The Battle for the Soul of Capitalism

The Battle for the Soul of Capitalism

John C. Bogle
Copyright Date: 2005
Published by: Yale University Press
Pages: 288
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  • Book Info
    The Battle for the Soul of Capitalism
    Book Description:

    There is no one better qualified to tell us about the failures of the American financial system and the grotesque abuses that have taken place in recent years than John Bogle, who as founder and former chief executive of the Vanguard mutual funds group has seen firsthand the innermost workings of the financial industry. A zealous advocate for the small investor for more than fifty years, Bogle has championed the restoration of integrity in industry practices. As an astute observer and commentator, he knows that a trustworthy business and financial complex is essential to America's continuing leadership in the world and to social and economic progress at home.This book tells not just a story about what went wrong but, more important, the story of why we lost our way and of how we can right our course. Bogle argues for a return to a governance structure in which owners' capital that has been put at risk is used in their interests rather than in the interests of corporate and financial managers. Given that ownership is now consolidated in the hands of relatively few large mutual and pension funds, the specific reforms Bogle details in this book are essential as well as practical. Every investor, analyst, Wall-Streeter, policy maker, and businessperson should read this deeply informed book.

    eISBN: 978-0-300-13483-4
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
    (pp. ix-x)
    Peter G. Peterson

    Some, particularly those from the financial services industry, might say that Jack Bogle is cantankerous. Perhaps, but we now know that had we heeded his persistent warnings about a troubled financial system we may well have avoided the stock market losses and corporate scandals we have witnessed in recent years. We now know that on many matters he was right and others were wrong.

    “Cantankerous” simply may be a hapless attempt by some with interests to protect to dismiss a man who has done so much to elevate the standards of conduct in business over the years. Indeed, if cantankerous,...

    (pp. xi-xiv)
  5. INTRODUCTION: Capitalism and American Society
    (pp. xv-xxiv)

    As some readers will recognize, that paragraph, aptly describing our nation as the twenty-first century began on January 1, 2001, is a play on the words of the famous opening paragraph of Edward Gibbon’s 1838 epic,The Decline and Fall of the Roman Empire.And yet, Gibbon continued, “the Roman Empire would decline and fall, a revolution which will be ever remembered and is still felt by the nations of the earth.”¹ By the end of his epic, the Roman Empire was no more. Constantinople had fallen, the fruitful provinces overwhelmed by Vandals; Britain was lost; Gaul was overrun; and...

    • [PART ONE Introduction]
      (pp. 1-2)

      We begin with an analysis of what went wrong in corporate America, reflected in “a pathological mutation” from traditional owners’ capitalism to a new form, managers’ capitalism. While the modern world of business was built on a system of trusting and being trusted, societal changes produced a new “bottom line” society whose attributes included grossly excessive executive compensation and stock options, part of an enormous transfer of wealth from public investors to the hands of business leaders, corporate insiders, and financial intermediaries during the stock market boom and bust.

      Much of the responsibility for this subversion of capitalism lies in...

    • CHAPTER 1 What Went Wrong in Corporate America? “A Pathological Mutation”
      (pp. 3-28)

      The great stock market bubble of 1997–2000, and the great crash that inevitably followed, are poignant reminders of the periodic but random aberrations described in Charles MacKay’s 1885 epic history of speculation,Extraordinary Popular Delusions and the Madness of Crowds.Each burst of madness, of course, is different, but each yields similar adverse consequences. The most recent episode witnessed the culmination of an era in which our business corporations and our financial institutions, working in tacit harmony, corrupted the traditional nature of capitalism, shattering both confidence in the markets and the accumulated wealth of countless American families. Something went...

    • CHAPTER 2 Why Did Corporate America Go Wrong? “Somebody’s Gotta Keep an Eye on These Geniuses”
      (pp. 29-46)

      The failure of corporate governance lies at the heart of why corporate America went astray. As James Madison wrote inThe Federalist Papersin 1788, “If men were angels, no government would be necessary.” Similarly, in describing capitalism today, we could aptly say, “If business executives were angels, no corporate governance would be necessary.”

      The analogy between national and corporate governance is fitting. Just as the United States is not a puredemocracy,controlled directly by its citizens, neither is the American corporation. (Even approvals of corporate resolutions by shareholders are often nonbinding.) Rather, like our nation, the corporation is...

    • CHAPTER 3 How to Return Corporate America to Its Owners: “Owners of the World, Unite!”
      (pp. 47-68)

      The previous two chapters represent my efforts to make it clear, first, that something fundamental has gone wrong in corporate America, and second, that its root cause lies in the ascendancy of capitalism that benefits managers at the expense of the owners. The consequences of this mutation in our system have substantially weakened our nation’s system of capital formation, and what is wrong must be remedied. Before turning to some policy recommendations designed to right these wrongs, however, I want to discuss the progress that has already been made.

      Surprisingly, it was not the profound problems of aggressive earnings management,...

    • [PART TWO Introduction]
      (pp. 69-70)

      The first chapter in this section reiterates the “what went wrong?” theme, but here the focus is on investment America. Today, the earlier diffusion of stock ownership by many individual investors described in chapter two has almost vanished, replaced by the concentrated ownership of a relative handful of powerful financial institutions. The one hundred largest of these firms own 52 percent of all corporate shares, constituting majority control of corporate America. Yet the change in focus of these institutions from long-term investment to short-term speculation—along with the serious conflicts of interest these institutions face by collectively owning huge amounts...

    • CHAPTER 4 What Went Wrong in Investment America? King Kong, or Mighty Joe Young?
      (pp. 71-91)

      Having “investors of the world unite” is far easier said than done. So as we turn our attention from corporate America to investment America—the shareholders who are the owners of our corporations—let’s begin by examining, first, the ownership of our nation’s publicly held firms, and second, the relationship between ownership and control.

      When Berle and Means first examined this issue all those years ago inThe Modern Corporation and Private Property,individual investors owned substantially all shares of U.S. stocks outstanding.¹ Unimaginable as it may seem today, the world of the early 1930s that they described was a...

    • CHAPTER 5 Why Did Investment America Go Wrong? The Momentary Precision of Stock Prices Versus the Eternal Importance of Intrinsic Values
      (pp. 92-116)

      The failure of investment America to exercise its ownership rights over corporate America has been the major factor in the pathological mutation that has reshaped owners’ capitalism into managers’ capitalism. That mutation, in turn, has been importantly responsible for the gross excesses in executive compensation, as well as the flaws in the investment system itself that emerged in the late twentieth century, reaching their climax during the mania of the stock market bubble. One of the most important contributors to that transformation was the sea change in the philosophy of investment America that I mentioned in the previous chapter, from...

    • CHAPTER 6 How to Fix Investment America: “Capitalism Without Owners Will Fail”
      (pp. 117-138)

      Investment America needs to be more like King Kong. Not to threaten to destroy everything in its path, but to ensure that our citizens, who put up the capital and assume the risks of ownership, realize the rewards of ownership to which they are entitled. Only investment America has the power to bend corporate America to its will, and with that power, the ability to reverse the present ethos of managers’ capitalism and return to the system of owners’ capitalism that has been critical to the building of our nation’s economic prosperity and global power. But demanding that owners again...

    • [PART THREE Introduction]
      (pp. 139-140)

      The mutual fund industry played a major role in the failure of investment America to observe its ownership responsibilities. But given its massive assets, its ownership by nearly 100 million individual shareholders, and its unique governance structure that makes shareholder democracy virtually impossible, it demands a separate and extensive treatment in this book. In fact, the fund industry is the consummate example of owners’ capitalism gone awry.

      The first chapter in Part III, “What Went Wrong in Mutual Fund America?” describes the extraordinary happenings of the recent era. Ignoring both the principles and words of the Investment Company Act of...

    • CHAPTER 7 What Went Wrong in Mutual Fund America? The Triumph of Salesmanship over Stewardship
      (pp. 141-168)

      As part of the broad community of large financial institutions, mutual fund America played a major role in the failure of investment America to observe the responsibilities of corporate citizenship that resulted in the triumph of managers’ capitalism over owners’ capitalism in corporate America. What is more, by virtue of its own perverse governance structure, the fund industry itself presents the most extreme version of managers’ capitalism.

      Using an organizational design that would amaze (and delight!) the oligarchs of corporate America, the managers of mutual funds have enjoyed virtually free rein to place their interests ahead of the interests of...

    • CHAPTER 8 Why Did Mutual Fund America Go Wrong? “Losing Our Way”
      (pp. 169-190)

      Just as in corporate America, the failure of governance lies at the heart of why mutual fund America lost its way. Similar to corporate America, while the deterioration came gradually, it gathered enormous momentum during the booming stock market of the last two decades of the twentieth century, culminating in the now-familiar market mania and its aftermath. Further, like our corporations, our mutual funds are essentially organized as republics, with supreme power vested in their shareholders, members of a democracy who exercise their power by electing directors to represent their ownership interests.

      But there the similarities end. For mutual funds...

    • CHAPTER 9 How to Fix Mutual Fund America: “Organized, Operated, and Managed” for Shareholders
      (pp. 191-214)

      If a flawed governance system lies at the heart of why the mutual fund industry went wrong, then the governance system must be fixed. In that same 1996 speech with which the previous chapter concluded, I described the central goal of the reforms we will need, urging this industry to move to a system in which “the focus of mutual fund governance and control is shifted . . . to the directors and shareholders of the mutual funds themselves, and away from the executives and owners of mutual fund management companies [where it almost universally reposes today], who seek good...

    • [PART FOUR Introduction]
      (pp. 215-216)

      This tenth and final chapter returns to the theme of the introduction: the importance of capitalism—corporate America, investment America, and mutual fund America alike—in contributing to the proper functioning of our society and to our strength as a nation. Here, I call for a federal commission to undertake a sweeping examination of two vital aspects of our new world: One, a major displacement of the direct ownership by the shareholders of our corporations in favor of a new system of “agency ownership” dominated by financial intermediaries, largely mutual funds and pension funds that hold shares for the benefit...

    • CHAPTER 10 American Capitalism in the Twenty-first Century: “To Begin the World Anew”
      (pp. 217-242)

      Traditional capitalism has made a superb contribution to America’s economic and social greatness. In the recent era, however, it has gone off track, moving away from its original concept of ownership power to a new concept of manager power, in corporate America, in investment America, and in mutual fund America alike. But our system can be fixed, and I remain steadfastly optimistic about our country’s ability to right itself.

      It is incumbent both on our business leaders and on our financial leaders to go well beyond the reforms described throughout this book, some already instituted and some on the way...

  10. NOTES
    (pp. 243-252)
  11. INDEX
    (pp. 253-260)