Book Review: Fixing the Game: What Capitalism Can Learn from the NFL

In his book, Fixing the Game, Roger Martin argues that putting the creation of shareowner value first and foremost among corporate goals is misguided and, ultimately, self-defeating.

Martin, dean of the University of Toronto’s Rotman School of Management, contends that the “holy grail” of shareowner value creation grew out of trying to find a solution to the classic corporate governance agency problem in the corporate structure. According to agency theory, management — the agents of the shareowners — often pursue their own interests at the expense of shareowners. Over the years, this problem has often been addressed by loading executive pay with equity sweeteners to better align the interests of management with shareowners.

According to Martin, agency theory “had the unfortunate effect of tightly tying together two markets: the real market and the expectations market.” The “real market,” in this case, is the world in which we live, where products are produced and consumed in a capitalistic marketplace, governed by simple supply and demand that balances out over time. The “expectations market,” meanwhile, is the stock market.

Linking compensation to the expectations market is a relatively recent phenomenon, which has led to executives gaming the system and companies becoming more short-term focused. Put simply, an executive who is trying to meet the yearly, or even quarterly, goals that trigger stock or option bonuses is less likely to manage for the long term, while the executive who is trying to maximize customer satisfaction — what Martin vividly terms “maximizing customer delight” — is more likely to manage for the long term.

Martin crafts an analogy that he weaves through the book comparing American capitalism with the National Football League. (Bubbles, Crashes, and What Capitalism Can Learn from the NFL is, after all, the subtitle of the book.) Although the analogies aren’t always perfect, Martin successfully makes the point that the NFL has managed for the long term by maximizing customer delight, while the current flavor of American capitalism and one of its main engines — the public corporation — have managed for the short term, attempting to maximize shareowner value to the detriment of the customer.

In comparing the NFL to American capitalism, he claims that American CEOs managing for the expectations market (the stock market) is akin to coaches and quarterbacks in the NFL judging their success based on beating the gambling point spread instead of actual wins and losses. The latter translates to building market share and increasing customer satisfaction.

According to Martin, stock-based compensation tied to the expectations game has overwhelmed incentives tied to the real market. “What would lead her (a CEO) to do the hard, long-term work of substantially improving real-market performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is,” he writes.

Martin encourages companies to do away with stock-based compensation, or at the very least, tying it to a long-term performance period that goes beyond a CEO’s own tenure. Martin makes other recommendations for “fixing the game,” or healing American capitalism, that include calling on boards and executives to re-examine theories on agency-issue cures, better regulation of market players, and putting customers, employees, and society ahead of the creation of shareowner value in the American capitalism food chain. He argues that if we take care of those constituencies, long-term profits will largely take care of themselves.