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Roger Martin, dean of the Rotman School of Management at the University of Toronto.Ashley Hutcheson

"American capitalism is at a critical juncture," writes Roger Martin in his new book, Fixing The Game Bubbles, Crashes, and What Capitalism Can Learn from the NFL. "Our leaders have embraced a persuasive but ultimately flawed theory to construct their understanding of the economy, the model of executive compensation and the role of business. This theory leads us inexorably down a path to greater volatility, less value creation and minimal authenticity."

And as long as we fail to understand the real, fundamental reasons behind past financial crises, and the bubbles that preceded them, it is only a matter of time until we will have the next crisis, Prof. Martin writes.

Prof. Martin is Dean of the Rotman School of Management, University of Toronto. He holds the Premier's Chair in Competitiveness and Productivity and serves as Director of the Michael Lee-Chin Family Institute for Corporate Citizenship at Rotman.

He took reader questions in a live chat Monday.

Read the transcript below:

Claire Neary, ROB editor - He re's one from me.

In your book, you write that after the financial crisis of 2008, there was a run on scapegoats, and we haven't taken the time to examine the real causes of the crisis. You worry that for these reasons, another crisis might be right around the corner. Do you think we've learned anything from the crisis? Is there still hope that we will?

[Comment From Roger Martin]/b>

I am forever optimistic - and that is why I write. So I hope that we can and will learn. My concern at this point is that we have learned unhelpful lessons - in this case that the problem was lax oversight and loose regulations. I just don't think those things were determinative and because of that, I don't think the fixes thus far proposed will be very helpful.

[Comment From Saurabh Bhatt]/b>

What are you insights into the financial crisis through a complexity lens?

[Comment From Roger Martin]/b>

A couple of thoughts strike me. First, compensation theorists did not take a 'complexity view' of human motivations. They said: more incentive compensation means more/better performance of individuals and that means more/better performance of organizations. It is a little more complex than that. (I will send and do the other half next)

[Comment From Roger Martin]/b>

The other part of complexity theory/thinking that was missed was the overconfidence in models. Life is always more complicated than the models we use to explain it. When we forget this, we put too much confidence in our models. I think that Wall Street was hyper-confident of a number of its models and followed those models right over a cliff of complexity.

Claire Neary, ROB editor - Thanks, Roger.

Since it's election day, here's a Canadian question from one of our readers.

[Comment From David]/b>

Is lowering Canadian corporate taxes a good or bad idea? Political opinions vary diametrically.

[Comment From Roger Martin]/b>

It is an interesting question. I actually think that lowering them a bit from the current level wouldn't do much positive. At the level currently planned, they are now competitive with the rates in the US. Being slightly below the US wouldn't matter. What I believe would be great for all Canadians and great for our prosperity would be to take bold action on corporate income taxation - and that bold action would be to eliminate it entirely. Corporate income taxation doesn't make any economic sense. It is a badly-performing tax on workers and consumers (because it is always passed on to them). And there is a massive corporate income tax arbitrage game going on around the world that won't stop until corporate income taxes hit a minimal level. The losers in this game are going to be the countries that lag in getting rid of corporate income taxes and the winners are going to be the ones that lead. So the argument shouldn't be about level of corporate income taxes but rather about whether.

Claire Neary, ROB editor - Are there any countries that have done this yet?

[Comment From Roger Martin]/b>

Yes and no. There are many countries that provide time-bound tax holidays. But probably the cleverest players in this game are the various Cantons of Switzerland who cut very specific permanent tax deals at very low rates and even cap the total dollar taxation level. And they are getting lots of takers!

Claire Neary, ROB editor - I guess we'll see where we stand when we get the results of today's vote.

Here's one about the documentary Inside Job, which I just saw last week. The doc points out that many of the people Obama has hired to fix the financial crisis are the same people involved in the decisions that caused it.

[Comment From Mike Wood]/b>

Roger: Do you have worries like those expressed in "The Inside Job" that some of the key players who were central to the crisis are still at the centre of financial system structures in the US?

[Comment From Roger Martin]/b>

Mike: Absolutely. And if you will allow a little rant, I am stunned that even though no economist of any note had as of late spring of 2008 anything but a rosy forecast for the second half of 2008, when the economy crashed spectacularly in the second half of 2008 they were all there pontificating about how the recovery was going to go. Why anybody actually listened to a word they said is beyond my comprehension. They were trotting out the same utterly flawed macroeconomic models that completely missed the 2008 downturn. OK, now that the rant is done, I can say that I have the same concern for the financial regulators. Their models didn't help at all to prevent or ameliorate the financial blow-out and they are now using the same models to structure the future. Their models weren't poorly applied; they were poorly conceived. The Inside Job might have exaggerated some things, but I find it hard to fault its core themes.

[Comment From john]/b>

What are the lessons from the financial crisis in terms of improving corporate governance?

[Comment From Roger Martin]/b>

First, that there are real limitations to corporate governance. Boards have little ability to effectively govern a CEO who is bloody-minded and wants to keep them in the dark. Investors need to pay more attention to the moral quality of CEOs (as evidenced by their prior behavior) and not count on boards to discipline badly-behaved CEOs. Second, boards should stop thinking that stock-based compensation aligns the interests of shareholders and management. It dis-aligns the interests by focusing executives on short-term stock prices rather than the real performance of the company. And while they are at understanding that, they may want to remember that the same holds for board stock-based compensation and its supposed alignment of interests of shareholders. Finally, the only way we are going to get effective boards is if board members see their job as public service to protect democratic capitalism - not just the individual shareholders of the individual company.

[Comment From Robin Elliott]/b>

A follow-up on the "Inside Job" questions: one thing demonstrated by the film was that academics were often complicit in the promulgation of the sort of damaging theories that you refer to in your new book. In light of this, how do you see your role at the Rotman school?

[Comment From Roger Martin]/b>

Robin: You are absolutely right. Academics were complicit in promulgating unhelpful theories in that case. I see our role at the Rotman School as being to produce business leaders who think very carefully about their models - the limits of their effectiveness and the underlying intent. I don't think that the problem leading to the crash was mainly about bad people behaving badly. I think it was more about unthinking people using models naively. That led to two bad things. First, they followed the models right over cliff-edges that they could not see. And second, they didn't pay attention to the consequences of their models. For example, if you are going to bet against mortgages and make $5 billion; someone else is going to lose $5 billion. You may think twice about taking advantage of a totally naive counterparty if you think hard about what you are doing to them. I hope that we help students understand that just because you can do something, it doesn't mean that you should do it.

Claire Neary, ROB editor - While you've got your MBA school hat on, here's one from a prospective student.

[Comment From Phil]/b>

As a young professional in my mid 20's the MBA prospect is 'a clear and present danger' when I see schools producing graduates that are both a part and contribute to this failing system. I have to wonder if I should bother at all. However, the system will put me at a career disadvantage if I decide to do so. Is there hope for it to change or should I just bite the bullet and play the game and put in an application

[Comment From Roger Martin]/b>

Great question, Phil. I commend you on being a sophisticated consumer of business education. I prefer sophisticated to naive consumers - even though they can be a lot of work to deal with! I guess I have two thoughts on your question. First, a lot of what will happen to you depends on you. If you go to b-school and unquestioningly lap up every theory/model/concept you are taught, you should probably skip the idea of b-school. If instead, you attend with a constructively critical eye and an intent to build your own model of yourself as a businessman utilizing both your experiences to date and the tools offered, you will be better for the educational experience. Second, not all b-schools are created equal on this front. Lots are doubling down on the existing theories and blaming the crash on things external to them. Some are being introspective and thinking about what and how we teach. I would pick one that is clear about the latter. Hope that helps...

[Comment From Vinoth Vaihunthen]/b>

What sort of incentives should we offer to get regulatory body to become pro-active in finding potential pitfalls in our economies, which lead to crisis?

[Comment From Roger Martin]/b>

It is a tricky question. One could say that they shouldn't need incentives to just do their job. But that is a facile answer to a good question. My thought on the question is that we need to attempt to structure our world in a way that ensures that our regulators don't need to be superhuman beings. I often think that we give impossible tasks to folks in the regulatory environment. For example, bond ratings agencies are part of the regulatory environment - they aren't regulators themselves but because the regulators make rules that require fiduciary agents to use the products of rating agencies in their decisions, they are part of the regulatory regime. So think about a rater in a bond rating agency. He/she has to be able to discern with accuracy the true risk of the bond - otherwise the rating isn't worth a thing. However, if he/she could actually do that, he/she would be a bond trader making 20-50 times his/her bond rating salary. So why do we assume that we can count on the accuracy of his/her ratings? Because we think - but only implicitly - he/she is superhuman. That is begging for trouble - and guess what, here and in the US we got into big trouble on this front.

[Comment From Jon Houle ]/b>

I previously worked at a tech giant (hint hint) who went under. The executives took home large bonuses to stick around and navigate the company through its restructuring process (a.k.a: laying off employees and selling off the company). What do you think of such bonus structures?

[Comment From Roger Martin]/b>

Gee. I am trying to figure out what company that would be! Generally speaking, I hate those structures and actually wrote a blog about that in relation to AIG (you should be able to find it at www.rogerlmartin.com). My general view is that if the people who got you into massive trouble insist on retention bonuses to wind things up (at a massive loss to all involved), they should be instantly fired without a moment's hesitation. If it was me, I would invite the existing management team members into my office one-by-one and ask them: Would you like to attempt to redeem yourself in the eyes of shareholders, bondholders, employees and the community by working hard to make the best of a terrible situation? And if so, are you willing to work as hard as you can at your current salary? If their answer is yes, I would retain them with delight. If their answer is no, I would fire them - and attempt to make it for cause.

Claire Neary, ROB editor - Thanks very much, Roger. We're almost at the end of our time, but before we wrap up, a lot of people were intrigued by your comments on corporate taxes. We'll finish with a couple of questions on that topic.

[Comment From Robin Elliott ]/b>

Hi Roger. That is an interesting thought on corporate taxes. This may be a bit off topic but what sort of tax arrangement would you say is efficient?

[Comment From Guest ]/b>

If corporate taxes are eliminated, what should happen to the tax rate on dividends? What about the lost tax revenue on dividends to non-residents?

[Comment From Roger Martin]/b>

Robin - The most efficient taxes encourage that which you want more of and discourage that which you want less of. So taxing work, investment, effort, etc. are less efficient and taxing consumption - especially of things like cigarettes and carbon - is a good idea. Guest - There should be no dividend exclusion because there would no longer be double taxation to worry about. And there should be a stiffer withholding tax on non-residents - one that approximates the effect of the current corporate income tax level. Thanks for all the awesome questions. R

Claire Neary, ROB editor - Thanks again, Roger. And thanks to our readers for sending so many thoughtful questions. We got lots today, so I'm sorry if we didn't have time to get to yours.

You can read five excerpts from Roger Martin's new book, 'Fixing the Game,' on The Globe's website. They're all linked at the bottom of this page.

[Comment From Roger Martin]/b>

Thanks for organizing this Claire. It was a pleasure.



Read excerpts from Fixing The Game

  • The next financial crisis could be right around the corner
  • How an economic theory changed the way CEOs get paid
  • What capitalism can learn from the NFL
  • Why are CEOs compensated differently than quarterbacks?
  • Flawed theories are destroying American capitalism


Click here for a mobile version of this chat.



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