John Bogle addressing the Miller Forum at the University of Virginia: Curiously enough, what has happened to our system of capitalism is precisely what this university's great founder warned us about two centuries ago. Hear Thomas Jefferson: "I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trail of strength, and bid defiance to our laws." We didn't do that, and here are nine quick examples—three each from corporate America, investment America, and mutual fund America—that reflect the negative consequences of this change. In Corporate America:
1. The staggering increase in managers' compensation.... Long ago, Herbert Hoover, one of our few businessmen to serve as President, put it well: "The only trouble with capitalism is capitalists. They're too darn greedy." Imagine what he'd say today.
2. The rise of financial engineering. In a remarkable manipulation of financial statements,corporate earnings are managed to meet the "guidance" that these executives give to Wall Street, quarter by quarter.....
3. The failure of our traditional gatekeepers. ..auditors,...became partners, if not co-conspirators...Regulators and legislators (who in 1993 forced the SEC to back down on requiring that option costs to be treated as—of all things!—corporate expenses) also ignored the public interest. And corporate directors failed to provide, as I put it in my book, the necessary "adult supervision of these geniuses" who managed the firms. Put more harshly, ... "When we have strong managers, weak directors, and passive owners, don't be surprised when the looting begins." And that's, of course, what we've seen at Enron, WorldCom, and too many others.
In Investment America:
4. The vanishing ownership society. ..
5. The rise of short-termism. Institutional money management, once an own-a-stock industry (holding an average stock for 6 years during my first 15 years in this field) has become a rent-a-stock industry,...
6. The triumph of illusion over reality....security analysts came to focus ever more heavily on illusion—the momentary precision of the price of the stock—they increasingly ignored the reality—... Measuring up, unfortunately, to Oscar Wilde's piercing description of the cynic, our money managers came "to know the price of everything, but the value of nothing." But when there is a gap between perception—illusion—and reality—the business fundamentals of cash flow and dividends—it is, to state the obvious, only a matter of time until the gap is reconciled . . . inevitably, in favor of reality.
In Mutual Fund America:
7. The industry changed. ... Our traditional guiding star of stewardship was transmogrified into a new star—salesmanship.
8. The conglomerates take over. ... Alas, in the fund industry in the aggregate, you not only don't get what you pay for, you get
precisely what you don't pay for.
9. Mutual fund returns fall drastically short of market returns... Warren Buffett accurately describes the problem: "The principal enemies of the equity investor are expenses and emotions." The fund industry has failed investors on both counts.
1. The staggering increase in managers' compensation.... Long ago, Herbert Hoover, one of our few businessmen to serve as President, put it well: "The only trouble with capitalism is capitalists. They're too darn greedy." Imagine what he'd say today.
2. The rise of financial engineering. In a remarkable manipulation of financial statements,corporate earnings are managed to meet the "guidance" that these executives give to Wall Street, quarter by quarter.....
3. The failure of our traditional gatekeepers. ..auditors,...became partners, if not co-conspirators...Regulators and legislators (who in 1993 forced the SEC to back down on requiring that option costs to be treated as—of all things!—corporate expenses) also ignored the public interest. And corporate directors failed to provide, as I put it in my book, the necessary "adult supervision of these geniuses" who managed the firms. Put more harshly, ... "When we have strong managers, weak directors, and passive owners, don't be surprised when the looting begins." And that's, of course, what we've seen at Enron, WorldCom, and too many others.
In Investment America:
4. The vanishing ownership society. ..
5. The rise of short-termism. Institutional money management, once an own-a-stock industry (holding an average stock for 6 years during my first 15 years in this field) has become a rent-a-stock industry,...
6. The triumph of illusion over reality....security analysts came to focus ever more heavily on illusion—the momentary precision of the price of the stock—they increasingly ignored the reality—... Measuring up, unfortunately, to Oscar Wilde's piercing description of the cynic, our money managers came "to know the price of everything, but the value of nothing." But when there is a gap between perception—illusion—and reality—the business fundamentals of cash flow and dividends—it is, to state the obvious, only a matter of time until the gap is reconciled . . . inevitably, in favor of reality.
In Mutual Fund America:
7. The industry changed. ... Our traditional guiding star of stewardship was transmogrified into a new star—salesmanship.
8. The conglomerates take over. ... Alas, in the fund industry in the aggregate, you not only don't get what you pay for, you get
precisely what you don't pay for.
9. Mutual fund returns fall drastically short of market returns... Warren Buffett accurately describes the problem: "The principal enemies of the equity investor are expenses and emotions." The fund industry has failed investors on both counts.
Read the John Bogle's entire address here.
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