Enough: John Borg's Code of Money, Business, and Life, by John Borg, Translated by Gao Yuan, CITIC Publishing Group, August 2021.
Money corrupts professional institutions
From an old era when traditional values were deeply rooted, to today's flexible values, data dominates everything, and ethical standards are increasingly blurred, one of the most disturbing things is the slow evolution of professional institutions into business-oriented enterprises. Just as power corrupts people, money corrupts the normal functioning of the state's public institutions.
But that's not always the case. More than 40 years ago, The prestigious magazine "Daedalus" of the American College of Arts and Sciences declared with great enthusiasm:
Wherever Americans live, the profession is absolutely dominant.
But revisiting the subject in the 2005 summer issue of Daedalus said that professional dominance was short.-lived. "From the spread of new technologies to the growing importance of making money, our professionals are gradually under a whole new set of pressures." The article also said, "The idea of a sense of purpose has been destroyed by powerful market forces that are so strong that it is increasingly difficult for us to distinguish between professionals and non-professionals who have the power and resources." ”
Let's start by thinking about what we mean when we talk about professions and professionals. The Daedalus magazine article gives a definition of profession, which argues that the profession has the following 6 characteristics:
1. Committed to the interests of customers, as well as the interests of society as a whole.
2.Proficient in theory and professional knowledge.
3. Possess specialized skills in a specific field, as well as experience and performance to match.
4. Have the ability to make moral judgments with integrity and integrity in the case of unclear morals.
5. Have the ability to learn effectively from individual and collective experiences, and be able to acquire new knowledge from practice.
6. Be able to develop a professional team to supervise and ensure the quality of practitioners and professional educators in the field.
Daedalus magazine added a wonderful quote: "The main characteristic of any professionalism is responsible, selfless and wise service... And to establish an intrinsic moral and ethical system between professionals and the general public. ”
john k John C. Bogle (1929-2019), founder of Vanguard Group. He is known as the "father of index funds"; one of the "Four Investment Giants of the 20th Century" by Fortune Magazine; one of the "Top Ten Fund Managers in the World in the 20th Century" by the New York Times; selected as one of the "100 Global Influencers" of Time Magazine in 2004; and awarded the "Lifetime Achievement Award" by the well-known Financial Magazine "Institutional Investors" in the United States. He is the author of "Common Sense of Mutual Funds", "Perseverance" and many other books.
Abandoning professionalism brings disaster
When it comes to professionals, most people first think of doctors, lawyers, teachers, engineers, architects, accountants, and pastors. I think journalists and trustees entrusted with managing other people's wealth are at least theoretically professionals.
However, in many areas of expertise, traditional values have collapsed. The essential reason for this is that modern society places too much emphasis on the ability to calculate accurately, but this ability is not so important. Unfettered market forces not only pose a great challenge to the trust that people have in the social tradition of the profession, but in some cases have even destroyed the norms of professional behavior that have been formed over centuries.
Unfortunately, the financial services industry, including the fund industry to which I have dedicated my life, seems to be taking the lead in the development of these harmful forces, which has led to a gradual loss of credibility. The wealth management industry used to be more professional than commercial, but now professionalism has become a vassal of business.
Harvard Business School professor Lakesh Kurana's definition of professional ethics is to the point: "I want to create value for society, not extract value." ”
Most people in economic activity are trying to create value. Value is created by the professionals we mentioned earlier, as well as by commodity manufacturers, service providers, engineers, builders, etc., but not by the financial industry. As I mentioned earlier, the wealth management industry extracts value from the income earned by enterprises, but in the pursuit of maximizing its own business interests, the industry seems to be drifting away from professionalism.
Examples of the serious consequences of abandoning professional ethics are everywhere.
In the field of public accounting, there were eight accounting firms in the United States (now only the last "big four" remained), and the big eight accounting firms started from the audit business, step by step began to provide lucrative consulting services to their audit clients, and they became business partners of management, rather than independent and professional evaluators who generally followed (if not strictly enforced) accounting principles.
The bankruptcy of Arthur Arthur Andersen, which went bankrupt in 2003, and Enron, a major client whose previous scandal broke out, are a dramatic example of the serious consequences of conflict-of-interest relationships.
I'm not starting to care about it now. I've written many articles before about the imbalance between business and professional values in journalism, where the importance of the distribution department is increasingly superior to the editorial board. In recent years, several important newspapers and periodicals in the United States, such as the New York Times, the Los Angeles Times, the Washington Post, and so on, have successively broken scandals.
Nor has the judiciary been left alone. The professional ethics of legal professionals have always been good, but they are no longer the same, and the prestige of reputation cannot resist the temptation of money.
The medical industry is not immune. Basic humanitarian and human needs of patients give way to the commercial interests of a multitude of entities, such as our vast healthcare complex of hospitals, insurance companies, drug manufacturers and drug dealers, and health care organizations.
John Borg
Party B and Party A: Hammers and Nails?
In short, professional relationships with clients have increasingly become purely business relationships with clients.
In a world where all service users are seen as customers, all service providers become sellers, in other words: when service providers become hammers, customers are seen as nails. I'm well aware that every profession has a business element. In fact, no organization, even noble religious institutions, can survive if income cannot cover expenditure.
But as many of the professions we are proud of gradually shift their traditional mindset to no longer focus on the interests of our customers, but instead become businesses that seek only competitive advantage and profits, those who rely on them for their services naturally become losers.
A few years ago, the well-known writer Roger Lowenstein made a similar observation, lamenting that ideas that originated in the ancient world, such as integrity, morality, and the "Calvinist integrity" of customer loyalty, were disappearing.
He wrote: "Professional institutions in the United States have become too commercial ... The accounting firm went so far as to sponsor a golf tournament. And, he might add, mutual fund managers aren't just doing the same thing, they're buying the stadium's naming rights! He concluded that "the war for professional independence will never succeed"
Capitalism has changed values
Our business enterprises are also far removed from traditional capitalist values.
The origins of contemporary capitalism can be traced back to the Industrial Revolution in England at the end of the 18th century. The rise of capitalism is due to factors such as entrepreneurship and risk-taking, capital raising, fierce competition, free markets, and the efficient use of capital appreciation.
At the heart of the effective functioning of early capitalism, however, was the basic principle of trust and being trusted.
This is not to say that capitalism has not suffered serious setbacks for a long time. Some of the problems of capitalism stem from moral degradation, such as the abuse of workers (often child labor) in early factories. There are other issues such as violations of the rules of fair and open competition, such as oil trusts and former robber capitalists.
The problem that arose in the second half of the 20th century was the erosion of the capitalist structure itself. Not only is "trusting and being trusted" less and less important, but even the owners of the business have become secondary in the operation of the system.
CEO Compensation: How Much Is Enough?
Today, "a huge sum" is no longer enough to describe the compensation that companies pay executives. What is causing this is the combined action of two forces, namely the principal-agent issue and the strategy of new shareholders to hold stocks in the short term.
The biggest difference between business values and professional values is the role that money plays. From a business point of view, the more money, the better, but from a professional point of view, money is far less important than ethical standards and social services.
Corporate executive compensation levels are now staggeringly high. But how much value do these CEOs really contribute to the economy? I really can't see it. In "Fighting for the Soul of Capitalism", I also concluded on this question:
The English edition of "Fighting for the Soul of Capitalism".
In 1980, the average CEO salary was 42 times that of the average general staff;
By 2004, the proportion had risen to 280 times (peaking at 531 times in 2000). Over the past 25 years, CEO salaries have risen almost 16-fold overall in current purchasing power, while the average salary of the average employee has barely doubled.
However, if the monetary purchasing power of 1980 is used, the average salary of the average employee has increased by only 0.3% per year, which is only barely enough. However, THE SALARY OF CEOs is increasing at a rate of 8.5% per year, and their salaries have increased more than 7 times during this period.
The rational reason for the increase in compensation should be that CEOs create wealth for shareholders. But does this increase match the value they create? On average, it is a very mismatch.
Excluding price factors, the annual growth rate of total corporate profits is only 2.9%, while the US economic growth rate represented by US GDP is 3.1%. With the growth rate of total corporate profits not optimistic, how could the average CEO's compensation reach a staggering $9.8 million in 2004? This is truly the insoluble mystery of this era.
In recent years, many companies have barely increased (and often decreased), yet CEO compensation remains high. Why? As mentioned earlier, the share of U.S. corporate earnings in GDP has been relatively stable for many years, without a significant increase. Therefore, corporate performance cannot be used as an excuse for salary increases. What's more, THE CEO's salary, which was previously 42 times the average salary of the average employee, soared to 280 times in 2004, and now it has risen to 520 times the average salary of the average employee, up to $18.8 million, almost double that of 2004.
If CEOs' abilities as a group are (and even certainly) ordinary, how do we explain their pay explosions?
Another theory is that their salaries reflect a trend: regardless of the industry, as long as they are the most capable or the most lucky, their salaries have risen significantly, such as movie and TELEVISION stars, professional baseball, basketball and football players. Celebrity athletes and celebrities are certainly paid sky-high, but their salaries are paid directly or indirectly by fans, and team or TV bosses willingly pay them out of their pockets (because these stars help them make a lot of money).
The deal is fair, in contrast, the CEO's remuneration is paid by the board, but not out of the pocket of the directors, but with the shareholders' money. From this example, we can see how serious the principal-agent problem is under the current investment system in the United States. We only focus on business operations, not on professional ethics.
Accountability is useless
The fundamental problem is that shareholders have little say in CEO compensation.
Benjamin Graham spoke about this a long time ago, and he's right. He found that in terms of legal rights, "shareholders are the boss, and shareholders can hire or fire executives with the consent of a majority of shareholders, and they can also require executives to act according to the shareholders' wishes".
However, from the perspective of the actual exercise of shareholder rights, "shareholders are no different from waste... They are neither shrewd nor alert... No matter how bad the executives' past performance is, as long as it is a suggestion made by the executives, they will obediently agree like a little sheep." Written in 1949, Graham's remarks seemed plausible and still apply today.
Due to the lack of shareholder accountability to the board of directors, the issue of principal-agent penetrates into the corporate governance system mainly through three forms. The first is the fund manager who is paid well and controls the equity of listed companies in the United States as a whole, but is indifferent to this issue. The second is the conflict of interest faced by fund managers, on the one hand, they are entrusted by fund investors and pension fund beneficiaries, but on the other hand, they are also responsible for raising and managing assets under the name of funds and pension fund accounts, the latter can bring them more economic benefits, while the former is only responsible. Third, the vast majority of fund managers no longer embrace the philosophy of long-term investing. Logically, long-term investing requires paying close attention to corporate governance issues, and now they only care about the short term, holding a company's stock for an average of less than a year (which logically leads to their indifference to corporate governance issues).
One solution might be to these three problems: allow shareholders to vote non-binding on CEO compensation. The implementation cost of this method is controllable, and it can also force fund managers who actually control listed companies in the United States to assume their due responsibilities and be conscientious corporate citizens in order to increase the well-being of the whole society.
Intrinsic value is not the stock price
No one should be surprised that CEO compensation has risen as the company's stock has risen, after all, in the CEO's salary structure, options account for a large proportion, so it is strange that the CEO's salary does not increase with the stock price.
But I strongly disagree with this practice of linking CEO compensation to stock prices. We all know that the volatility of stock prices in the short term, although they can be reflected in specific figures, do not truly reflect the value of the company. The CEO's performance evaluation should be based on the intrinsic value of the long-term and lasting enterprise. This intrinsic value, although there is no concrete data to follow, is real. (This is a paradox.) ）
It makes much more sense to reward CEOs based on changes in the intrinsic value of the business. For example, we may be able to determine the CEO's compensation based on indicators such as earnings growth, cash flow (more important but more difficult to control), dividend growth, etc., and we can also use the return on capital of the same industry and listed companies as a whole (for example, all constituents of the S&P 500 Index) as a reference to determine the CEO's compensation. However, these measurements must be made over a longer period of time.
In addition, the CEO receives bonuses only if a certain minimum required rate of return is achieved that exceeds the company's cost of capital. Of course, achieving these goals is extremely challenging. But isn't the courage to face challenges the key to business success?
Only capitalists can kill capitalism
All those who are responsible in the business world have a responsibility to establish uncompromising professional principles for businesses and industries, and these principles should be upheld, safeguarded and defended. If we fail to do so (as has been the case in recent years), discontent will pervade society and the ills of society will intensify. The well-known financier Felix Rohatin knows this better than I do. Rohartin is a former executive director of Lazard Investment Bank and is beloved by everyone. He said in the Wall Street Journal a few years ago:
I am an American and a capitalist, and I believe that market capitalism is the best economic system ever made. But market capitalism must be fair, it must be normative, and it must be ethical. What has happened in recent years has proven that financial capitalism and modern technology have become unbridled by the misuse of human outright greed. The only one who can kill capitalism is the capitalists. Our economic system can no longer tolerate this abuse, which has often been seen in recent years, or the financial and social polarization we see today.
Today, we place too much emphasis on business and despise professionalism. Business standards have taken precedence over professional standards, and we've seen the consequences in corporate and financial markets. Nor should we deny that the first priority of business is to make a profit, but we should require companies to operate with professional ethics. Our society needs to regain the professional values that prevailed in this country 40 years ago and have had a huge impact on our society.
Written | John Borg
Excerpt and editor| Li Yongbo
Introduction Proofreader | Li Shihui