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Fixing The Game: Bubbles, Crashes, And What Capitalism Can Learn From The NFL (2011)

by Roger L. Martin(Favorite Author)

3.66 of 5 Votes: 2

ISBN

1422171647 (ISBN13: 9781422171646)

languge

English

genre

Nonfiction

publisher

Harvard Business Review Press

review 1: Great book about the failures of capitalism in modern society that I had to pick up after seeing Roger Martin speak in person with an outstanding message about prioritizing long-term sustainability in the corporate world vs. short-term shareholder gains (quarterly stock performance). Martin’s prediction (/hope) is that we will soon see a return to the days of private/public hybrid companies (e.g. Rockefeller and Vanderbilt) where shareholders invest in privately run companies but hold no sway over the direction of the company so that long-term innovation is not sacrificed for the sake of short term returns (that benefit shareholders and not customers nor the company). Martin writes this novel in a very entertaining manner comparing capitalism to the way that commission... moreers run the NFL – ensuring that customer satisfaction is #1 (i.e. delight of the fans) and taking actions on a yearly and gradual basis to ensure compeition and parity so that every team has a fair chance at success – which has resulted in the NFL becoming a $33B business. Basically his proposal is to focus on the product (customers and public good) which will result in sustainable financial success, instead of the other way around which can deliver short term rewards but often at the expense of the primary objective and thus a loss of long-term success. A brief synopsis:- after the financial crises of 1929, 200, and 2008 our government took steps to prevent the specific abuses from happening again (more independence for auditors, executive compensation), which addressed symptoms but not the root cause of capitalism's failures: the fundamental objective to maximize short-term shareholder return. - cites a 1976 paper by 2 professors from Simon School of business entitled "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership structure" that formed the "principal/agency theory" - that shareholders are the principal owners of a firm and executives are the agents whose task should be to maximize shareholder value. Hence the movement to principal/agent roles with the executive as shareholder who is incentivized personally to create value, though that has not been the result: pre shareholder-value, TSR from 1933-1976 was 7.5%/yr. from 1976-2010 was 6.5%/yr.- draws a parallel between the real market (actual product sales/revenue) and the expectations market (stocks) as with football where you have real games (winners/losers) and a betting line based on expectations of how much a team should win by (cover the spread). As a team wins more and more, the spread they have to cover also increases since expectations are higher - would be ridiculous for a qb like Tom Brady to spend a post-game conference talking about how he should have scored more points to win by even more. Here in the nfl players are isolated from the expectations market and care only about the real one. In a real market, customers and this innovation in products/services are the central focus (winning). In the expectations market, traders and gaming are the focus.- 2nd chapter delves into the fundamental goal of a company that should be changed to delivering for the customer and not the shareholder. Examples given of J&J who puts the shareholder behind the customer politely (#4 in their credo), P&G who does so subtly, and Apple where Steve Jobs did so with open disdain. Examples given about how focusing on shareholder value often comes with a sacrifice to customers, but vice-versa does deliver shareholder value in the long term. NFL example given is one of constant governance what the 3 commissioners over the last 50years subtly have introduced slight shifts over time to make sure that the league has parity and balance between offense and defense - keeping the customer (fans) as priority #1 so that games stay exciting and competitive. Compared vs baseball who has had many commissioners that act in the interest of the owners and has lost viewership (and the nfl result has been a huge spike in team value long-term). J&J and P&G both outperformed companies as GE and coca-cola that espoused shareholder return as priority #1 during their famed ceo's tenures.- 3rd chapter is about the impact of earnings management where stock trading (expectations market) delivers absolutely nothing for the customer and only profits traders at the expense of others who are not able to get such a good deal. When a company's stock price increases, the only benefit is to the shareholder who can then sell at a higher price to someone else - the amount of money the company received to expand is the same.- hitting your projection has become paramount for a company: 75% of ceo's would abandon a 5yr npv positive project if it would affect meeting next quarter's expectations. Studies also show that a company is less likely to succeed if it earns more but lower than expectations vs earns less but beat expectations. Martin contends that putting executives responsible for releasing quarterly expectations adds zero value to society or the customer since so much time is spent artificially finding ways to make the numbers work. Shareholders derive no value either since so many pundits track results so carefully as to be able to offer accurate market projections anyways.- interesting study cited by Prof Lie of Iowa school of business that tracked stock compensation to Ceo's over 30years: these gifts are always preceded by a drop then by a rise. Ceo's are incentivized to make stocks drop upon taking the helm so they can be see as building stock price during their tenure.- chapter 4 about the perverse conflicts of interests of governing boards and how these are ultimately ineffective at curbing abuses or building value. Martin draws a good analogy in that directors need to be like judges - serve out of a duty to public service. Judges make less money than lawyers but are held in high esteem for serving the good of their profession.- chapter 5 about the 2&20 policy, whereby hedge fund managers claim 2% of all assets and 20% of stock gains, an incentive structure that pushes them to go for big bets only with the safety of knowing that they get 2% win or lose. This they are incentivized to increase volatility. Executives are incentivized to create perceived value in the expectations market rather than concrete value in the real market. Prior to 2&20, investors did just fine financially relying on only 2%.- Martin holds the position that betterment of companies is to not only place customers as priority over shareholders but also strive to build civil foundations at the expense of some profits. A bit of a Buddhist type thought here in focusing on authenticity. Like in "bonfire of the vanities", if you can't explain what you do as a bond trader to a child, then you probably don't add any real value to this world.- like the nfl, we should1) keep our players from betting on the games they play (I.e. Remove the conflict of interest of ceo's who can also trade their own stock)2) provide the right incentives to executives to focus on the real market instead of expectations market.3) consistently tweak the rules as the market evolves instead of having to catch up after many years of changing dynamics.4) focus on customer delight above shareholder return.5) rethink the role of governance boards6) focus on betterment of the world instead of short term profitsNo argument from me as to what to do - the real question is how? In the real world prisoner's dilemma is this even possible to do from the inside? With lobbying and special interest groups I think it's clearly not going to happen from outside (government) considering how many times we have tried after 2 crises in a decade.
review 2: There was a time when shareholders provided capital so that companies could exist so that companies could serve customers or some social need. Today, in the era of maximizing shareholder value, that equation has gotten flipped: companies exist solely to enrich shareholders, primarily by raising expectations and pushing up company stock prices and accomplishing this by whatever means necessary. If customers and society are served in the process, fine. But if customers and society need to be deceived, fleeced, or trampled over, that's also fine. Without being nostalgic for bygone days that were by no means perfect, this book offers a sane assessment of the shareholder-first market's structural problems, and more importantly offers ideas for the beginnings of solutions. less

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