John C. Bogle: The Battle for the Soul of Capitalism (Bogle is the founder of the Vanguard mutual funds.)
A commited capitalist and Republican, Bogle’s premise is that the current financial system is in need of an overhaul in approach and new regulation. The problem he sees is that stock ownership, which provides governance oversight of management, has become both so diffuse (lots of little owners) and so remote (via mutual funds, etc.) that owners don’t have the ability or interest in ownership duties. Because they don’t, “ownership capitalism” has been replaced with “management capitalism” and the executive suites are robbing owners by diverting unreasonably large amounts of owner returns to managements' own compensation. This is bad because the people taking the risk (owners investment $) aren’t getting appropriate returns and eventually the system will implode from manager greed.
Bogle presents a variety of recommended principles, including regulations requiring mutual fund companies to take a fudiciary trustee responsibility to maxmize investors return, just as a pension fund trustee has the same responsibility, as well as several recommendations for changes to give the investor owners real say in board composition and proxies for things directly affecting their ownership rights (as opposed to ordinary-course-of-business), such as executive compensation, etc.
An extensive section on how executives are not paid for performance and how the current compensation system is rigged to ramp up executive compensation regardless of results. He makes several proposals for compensation being based on out-performing peers or market results (so doing better than others even in a declining market is rewarded), indexed over time rather than fixed-price options.
I would like to have seen more specifics on how damaging excessive pay is to shareholder value, as opposed to generalities. He argues from the corrupting influence extraordinary returns have, plucked from the many headlines, and how they have devestated shareholder value. But even without near-total implosions ala Enron, I would have added things like:
- every $1M paid is 10 fully-loaded people, so paying an exec $10M extra is like killing a 100-person R&D team that would otherwise have been designing the next generation products; or that
- $10M, post tax is $7M which means (1) in less than a year they earned more then their typical employee will in their entire life and (2) they could retire immeditately and still live in the top 1% of the world for the rest of their life: on $350,000 a year!
