April 26, 2009
By Robert L. McMahon
Within a week we have seen two extraordinary Op-Ed’s in The Wall Street Journal. On April 20th we had John Bogle, founder and former chief executive of the Vanguard Group of Mutual Funds, writing a brilliant piece titled A Crisis of Ethic Proportions and on April 24th we had Michael Jacobs, a professor at the University of North Carolina’s Kenan-Flagler Business School, writing the incisive How Business Schools Have Failed Business. Both pieces are exceptional in their timeliness and subject matters, and both point the way forward in how we need to improve our professional investment management communities.
John Bogle’s perspective is that our financial and business communities have drifted further and further away from an “ownership society” and more toward an “agency society”. He lays out the usual suspect causes, those the financial media discuss, as the proximate cause of our current financial debacle: credit, financial risk, the over reliance on securitization to mitigate risk (which actually compounded the problem), the extraordinary leverage which encouraged outsized risk for outsized rewards, the overreliance on complex, esoteric derivatives, and, naturally, the failures of our regulatory bodies in performing their duties. In reality though, these are merely symptoms of the disease in our financial markets, “agencyitis”.
The greater cause he see’s is much more painful for us to think about, yet much more menacing if we continue to ignore it; and that’s how the further away from an ownership society we move, the further away from a capitalist society we also drift. He goes on to say, “But the larger cause was our failure to recognize the sea change in the nature of capitalism that was occurring right before our eyes. That change was the growth of giant business corporations and giant financial institutions controlled not by their owners in the “ownership society” of yore, but by agents of the owners, which created an “agency society”.”
In this world the “managers” of the corporations could more readily put their own interests ahead of the owners, i.e. “the shareholders”. And just who are these shareholders today? They’re the professional investment managers of America who control, through agency, some 75% of all shares of publicly traded companies and who, by the way, vote in near lock-step with management on proxy issues and directors at these same publicly traded companies. If you want to blame somebody for the idiocy you see before your eyes daily on CNBC talk to your investment managers! In John Bogle’s words, “They fostered the crisis with superficial security analysis and research and by ignoring corporate governance”.
And this is where we divert our conversation to Professor Michael Jacobs' Op-Ed on how business schools have failed American business. He posits that our American business schools have undereducated our graduate students in three keys areas: compensation schemes, corporate board accountability, and the rights and obligations of shareholders (emphasis added here by R. McMahon). Let’s stay with item three here, for John Bogle’s sake, because it has the most to do with capitalist ownership.
As Prof. Jacobs writes, “About 70% of the shares of American corporations are held by institutional investors such as pension and mutual funds. These organizations are brimming with MBA’s. But how many of these MBA’s took a class devoted to how shareholders should exercise their rights and obligations as the owners of America’s corporations? .... When shareholders are uneducated about their obligations, how can a corporate accountability system function properly?” Or as I like to rhetorically say, “When everybody owns General Motors, nobody owns General Motors.” Yes. You can safely blame every investment firm in America for GM’s demise. They stood by, quietly, head in the sand, fingers in their ears as the corporation that won World War II killed itself, very publicly, on CNBC. God, how I loved the lines and sound of that 1967 GTO and my Mom’s 1967 Impala…
In the end capitalism requires owners, individuals engaged in enterprise for profit, for gain, for growth. Nothing I’ve read could beat the quote that John Bogle includes in his Op-Ed when he cites capitalisms “grand old man”, Adam Smith:
“Managers’ of other people’s money rarely watch over it with the same anxious vigilance with which they watch their own….they….very easily give themselves a dispensation. Negligence and profusion must always prevail.”
Within a week we have seen two extraordinary Op-Ed’s in The Wall Street Journal. On April 20th we had John Bogle, founder and former chief executive of the Vanguard Group of Mutual Funds, writing a brilliant piece titled A Crisis of Ethic Proportions and on April 24th we had Michael Jacobs, a professor at the University of North Carolina’s Kenan-Flagler Business School, writing the incisive How Business Schools Have Failed Business. Both pieces are exceptional in their timeliness and subject matters, and both point the way forward in how we need to improve our professional investment management communities.
John Bogle’s perspective is that our financial and business communities have drifted further and further away from an “ownership society” and more toward an “agency society”. He lays out the usual suspect causes, those the financial media discuss, as the proximate cause of our current financial debacle: credit, financial risk, the over reliance on securitization to mitigate risk (which actually compounded the problem), the extraordinary leverage which encouraged outsized risk for outsized rewards, the overreliance on complex, esoteric derivatives, and, naturally, the failures of our regulatory bodies in performing their duties. In reality though, these are merely symptoms of the disease in our financial markets, “agencyitis”.
The greater cause he see’s is much more painful for us to think about, yet much more menacing if we continue to ignore it; and that’s how the further away from an ownership society we move, the further away from a capitalist society we also drift. He goes on to say, “But the larger cause was our failure to recognize the sea change in the nature of capitalism that was occurring right before our eyes. That change was the growth of giant business corporations and giant financial institutions controlled not by their owners in the “ownership society” of yore, but by agents of the owners, which created an “agency society”.”
In this world the “managers” of the corporations could more readily put their own interests ahead of the owners, i.e. “the shareholders”. And just who are these shareholders today? They’re the professional investment managers of America who control, through agency, some 75% of all shares of publicly traded companies and who, by the way, vote in near lock-step with management on proxy issues and directors at these same publicly traded companies. If you want to blame somebody for the idiocy you see before your eyes daily on CNBC talk to your investment managers! In John Bogle’s words, “They fostered the crisis with superficial security analysis and research and by ignoring corporate governance”.
And this is where we divert our conversation to Professor Michael Jacobs' Op-Ed on how business schools have failed American business. He posits that our American business schools have undereducated our graduate students in three keys areas: compensation schemes, corporate board accountability, and the rights and obligations of shareholders (emphasis added here by R. McMahon). Let’s stay with item three here, for John Bogle’s sake, because it has the most to do with capitalist ownership.
As Prof. Jacobs writes, “About 70% of the shares of American corporations are held by institutional investors such as pension and mutual funds. These organizations are brimming with MBA’s. But how many of these MBA’s took a class devoted to how shareholders should exercise their rights and obligations as the owners of America’s corporations? .... When shareholders are uneducated about their obligations, how can a corporate accountability system function properly?” Or as I like to rhetorically say, “When everybody owns General Motors, nobody owns General Motors.” Yes. You can safely blame every investment firm in America for GM’s demise. They stood by, quietly, head in the sand, fingers in their ears as the corporation that won World War II killed itself, very publicly, on CNBC. God, how I loved the lines and sound of that 1967 GTO and my Mom’s 1967 Impala…
In the end capitalism requires owners, individuals engaged in enterprise for profit, for gain, for growth. Nothing I’ve read could beat the quote that John Bogle includes in his Op-Ed when he cites capitalisms “grand old man”, Adam Smith:
“Managers’ of other people’s money rarely watch over it with the same anxious vigilance with which they watch their own….they….very easily give themselves a dispensation. Negligence and profusion must always prevail.”
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