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Executive Times |
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2006 Book Reviews |
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The
Battle for the Soul of Capitalism by John C. Bogle |
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Rating: |
**** |
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(Highly Recommended) |
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Click on
title or picture to buy from amazon.com |
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Lucidity Former
Vanguard CEO John C. Bogle presents a realistic summary of what has gone wrong
in recent years in corporate The failure of corporate
governance lies at the heart of why corporate The analogy between
national and corporate governance is fitting. Just as the Indeed, we have come
perilously close to accepting a system of dictatorship in corporate The republican system of
corporate governance has broken down. Too many hoards have failed to
adequately exercise their responsibilities of managerial oversight. Worse, it
was only the rare institutional investor that exercised its responsibilities
of corporate citizenship and demanded such oversight, insisting that managers
operate not in their own interest, but in the interest of the owners. In
short, the owners didn’t seem to care. When the owners of corporate Writing in The New Yorker a
few years ago, business columnist James Surowiecki
gave us an amusing but perceptive answer. He used the example of the 1956
comedy The Solid Gold Cadillac, in which Judy Holliday played Laura
Partridge, a small investor. Her continual harassment of the board of
directors finally forces the company to put her on the payroll as its first
director of investor relations. She quickly uses the position to organize a
shareholder revolt that topples the corrupt CEO. As Surowiecki
concludes: “American companies are the most productive and inventive in the
world, but a little adult supervision [by the owners] wouldn’t hurt. Laura
Partridge had it right a half a century ago: ‘Somebody’s gotta
keep an eye on these geniuses.” Under our governance
system, the board of directors is the first “somebody.” It is the board that
is charged with holding management responsible to represent the interests of
shareholders. And when the directors don’t fulfill that responsibility, the
second “somebody” must hold the board accountable: the shareholders
themselves. If the directors do not provide the necessary “adult supervision”
required to move us away from the existing system of managers’ capitalism
that we never should have allowed to come into existence in the first place,
then it is up to the shareholders to do so. As owners, they have the right to
vigorously demand a return to the system that began all those years ago, a
system in which trusting and being trusted created a virtuous circle of
progress. Only the owners can return us to owners’ capitalism. This is not to say that the
long history of capitalism has been bereft of aberrations. The Robber Barons
of the late nineteenth century, the competition-stifling business trusts of
the early twentieth century, the utility-holding companies
of the 1920s, all were betrayals of trust. But the ugly deviations from fair
play in the recent era represent a new breed of corruption. It required only
two ingredients: 1. The diffusion of corporate ownership among a large number of
investors, none holding a controlling share of the voting power. 2. The unwillingness of the agents of the owners—the boards of
directors—to honor their responsibility to serve, above all else, the
interests of their principals—the shareowners themselves. The Modern Corporation and
Private Property The issue of widely
diffused corporate ownership was first examined systematically in 1932, as
the stock market was tumbling to its nadir in the Great Crash of 1929—33.
During this period, an astonishing 90 percent of the market value of Their principal
conclusions: • Most fundamental of all, the position of ownership has changed
from that of an active to that of a passive agent. The owner now holds a
piece of paper representing a set of rights and expectations with respect to
an enterprise, but [he] has little control. The owner is practically
powerless to affect the underlying property through his own efforts. • The spiritual values that formerly went with ownership have
been separated from it. Physical property capable of being shaped by its
Owner could bring to him direct satisfaction apart from the income it yielded
in more concrete form. • The value of an individual’s wealth is determined on the one
hand by the actions of the individuals in command of the enterprise—
individuals over whom the typical owner has no control—and on the other hand,
by the actions of others in a sensitive and often capricious market. The
value is thus subject to the vagaries and manipulations characteristic of the
marketplace. • The value of the individual’s wealth not only fluctuates
constantly, but is subject to a constant appraisal. The individual can see
the change in the appraised value of his estate from moment to moment, a fact
which may markedly affect both the expenditure of his income and his
enjoyment of that income. • Individual wealth has become extremely liquid through the
organized markets, convertible into other forms of wealth at a moment’s
notice. • Finally, in the corporate system, the “owner” of industrial
wealth is left with a mere symbol of ownership while the power, the responsibility,
and the substance which have been an integral part of ownership in the past
are being transferred to a separate group in whose hands lies control.2 Berle and Means, insightful prophets of how
corporate control would evolve, had identified a problem that would plague
modern capitalism, a problem that has yet to be resolved. But in that era of
deeply depressed stock prices, with corporations struggling to achieve
profitability, perhaps even an era in which standards of business conduct
were higher (albeit not without some notorious abusers), their warnings
gained little public notice. Only decades later, in a booming stock market
environment that was aided and abetted by the happy conspiracy among
virtually all market participants, did we realize the residual effects that
arose from passive ownership by shareholders, including excessive management
compensation, managed earnings, and merger mania. The worst potential abuses
of managers’ capitalism became stark realities. When most owners either
don’t or won’t or can’t stand up for their rights, when directors lose sight
of whom they represent, and when financial manipulation is unchecked by the
system’s gatekeepers, corporate managers quickly step in to fill the void,
confirming Spinoza’s claim that “nature abhors a vacuum.” Little good is
likely to result when the CEO becomes not only boss of the business but boss
of the board, erasing the bright line that common sense tells us ought to
exist between management and governance. Put more harshly, in an unattributed quote that I came across a few years ago,
“when we have strong managers, weak directors, and passive owners, don’t be
surprised when the looting begins.” Adam Smith, that patron
saint of capitalism, would not have been surprised by this outcome. More than
two centuries ago, he wrote: “It cannot be well expected that the directors
of companies, being the managers rather of other people’s money than of their
own, should watch over it with the same anxious vigilance with which partners
in a private copartnery frequently watch over their
own. Like the stewards of a rich man, they. . .very
easily give themselves a dispensation. Negligence and profusion must always
prevail.”3 Adam Smith’s words
presciently describe corporate The Failure of the
Gatekeepers: Directors Stock owners have
traditionally relied on a whole bevy of gatekeepers to ensure that
corporations would be operated with honesty and integrity, and in their
interests. During the Great Bull Market of 199 7— 2.000, however, we
witnessed a fatal breakdown among all of these gatekeepers. Independent
auditors became business partners of management. The investment community put
aside its professionalism, its traditional skepticism, and even its
independence. Government regulations were relaxed. Our elected public
officials not only didn’t care but actually stood by, aiding and abetting the
malfeasance Worst of all, corporate directors, who should have constituted
the front line of defense against management overreaching failed to fulfill
their responsibilities. Directors are the most
important of the gatekeepers that society relies on to keep corporations
functioning productively, efficiently, and honestly. Given the business saavy of board members, their joint perspective, and
their intimacy with the particular organization they serve, they are well
placed to intervene when necessary, on behalf of shareholders. But corporate
boards often seemed reluctant, unwilling, and perhaps even unable to govern
with a firm hand. As a result, our directors must assume a major portion of
the responsibility for the problems that developed in corporate Despite being the elected
representatives of the owners, boards of directors looked on the proceedings
with benign neglect, apparently unmindful of the impending storm. Lightning
first struck Enron. When the firm collapsed in November 2.001, the New York
Times described it as a “catastrophic corporate implosion . . . that
encompassed the company’s auditors, lawyers, and directors . . . regulators,
financial analysts, credit rating agencies, the media, and Congress . . . a
massive failure in the governance system.”4 Other dominoes soon
fell, including WorldCom, Adelphia, Global
Crossing, and Tyco. In the years that followed, still more disreputable
companies were to surface. The straight forward language Bogle uses in The
Battle for the Soul of Capitalism, leaves
readers with a choice on every page: agree or disagree. Present an
alternative, or accept the premise. Some readers will take offense at some of
Bogle’s shots. Many will find his perspective
refreshing, his ideas beneficial, and his solutions achievable. Steve Hopkins,
January 25, 2006 |
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The recommendation rating for
this book appeared in the February 2006
issue of Executive Times URL for this review: http://www.hopkinsandcompany.com/Books/The
Battle for the Soul of Capitalism.htm For Reprint Permission,
Contact: Hopkins & Company, LLC • E-mail: books@hopkinsandcompany.com |
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