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Martin discussing his book

One of the most influential papers defining the role of business, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” was coauthored in 1976 by Michael Jensen, the Jesse Isidor Straus Professor of Business Administration, Emeritus, and William Meckling.

Capitalism has been reeling ever since.

That’s the view of Roger Martin (MBA ’81) in his new book, Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL (Harvard Business Review Press). Martin is dean of the Rotman School of Management at the University of Toronto.

The paper argued that the structure of executive compensation and perks motivated CEOs and other top officers to feather their own nests at the expense of the business itself — the “principal-agent problem.” How much better it would be, Jensen and Meckling theorized, if executive comp was aligned with the interests of shareholders. If the company’s stock did well, executive pay would rise in concert. Thus was born the idea that CEOs should serve to maximize shareholder value, the mantra that has defined the business landscape and management education ever since.

And the result? Martin lays out a litany of misery: two economic collapses in 10 years (following 70 years of relative stability), the public’s growing distrust of business, an unending line of execs paraded on perp walks, and decreasing rather than increasing returns to investors.

“It’s a pretty sorry picture and one that has little chance of getting better with the current theories in place,” Martin writes. Clearly, maximizing shareholder value has not worked and needs to be replaced. The problem as Martin sees it is that CEOs game the system to prop up share price, what he calls the world of expectations, rather than managing the business itself, the world of reality.

To “fix the game,” five steps are necessary: put customers at the center of everything that firms do, eliminate stock-based executive compensation, rethink the role of corporate boards, use a strong regulatory hand to rein in the power of hedge funds, and encourage companies to contribute positively to society.

The National Football League is Martin’s exemplar because it does all it can do to improve the customer experience while ensuring its employees — players to owners — can’t rig the system. For example, the NFL constantly tweaks game rules and experiments with innovations such as a salary cap aimed at increasing competition. “In order to maximize customer delight, those responsible for regulating American capitalism must recognize that we will have to keep tweaking the game; otherwise, savvy players will inevitably game the game in ways that diminish the customer experience.”

Change the rules of capitalism? Something to mull over as you tune in your favorite football team this fall.

— Sean Silverthorne

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