A titan of American capitalism delivered a stinging critique of American capitalism in Madison on Wednesday.
But John Bogle, founder of The Vanguard Group and father of the index mutual fund, also offered a plan to fix it as he spoke at the Directors' Summit conference on corporate governance at UW-Madison.
"The fact is, in America today it is high time for bluntness," said the feisty Bogle, who showed none of the frailty that might be expected from a 74-year-old heart transplant recipient.
Reciting the litany of recent corporate scandals - from Enron to Tyco to WorldCom to the New York Stock Exchange - Bogle said that "in the 1990s our whole system broke down."
With boards of directors failing to act in the interests of the shareholders they ostensibly represent, our system of "ownership capitalism" became one of "management capitalism," where the profits went not to shareholders as they should but to executives receiving outrageously excessive compensation, Bogle said.
From 1988-2001, he said, workers' compensation increased 60 percent - just slightly above inflation - while CEO compensation soared 443 percent.
"Little good comes from when the CEO becomes not only boss of the business but boss of the board as well," Bogle said. "Don't be surprised when the looting begins."
Even worse, the excessive executive compensation did not correspond with any appreciable corporate achievements, he said.
"Simply no evidence possibly justifies the outrageous compensation increases bestowed on corporate leaders," Bogle roared.
While a "few bad apples" caused immense harm, their exposure had a benefit, Bogle said.
"We owe a perverse kind of debt to the fallen apples for illuminating the cracks in the barrel of capitalism," he said. "We're all better off now that it's out in the open."
While directors may have abdicated their responsibility in overseeing companies, the owners - shareholders - have the ultimate responsibility "and should have stepped in."
In America today, shareholders essentially means institutional investors such as mutual funds and pension funds: The 100 largest own 56 percent of U.S. equities, Bogle said.
But they did nothing during the stock market bubble, he said.
"The only sound we heard was the sound of silence," Bogle said.
And that's because they became a part of the problem, he added, as evidenced by the scandal uncovered by New York Attorney General Eliot Spitzer that has engulfed Milwaukee-based Strong Capital Management, among others.
As in some of the businesses they owned shares in, "the interests of the managers prevailed" at the funds, rather than the interests of the investors, Bogle said.
Short-term trading and portfolio turnover to produce fees won out over long-term investing in pursuit of corporate value, said Bogle, who called the change "from stewardship to salesmanship."
"It was not always that way but it became so in the 1990s," he said. "I hope the recent scandal helps this industry return to its proud past."
Bogle urged a return to "corporate democracy" with enhanced shareholder rights.
"The cause is not lost," he said in laying out eight ideas for reform: Encouraging corporate citizenship; clearly separating ownership from management; returning to a long-term business focus rather than quarter-to-quarter earnings; fixing the stock option mess; letting sunlight shine on accounting; bringing back dividends; reforming the fund industry; and "institutions of the world unite" in pursuit of corporate governance.
"We have eroded the character of capitalism yet character is what we need more than ever today," Bogle said.
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