Roger Martin on Fixing the Game
Roger Martin, dean of Rotman School of Management at the University of Toronto, swung by our office this morning to talk strategy with Monitor partner, Steve Goldbach. Martin’s latest book, Fixing the Game, uses the NFL as a way to illustrate that it is actually possible to think about the global economy (and capitalism) in a responsible, less than destructive way. I live-tweeted the early morning affair; here are the collected tweets along with some extended comments:
“Roger Martin reflects that Occupy Wall Street is a reaction to fact that corporations have created damage rather than growth.”
“The problem society faces, says Roger Martin, is that the best way to become rich is to trade value, not create value.”
Asked to reflect on the Occupy movement (Zuccotti Park is a mere stone’s throw from where we were sitting), Martin said he thought those involved are asking a key question: why is it that organizations that are paying their executives so much money have created so much damage rather than a better economy, more jobs and growth? What protesters are responding to, he added, is the degree to which our economy has become a game of trading value, not creating value. There’s an important nuance here: this isn’t antipathy to the idea of wealth per se. “Americans in particular will cut slack to anyone creating net value,” he said. But the games of the market have become zero sum.
“Roger Martin schooling us on reality of stock market, incentives and pressure of expectations that can’t possibly be met.”
The pressure of stock-based competition causes executives to do crazy things. Martin hypothesized that Pfizer might find a cure for cancer and see its stock jump trillions of dollars. No chance to bask in the glow of, you know, curing cancer; the company would simply be under pressure to do the same again the very next quarter. That pressure is unsustainable.
“CDOs provided the first “infinite market”; at height of crash, derivatives accounted for 3x global economy.”
Never before in history have executives figured out how to keep expectations rising forever, Martin reminded us. That’s because in the main, real people had to buy the product. By creating synthetic credit derivatives such as CDOs, executives created the first infinite product, which they could slice and dice ad infinitum. Genius, right? Until it wasn’t.
“We take it on faith that heavy compensation creates organizational performance. There’s no proof for this.”
Behavioral economists are beginning to look into compensation theory, but for now, our assumption that high pay will result in “best” performance is based on nothing but our imagination. “There is no data; not a single study,” said Martin.
“P&G’s “kitchen logic”: baking soda in a fridge cleans your fridge, so baking soda in toothpaste must clean teeth. Actually no connection.”
I loved this story, from Martin’s experience at Procter & Gamble. “Kitchen logic” is where something feels right so it must surely work. Not so much. Baking soda toothpaste sells incredibly well… but it’s actually a “pretty crummy” product for cleaning your teeth.
“Looking at balance sheet/income statement has become the default. Companies are bad at describing strategy.”
“If you can’t talk about a company in more sophisticated ways, you look at the numbers. That’s the default,” said Martin. “Chimpanzees grunt because they can’t speak English. We can’t have a more sophisticated understanding of companies so we look at balance sheets and income statements.” There is a different way, he outlined: to understand a company’s strategy along qualitative dimensions. Sadly most don’t do this. “So we default to this base level chimp grunting and then we wonder why we get it wrong.”
“Roger Martin calls for ban of stock-based compensation and three tiers of capital gains tax, with 2x rate on short-term holding periods.”
Create three class of capital gains, he said. Long-term; two weeks to a year and then tax anything less than that at twice the normal rate, with a million dollar exemption that would mean that 98% of Americans would remain unaffected. The point, he said, would be to have a punishingly high taxation on short term holdings.
“The only useful reason for being on a board is to protect democratic capitalism.”
Martin, who’s on the board of companies such as Thomson Reuters and Research in Motion, professed that he doesn’t find serving in this capacity at all enjoyable. The question for him is why you’d want to add another layer of agents above company leadership. After all, board members are human, too.
“Focus on serving customers, not on maximizing shareholder value or on making money.”
“Have cause and effect straight in executives’ minds,” Martin advised. Teach them that if they keep focused on the initial goal of the company and serve customers, the money will take care of itself. “If I start thinking about money, it won’t take care of itself.” This might sound a little Pollyanna-ish, he acknowledged, but simply focusing on maximizing shareholder value will just create myriad other tricky problems.