Our current capital markets are structured around a dangerous lie -- that the sole function of the corporation is to return value to shareholders. Under this construct, every action undertaken by Wall Street traders, mortgage brokers and the rest make perfect sense and are morally unambiguous. It was their job to sell as much as they could, to grab as much value as possible, in order to return that value to shareholders. So long as shareholder-value-maximization remains our governing principle, no change in regulations will change the fundamental behavior. Executives are simply acting according to their incentives.
So we need to change the incentives. We need to recognize that by focusing our executives on shareholders, and on share price as a proxy of the value delivered to them, we are turning them away from what matters. We should want executives to focus on their customers and their employees. We should want them to make choices that maximize customer delight, recognizing that value of all kinds will follow from that orientation.
How do we get there? We reverse the pervasive trend towards stock-based incentive compensation. We recognize that rather than aligning the interests of shareholders and executives, stock-based incentive compensation drives the short-term thinking that creates volatility and produces crashes, working definitely against the interests of long-term shareholders. It creates orientations towards the expectations market (the capital markets, where value is traded) instead of the real market (the marketplace in which products and services are created and sold, where value is created). Perhaps if our business leaders were to turn their attention back to the real market -- composed of customers and employees from the 99% -- we could address the very real discontent that resides there.
The Occupy Wall Street movement can be a catalyst for change. But only if we ask the right questions. As of now, next steps for the movement are unclear. Perhaps winter will cause the occupiers to decamp. Or perhaps conditions and fraying nerves will lead to a very violent, very bad denouement. Or perhaps the movement will continue to grow and spread, as it has over these past weeks, to more cities and more people. In any case, the challenge for business is to dig deeper into the roots of the protest and to respond thoughtfully, rewriting our own rules before they are rewritten for us.
Roger Martin is dean of the Rotman School of Management, University of Toronto. He has been named one of the top fifty management thinkers and ten most influential business professors in the world. He is the author of "Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL." He serves on the Thomson Reuters and Research in Motion boards of directors. Jennifer Riel is Associate Director of the Desautels Centre for Integrative Thinking at the Rotman School and editor for Fixing the Game.
