What you think Roger Martin’s thesis is and what is the logic behind his argument?
Roger Martin in his book, “Fixing the Game” has presented some bitter realities on the American financial system. The first financial crisis that occurred in United States was in 1924 that was fueled by abundant hype and easy loans. As the crisis occurred, there was a blame game that who was responsible for this financial meltdown. As things settled down, heavy regulatory measures were imposed, so such kind of crisis does not occur in future. Then in the year 2000, the United States faced another financial crisis that became famous with the name, “Dotcom Bubble”. While many dotcom companies had unbelievable share values but there was no actual value in reality; thus this financial hype was exposed finally in 2000. After this crisis, there was again a process of finding a scapegoat and further tight regulations. The experts thought, after these measures, there was perception that such crisis will not occur in future, but there was another financial meltdown just after seven years in United States, this time there were large groups involved that became bankrupt. Even after this crisis, the process of finding scapegoat and regulation tightening.
Fixing the System
According to Roger Martin, the way the American Capitalism work is the major cause behind such financial meltdowns and it will continue in future, until we fix the system.
Stakeholders’ Value Maximization
His basic thesis is the notion that companies’ perception of Stakeholders’ value maximization is the major cause behind it. Instead of Stakeholders’ value maximization, the focus should be to serve customers. There are two types of markets according to the author. The first one is the real market and the second one is expectation market. The real market is the one in which the companies make products, earn profit and serve customers. The expectation market is the stock market. As there is a high probability of companies earning large returns from stock markets, the major focus of the organizations now is to enhance the company’s value in the expectation market. As this had become a major rule of the market, there was a landmark change in 1970s about the CEO’s remuneration. Instead of a straight salary, the CEOs were given ownership in the company’s stocks as well. By doing this, the CEO was expected to enhance the performance in the real markets and the expectation market.
The new remuneration was a big opportunity for the corporate head as it greatly enhanced the probability to earn beyond limits. As the manipulation of real market is difficult, this gave the opportunity to the corporate leaders to influence the expectation market. Since the high earning opportunity was in expectation market, the focus dramatically shifted from real performance to performance in expectation market.
Real Markets and Expectation Market
According to Roger Martin, the players in the real market should be separated from expectation markets. If the players of the real markets are involved in the expectation markets then financial crisis and economic bubbles become common.
The Case of NFL
What criticisms can you come up with, especially those grounded in what you have read or thought about in other courses?
Tightening of Rules and Regulations
Business analysts and experts have studied the factors that caused financial meltdown in USA in the years 2000 and 2007. From all over the world, different experts have identified the reasons of financial crisis but no proper action has been taken by the government except tightening the rules and regulations of mortgages and financial loans. Martin is one of the experts and thoughtful writer who researched the causes of financial turmoil or financial bubble burst in the financial institutions of US. He revealed the most surprising and bitter realities of corporate world. He communicated ways by which companies become lucrative rather than focusing on how companies want to become lucrative. Martin refers the financial turmoil faced by American Economy as game, and tried to give solutions to the corporations so that they can fix this game.
The renowned thinker depicts and highlights the problem due to which American economy faced financial distress, not just targets the issues, but also suggests the ways for getting cope up with those financial crises. The first financial bubble burst faced by the US government in 2000 when the dotcom boomed shook the corporate market. During that time, hype of dotcom companies had been created at its peak, which actuated investors to invest on large scale on the dotcom companies rather than on physical organizations. That hype was created by the real market players who interfered in the expectation markets and did speculation in the stock market. The actual worth of dotcom companies were not as much as those were speculated in the stock market. Although, companies attained short-term gain by speculating stock market but in the long term when that bubble burst up, they were collapsed, leaving all the directly and indirectly stakeholders in financial turmoil. After the financial crises, government tightened the rules and regulations on businesses and financial transactions and claimed that USA would not face such financial turmoil in the next 30 to 40 years.
Financial Crisis of 2007-2008
However, the claimed had been proven wrong when USA faced another financial meltdown or financial bubble burst just after seven years. This time the mortgage industry and financial markets were affected and the reasons were the same, which were the cause of initial financial turmoil. The financial turmoil not just affected worldwide financial institutions but also adversely affected US financial markets. The turmoil started in the year 2007 when home prices started to face drastic downward trend. That trend not just disturbed the real estate markets of the US economy but also started to disturb all the other financial institutions existed not only in US but also in overseas. The US economy faced a drastic downfall as major financial sectors faced financial losses and many of them were financially collapsed. Those sectors, which were adversely affected by US financial meltdown, included banking industry, insurance companies, mortgage markets etc. That financial turmoil not just affected the financial sector but also those organizations were adversely affected that relied mostly on credit from the affected financial markets. Those reasons were discussed by Martin in his book in very clear words; he revealed all the bitter realities and the manipulated games played by the corporate world in order to gain returns that are more lucrative. Businesses focus on maximizing shareholder value and we are taught the same in our professional fields. However, this statement is one of the reasons that cause financial distress and turmoil and if all organizations still focus on increasing shareholder’s value then soon there will be high chances of another financial meltdown that may hit financial sectors and world’s economy. The real market players i.e., CEOs interfere in the expectation market i.e., stock market, and to attain their own financial gain they speculate the stock market. This speculation gives benefit to the real market players and economy for a shorter time, however, eventually when the shareholders may not give the expected returns of the share purchased then that expectation bubble burst which results in high company loss or even companies collapsed financially.
Government although tighten the rules and regulations but did not take any initiative towards restricting the interference of real market players in expectation markets. The business rule must be amended in order to restraint from another financial meltdown. The focus must be not on maximizing the share prices but on maximizing the customers and sales of the companies’ products.
The CEO must focus on the real markets, they have to focus on earning the lucrative results through innovation, products diversification and other factors associated with it, no matter, companies can maximize their share value or not. However, emphasize must be given on the sales of actual companies products and services and maximizing as well as retaining customers. The same happened with Microsoft, where the company share value did not increase much in the ten years timeframe, however, its revenues, customers and sales get thrice times more than ten years before. This shows that the principle of running a business is not correct; the business must not aim at maximizing its shareholder value but its real products and customers. Only those companies can sustain in the long-term which focuses on its products and customers rather than speculating share prices in the stock market.
Given your criticisms, do you see his vision as bold and possible, or more problematic than he has seen it to be? Do not consult other sources.
Boldness in the Ideas and Backing it by Common Logic
The ideas that Roger Martin has expounded in his book is sheer bold and completely possible. These are not his mere belief, but he has explained them back by common logic. People might ponder that there are a multitude of intelligent individuals in the system that must have thought the same way as Roger then why they do not reject such a system. A simple answer to this question is the fact that this system suits them. The people involved in this system will not go against this system because unlike real markets, the expectation markets can be manipulated easily. These manipulations give the opportunity to money that is beyond the expectations of many.
The argument set by the author that such crisis will continue to occur in future is a possible reality because the rules of the system have become difficult through legal framework but the system remains the same. The legal hurdle might have made the strategy of manipulating the expectation market a bit difficult, but it has not changed the system that encourages it. The corporate leaders who have influence over both the markets like a player who openly admits that he is a better.
If United States wants to minimize the probability of the economic crisis in future then the corporations must shift their focus from stakeholders’ value to customer value. The aforementioned strategy should be complemented by the revision of the executive remuneration program. There should not be the involved of the CEO in the stock market. For ensuring the corporation to work efficiently and effectively, the concept of board of governance needs to be fundamentally changed. The hedge funds create no long-term value and they further enhance the speculating the expectation market; therefore, there power should be controlled and they should be regulated through an alternate mechanism. The idea of shareholders’ value maximization creates no benefit to the society in general. The organizations work must synergize to create benefit to the society; therefore, transformations are required in this side, as well. If the aforementioned guidelines are not followed, the United States will continue to face financial crisis in future, as well. Rather than considering the needs of few influential individuals, the country needs to reconsider its financial system for the betterment of the public at large.