That is scary for companies.
It is. And the reason it is scary is because of the education of this generation of managers. They have been educated to believe that the prudent thing to do, the wise thing to do, the stable thing to do, the correct thing to do, is to be analytical. They think they are being sloppy managers if they don’t.
Analysis is useful for honing and refining what we have already but will never get us to leap to something genuinely new and different.
There are lots of people out on the streets calling for a change to the capitalist system. You wrote the book Fixing the Game this year on that issue. What do you recommend?
We have a capitalist system that is dragged around like a bull with a nose ring on it by the expectations market – the stock market. The price of a stock is the collective expectation of people playing in the stock market of what will happen to the company in the future. It’s divorced from the real market, which is what companies actually do to produce real products and make a buck this year. We know there is a difference between the two as the S&P 500 over the course of its history has traded at about 16 times current earnings, which means 15 times earnings are all about future expectations.
With the coming of stock-based compensation – executives compensated on the basis of the performance of the stock market price – we have executives working more on shaping expectations than on actual performance. They hype their stock on Wall Street, concoct a series of mergers they shouldn’t, or opt for sharp if not illegal accounting and out-and-out fraud – to goose expectations rather than build real companies. That has created the last two bubbles and crashes. We went over 70 years from the third-last crash in 1929 to the second-last crash in 2001, but only seven years to the 2008 crash; they were both exacerbated by stock-based compensation and this extreme focus on the expectations market.
It will be hard to change but I think it’s doable. We need boards to recognize that stock-based compensation does not align the interest of shareholders and management. It disaligns their interest and it’s bad for companies. We have to make sure that hedge funds can’t make gobs of money and pay significantly lower taxes than the rest of us, because hedge funds create no value – they simply shuffle value around and are bad for the economy. We have to get pension funds to stop feeding these hedge funds by forbidding pension funds from investing with managers who charge both an asset management fee, 2 per cent of the assets, plus a performance fee, 20 per cent of the upside, because that is completely disaligned with the interests of pensioners and is extremely dangerous, making our markets more volatile.
I think the angst and anguish about the economy these days is not misplaced. There is a realization that the expectations market is wrecking the lives, jobs, homes and mortgages of real people for no utility to society as a whole.
Who do you turn to for reading, wisdom and learning on management?
The greatest thought leader in the history of business is Peter Drucker. Rereading Peter Drucker is almost better than reading anybody else. I am also a former close colleague of Mike Porter and have done lots of work with him; I think he is super-insightful and intelligent. He has written the best stuff on health care and country competiveness, so I pay attention to him. I have become a huge fan of Dan Pink. His books A Whole New Mind and Drive are terrific.
This interview has been condensed and edited.