive compensation has mushroomed in the shareholder value era mainly through mechanisms that were supposed to align the interests of executives with those of their shareholders, particularly the granting of share options as a major portion of executive compensation. The problem, as Martin makes clear, is that share options allow CEOs to share all of their shareholders' upside gain but none of their shareholders' downside pain. As a result, CEOs have enormous incentives to pursue risky, potentially company-destroying strategies in hope of big payoffs if they bet correctly. Corporate CEOs today practice a new kind of heads-I-win, tails-you-loose capitalism.

If there's a shortcoming in Martin's analyses, it's that he fails to identify what is to me the key fault of the goal-alignment thesis: the idea that there is any need to directly incentivize CEOs to work harder to meet company financial goals. I think it's safe to say that no one succeeds in business to the point of becoming a Fortune 500 CEO without a very driven personality, a very strong work ethic, and a laser-like focus on company performance. Any board that hires a laid-back, lazy, scatterbrained CEO deserves to see their company run into the ground. It simply boggles the mind to think that if you didn't give a Jack Welch or Jamie Dimon stock options he wouldn't work hard for the company. Maybe supermarket clerks need to be incentivized to sell bonus cards, but CEOs do not need to be incentivized to pursue profits. Although Martin's data are completely consistent with this point of view, he never makes the point himself.

A final note: though Martin does repeatedly turn to the NFL as an example of a well-regulated market, the NFL analogies aren't really strong enough or ubiquitous enough to justify the book's subtitle. This is not primarily a book about what capitalism can learn from the NFL. It's in there, but it's not the topic of the book (as the subtitle would imply). Ditto bubbles and crashes. This is fundamentally a book about appropriate incentives, appropriate regulation, and effective management. Don't buy the book for the subtitle, but buy the book. It's one of the best I've read. Finally -- an intelligent business book.

Salvatore Babones
[...]

Many years ago, Oliver Wendell Holmes is reported to have observed, "I wouldn't give a fig for simplicity on this side of complexity but I would give my life for simplicity on the other side of complexity." I recalled that observation as I began to read Roger Martin's latest book. With consummate skill, he enables an economics neophyte such as I to complete a journey that began in almost total ignorance and eventually reached a point at which a sound (albeit basic) understanding of key economic issues has been developed. The "game" to which the book's title refers is an economic system that based on theories that assume that "focusing on shareholder value maximization using stock-based compensation" will give shareholders a better deal when, in fact, these theories "have the ability to destroy our economy and rot out the core of American capitalism."

The repairs that are urgently needed (i.e. the "fixing" of that system), Martin asserts, require that the "expectations game" end, replaced by the re-establishment of a real market. Why? "The real market produces a positive-sum game for society. Everyone can be better off as more and more value is created for customers. In contrast, the expectations market produces a gigantic zero-sum game." The real market also produces meani9ng and motivation for organizations and their leaders, cobtri9butes to a sense of authenticity for individuals, and in general, Martin submits, "a real market orientation creates individual and societal good, while the expectations orientation creates a downward spiral that threatens both individual well-being and the health of our economy."

Martin provides a brief but remarkably insightful review of economic history that helps to create a frame of reference, a context, for his criticism of the focus on creating value for shareholders rather than for customers. It also helps to introduce the five action steps he proposes:

1. Shift companies' focus back to the customer.
2. Restore authenticity to the lives of executives.
3. Address the deficiencies of board governance
4. Regulate and manage expectations players more effectively, "most notably hedge funds. Net, hedge funds create no value for society."
5. Finally, business executives "need to take on a more expansive and positive view of the role of for-profit companies in society."

With characteristic precision and clarity, Martin explains (a) what must be done as well as what must not be done, (b) why changes must be made, and (c) how to proceed. His is a "bold vision" for companies and executives, to be sure, but he obviously agrees with Thomas Edison that "vision without execution is hallucination." As indicated in all of his articles and books, Martin is a results-driven visionary. Consider these comments in the final chapter:

"There is a superior option, one that only a fraction of senior executives choose to embrace. It is to contribute to strengthening the civil foundation, going beyond the laws and regulations already in place and the norms and conventions already prevailing. This means venturing into the frontier of initiatives that have not yet been attempted but that hold the promise of making the world a better place. It means truly taking the lead on initiatives that mean more than profits."

That brief excerpt helps to suggest the bold vision to which I referred earlier. Roger Martin is convinced that the core of business and capitalism can be restored but he is well-aware of all the perils that await those who aspire to achieve that worthy objective. Some of the rules of the "game" must be changed, others preserved, and all of them enforced. The competition must be located in a real market rather than one whose results are determined by expectations. Throughout the narrative, Martin cites lessons to be learned from the N.F.L., such as "keeping players from betting on the games they play" (i.e. executive compensation with stock-based incentives and rewards). At least some of what Roger Martin recommends can be accomplished by individuals but, as he fully understands, the institutional transformations needed can only be accomplished by a public-private coalition whose nature and extent would be unprecedented.

Roger L. Martin, dean of the Rotman School of Business at the University of Toronto, is fighting to change the way we think about and teach management. His newest book, Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL, has its origins in a fine, prescient article he wrote for Barron's in 2003 and is one of the very few business books that is better for the expanded treatment.

Martin sets out to show why capitalism in America has gotten into trouble over the past few decades. He argues that agency theory, derived from neoclassical economics, together with the gospel of shareholder value, has led to managers being compensated for doing the wrong things. Stock-based compensation, for example, focuses executives on expectations markets rather than real markets, where customer value is created. It is this focus on maximizing what should be an ancillary goal that has led to the marginalizing of customers as "marks" to be exploited.

Martin says that executives fix the game of business and try to manage expectations in much the same ways professional athletes would, if they were allowed to bet on games in which they play. Executives indulge in the business equivalents of "point shaving" (sacrificing a few points of advantage to win a game by a lower margin than expected) and "tanking" (making results appear worse than they are to lower expectations and make beating them easier).

The unintended consequence of agency theory, according to the author, has been the creation of a business environment that is akin to a casino, with zero-sum gambling games in which executives win and everyone else loses. Hence the lessons that capitalism (presumably in the guise of regulators) can learn from the National Football League (NFL): Keep real and expectations markets separate (players are banned from gambling), and focus on creating customer value, continually adjusting the playing field to ensure that the players concentrate on improving their performance in the real game.

This real game should be a positive-sum one that has meaning and motivation. Martin thinks that transactional communities have largely replaced the communities of long-term interest, with which public company executives once identified and to which their companies once catered. This has forced executives to lead inauthentic lives, becoming people that they are not, in order to satisfy the desires of an unhealthy, insatiable community of gamblers and speculators. Martin would restore authenticity by having executives focus on creating customer value, a worthy, challenging goal that includes providing a fair return for shareholders.

Many readers will consider Martin's battle plan radical. One of his immediate recommendations is the repeal of "safe harbor" provisions that protect company executives from accepting accountability for their forecasts. He also suggests that accounting rules such as FASB 142 (which mandates goodwill write-downs if share prices fall) be amended to focus only on changes in real markets, removing the need to manage expectations to avoid write-downs. He also wants to outlaw stock-based compensation except for long-term grants that would vest only several years after the recipient's retirement. Anything less, Martin writes, will lead to bubbles and crashes, more corporate scandals, and lower shareholder returns.

Martin turns his attention to corporate governance by contrasting the murky state of governance in Major League Baseball (MLB) -- where the commissioner is also an owner -- with that in the NFL. He finds that the NFL has shown continuity, purpose, and diligence in the provision of a compelling customer experience. In contrast, MLB has not focused on its customers, running the league for the benefit of the owners and players rather than the fans. As a result, growth in the popularity of football has outpaced that of baseball over the past three decades.

The problem with corporate directors, who Martin likens to the MLB governors, is that they lack both the capability and the incentive to serve outside stakeholders. This leaves them susceptible to the same temptations as executives -- perquisites, compensation, prestige, and so on -- all of which makes it highly unlikely that they will oppose the CEO on behalf of outsiders. He would have the job descriptions of directors changed so that they focused on customer value and public service, with directors acting like judges, protecting the long-run interests of the community at large, rather than the narrow interests of shareholders. However, the mechanism for this change is unclear.

In the book's penultimate chapter, the author attacks the hedge fund industry and its 2/20 fee formula (2 percent of assets under management and 20 percent of any gains), which he characterizes as predatory. In venture capital and leveraged buyout contexts, the formula is acceptable; any upticks can come only from an increase in real value. In the zero-sum world of hedge funds, however, gains come only if others lose. Thus, Martin believes that hedge funds perform no socially useful function, promote market volatility, and are parasitic. He recommends that they be outlawed or, failing that, taxed to suck excess profitability out of the industry and compensate the community at large for the damage they cause. It's bold recommendations like these, backed by reasoned arguments -- together with Martin's call for collective action to protect capitalist society's civil foundations -- that make Fixing the Game my pick for the best management book of the year.