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.
A Resurrected Russian
In Adapt: Why Success Always Starts with Failure, Tim Harford, an economics columnist for the Financial Times, describes the economy as “an evolutionary environment in which a huge variety of ingenious profit-seeking strategies emerge through a decentralized process of trial and error.” His key conclusion is that evolution is much smarter than we are; therefore, to be successful we must use evolutionary methods.