Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. Roger L. Martin. Harvard Business Review Press 2011, 251 pp. $24.95 Critics have blamed the financial crisis of 2007-09 on everything from greedy bankers and the deregulation of the financial sector to the policy of encouraging homeownership at all costs, even to [...]
Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. Roger L. Martin. Harvard Business Review Press 2011, 251 pp. $24.95
Critics have blamed the financial crisis of 2007-09 on everything from greedy bankers and the deregulation of the financial sector to the policy of encouraging homeownership at all costs, even to people with poor credit histories and with little realistic hopes of ever paying off their mortgages. In Fixing the Game, Roger L. Martin, dean of the Rotman School of Management at the University of Toronto, argues that merely scapegoating bad actors misses the big picture. Instead, he contends that at root of the 2008 crash is a systemic problem in American capitalism. He boldly contends that we must rethink the “theories that underpin American capitalism. Our theories about the fundamental goal of corporations about the fundamental goal of corporations and the optimal structure of executive compensation are fatally flawed and have created stock market upheavals.” To solve the financial crisis, argues Martin in this somewhat quixotic book, we must look to the National Football League (NFL).
Martin’s main – and radical – argument is that American capitalism should reject the prevailing business theory, famously enunciated by Jensen and Meckling in their seminal 1976 paper “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” that “the singular goal of a company should be to maximize the return to shareholders.” Indeed, Martin argues that “[w]e must eliminate stock-based incentive compensation and create new models that focus executives on real and meaningful goals.” To argue his point, Martin repeatedly contrasts the real market, where factories are built, goods are produced, and expenses are paid, with the expectations market, “the world in which shares in companies are traded between investors – in other words, the stock market.” Martin believes that the post-1976 shift to executive stock-based compensation, or compensation based in the expectations market, has been detrimental for American business. In American business today, CEOs are compensated not based simply on their performance in the real market, but by their ability to raise expectations; i.e., to raise the stock price. This, he argues, is problematic. It gives executives an incentive to leave or retire when expectations are high. At worst, stock-based compensation is to blame for the post-1976 dramatic “incidence of large-scale accounting fraud by public companies.” This last point, while intriguing, is very debatable and merits further empirical study.
If the problem is stock-based executive compensation, wherein lies the solution? Martin’s answer: football, America’s most widely viewed and most profitable professional sport. While he acknowledges that the NFL “isn’t a perfect metaphor for business,” he does contend, however, that American business has a lot to learn from how “the NFL managed the division between the real and expectations market in a manner that is exactly the opposite way we have managed it in business.” In Martin’s view, the NFL’s real market is the actual game itself when two teams compete on the gridiron. The NFL’s expectations market is gambling, wherein Las Vegas bookmakers balance the bets on both sides through the point spread. In a provocative comment surely to perplex those who would argue that investing in the stock market is different from betting on Tampa Bay, Martin states that “[t]he point spread in football is the analog to a stock price in business.” Martin correctly notes that quarterbacks aren’t based upon their performance vis-à-vis the point spread. Indeed, we would find such a compensation system to be unworkable. Martin’s point, however, is that American CEOs, in contrast with quarterbacks, are compensated against expectations. “The problem is, in American capitalism, CEOs are compensated directly and explicitly on how they perform against the point spread; that is, against expectations.”
Martin’s argument, while certainly thought-provoking, ultimately fails to persuade. First, the NFL is such a distinct and unique entity in American business that it is hardly a workable model for much of anything else. One need not be an ardent proponent of the free market to be skeptical of an organization that has instituted a salary cap, a revenue sharing agreement among winners and losers, and a free agency system that has no analog in the American labor market. Free market advocates would rightly bristle at Martin’s contention that “American capitalism needs the moral equivalent of an NFL commissioner to weed out existing incursions of the expectations market into the real market—like the safe harbor provision and FASB 142—and to guard against any new attempted incursions.” Outside of the realm of professional sports, however, the NFL commissioner would be something more akin to a Soviet commissar than a presidentially appointed agency head accountable to Congress.
Furthermore, while the NFL is to be commended for its ultimate objective of creating a good product for the fans, namely competitive games that are enjoyable to watch, the League is not afraid to play, for lack of a better term, hardball when it comes to its finances. Witness the NFL’s spurious –and unsuccessful – attempt in the American Needle case to persuade the Supreme Court that it should be considered a single entity for antitrust purposes. Furthermore, the ongoing labor unrest and the legal squabbling between owners and players hardly make the NFL worth emulating. Working American families have little sympathy for millionaire owners and millionaire players arguing over who gets a larger slice of what is a very large pie.
In conclusion, Fixing the Game is thought provoking and worth consideration by those interested in the regulation (or deregulation, as the case may be) of executive compensation. That said, the chances that American business will readily adopt Martin’s NFL model are extremely slim. Any attempt by Congress or regulators to impose such a model on American business would be anathema to the free enterprise system. Stock-based executive compensation may be flawed. There might be a better way of paying CEOs, but that is for individual companies to decide on their own. The NFL’s business model works well enough for the NFL.
Review by Jon Lewis © 2011