Book Review Enough: True Measures of Money, Business and Life John C.

Bogle John Wiley & Sons, Inc., 2009 The Battle for the Soul of Capitalism John C. Bogle Yale University Press, 2005 John Bogles most recent book, Enough, gives extensive insights into the benighted condition of todays capitalism, but adds to them a memoir of his personal convictions on values and ethics. This mixture is most appropriate, since the systems plight seems rooted both in structural flaws and well-nigh pervasive defects of character. The title of his 2005 book, The Battle for the Soul of Capitalism, captures clearly what is at stake. In common with many others today, Bogle sees that the market system has become untracked has lost its soul and needs much devoted attention (especially from capitalisms supporters, among whom he appropriately counts himself) to put it right. His theme is summed up well in a quote he cites from Felix Rohatyn: I am an American and a capitalist and believe that market capitalism is the best economic system ever invented. But it must be fair, it must be regulated, and it must be ethical Only capitalists can kill capitalism, but our system cannot stand much more abuse of the type we have witnessed recently. Time magazine in 2004 named Bogle one of the worlds 100 most powerful and influential people. Born in 1929 and a 1951 magna cum laude Princeton graduate, he became the founder of the Vanguard Mutual Fund Group, of which he was the CEO for 22 years. Although Time has good reason to rate him high on power and influence, those things do not come from his being in lock-step with his business contemporaries. He says my message [is] generally ill received by those in charge of our corporate and our financial institutions. In light of the dire condition of the corporate and financial world highlighted by (but by no means limited to) the Great Credit Crisis of 2007-2008, his outsider status stands him in good stead. His greatest influence may well come through the power of his ideas, perhaps with a rising generation who will see how ripe the time is for them. When it is healthy, Bogle says, capitalism is based on a virtuous cycle of trusting and being trusted. He speaks of the old-fashioned liberal humanitarianism that was the hallmark of the Age of Reason when the prevailing view was that anything thats important must have a moral authority. People count on each other to be trustworthy. A part of this is the notion of stewardship, by which people look after the interests not just of themselves but of the people with whom they are dealing. The business world is wellserved if a sense of fiduciary responsibility, of fair dealing, and of professionalism governs. What Bogle is describing is literally a culture in which humane values permeate both personal dealings and the structures established for the conduct of business. He makes an important point when he recounts how the major economists going back to Adam Smith believed that values are intimately embedded in the practice of business.

It is no surprise that Bogle sees how far todays capitalism has strayed from this ideal. He says that our society is moving in the wrong direction and speaks of absurdities and inequities that weve come to accept and take for granted. Americans live in a wealth-oriented, things-fixated society, with the result that the lure of money has overwhelmed the prestige of reputation. Every provider of services becomes a seller, which turns a system that should be built on trust into one with counting as its foundation. There has been a subversion of our character and values. The result is that rampant greed threatens to overwhelm our financial system and corporate world. We see how much Bogle is at odds with the spirit of his time when he titles his most recent book Enough. The idea that there should be self-imposed constraints on personal selfaggrandizement is today so alien in American life as to seem almost extraterrestrial. As we ponder this, we see that what has happened is that the cash nexus that Thomas Carlyle so much deplored as long ago as the mid-nineteenth century has by now carried the day. The fact that Carlyle was so sensitive to it shows that it was present even that long ago. It would be correct to say that the battle for the soul of capitalism has been a perpetual one. But there have been exacerbating features in American life in recent decades. These include the deeply-set attitudes of the me generation of the 1960s, with their disdain for canons of responsibility and absorption of an ideology of emphatic hatred toward the morality they considered bourgeois. (Ironically, these did not preclude cloaking themselves in the pieties of a pseudo-idealism.) It is a mistake to think that that time is long-since passed; its legacies are very much a part of American life today. Another development has been the near-total victory of a libertarian form of free-market theory that insists on certain ideological truisms but that has little interest in what institutions and business forms are prerequisites to the markets satisfactory functioning. It speaks very little, too, of the values that are essential cements to the market system. It doesnt take much imagination to see how all of this relates just as much to todays politics as it does to business and finance. The roles of lobbyists, big money and careerist self-advancement in American government go beyond the scope of Bogles discussion, but are no doubt joined at the hip with what he does examine. Much of Bogles analysis in both books pertains to the structures and rules of the game of contemporary business. He finds them as far off base as the value-system itself (as we would expect them to be, given that they have been spawned by that value-system). One of his major themes is born out of his long experience in the mutual funds industry, where he sees that owners capitalism has been transformed into managers capitalism. Bogle sees most mutual funds as having become dominated by the interests of [their] managers. As a result, fund organizations focused on salesmanship over stewardship; abandoned traditional investment committees in favor of flashy portfolio managers; engaged in ever more risky investment policies; and provided new funds to meet the fads of the day. Not limited to mutual funds, this is characteristic of corporate capitalism in general as stockholders, both by choice and because of how things are structured, are essentially impotent as owners. The lack of owner-control makes the various gatekeepers all the more important. Pointing to obscene executive compensation and the manipulation of earnings reports to inflate stock prices and enrich insiders, Bogle asks, How could these aberrations in corporate America occur? His answer: The responsibility lies heavily upon the shoulders of the gatekeepers we trusted to protect investors legislators, regulators, rating services,

attorneys, public accountants, and, most importantly, corporate directors. He discusses this in detail about each type of gatekeeper. This passage gives some taste of his discussion : When proposals for reform came for example, requiring that stock options actually be counted as a compensation expense, or prohibiting accountants from providing consulting services to the firms they audit the outrage of our legislators, inspired (if thats the right word) by political contributions and by the fierce lobbying efforts of corporate America and the accounting profession, thwarted these long overdue changes. Every bit as biting is his criticism of the turn from long-term value-creation to short-term financial manipulation. We have moved to a world where far too many of us seemingly no longer make anything; were merely trading pieces of paper, swapping stocks and paying our financial croupiers a veritable fortune. Mergers are often done solely for financial reasons and without business rationale. Avis, for example, has passed through 18 owners, and with each merger there has been a hemorrhage of bankers and lawyers fees, along with bonuses to top executives. Bogle cites the creation of ever more complex financial derivatives in which huge and unfathomable risks have been built into the financial system. The scale: The notional principal value of all derivatives is almost beyond imagination some $600 trillion, nearly 10 times the GDP of the entire world. He doesnt overlook the financial systems benefits, but he says these are outweighed by the negatives. One of the most striking aspects of his discussion is what he reveals about how much is skimmed from investors, leaving them with little even in the long term. Despite being thought to exercise professional investment judgment in the selection of their holdings, mutual funds generally dont even match, much less exceed, the performance of the stock market indices. When the charges made by the financial institutions, taxes and inflation are considered, investors get almost no return on their money. He speaks of the powerful marketing machine that is Wall Street and says that puffery is its stock in trade. The American public in recent years has been outraged by the compensation the people at the top pay each other. Some hedge fund managers receive billion-dollar annual paychecks. CEOs of the publicly-held corporations receive obscene compensation -including failed CEOs. The large public accounting firms render hugely profitable consulting services to their audit clients in what Bogle sees is clearly a conflict-riddled relationship. It all amounts to rampant greed, with the gatekeepers, such as the compensation committees of corporate boards of directors, not doing their jobs. (Bogle is focused on the top of the pyramid, but it is worth noticing how much the value system permeates so many levels and varied institutions in American society. A football coach recently accepted an immense compensation package at the same time the universitys financial exigency is making it eliminate student discounts on tickets. In a different time and place, one might think the coach would consider a lesser amount enough, out of consideration for the needs of his institution and of the people around him. From a detached perspective, one might wonder whether such narcissism ought not to be considered a disqualifying character trait in someone purporting to be a leader.) As it struggles to emerge from the economic crisis that became so apparent in the fall of 2008, the United States (as well as other countries, such as those in the G-20) will seek reforms to prevent a recurrence. Bogles books are a good place to start in spotting needed changes. There is a potential reform inherent in each of the things he criticizes, and

he adds a number of specific proposals. These include, among others, treating all stock options as expenses, putting corporate boards under the control of an independent chairman, providing boards with staffs of their own so that they will have information gathered independently of the management they are overseeing, strengthening the standards that require a rotation of auditors, and abolishing the favored tax treatment given to the compensation (euphemistically called carried interest) paid to hedge fund managers. There are a number of others. Before we conclude, some additional thoughts are in order: It is worth noting how much the value system essential to a healthy capitalism resembles points long-made by critics of capitalism. There is considerable overlap even among the adversaries. We have already commented on Thomas Carlyles passionate dislike for the cash nexus, a point that Bogle feels deeply about precisely as a defender of the sort of capitalism he admires. When Bogle decries an absence of stewardship and of fiduciary responsibility, there are echoes of the socialist R. H. Tawney in The Acquisitive Society. And when Bogle ruminates about how I dont think that any one of us can take sole credit for our success, he comes close to the heart of Henry Georges insight that the theory of property and of earnings should take into account the fact that there is much unearned increment in the gains that by outer appearance seem to be attributable entirely to a given individuals efforts. We will do well to reflect, too, on Bogles enthusiasm for the thesis expressed by Adolph Berle and Gardiner Means in their 1932 book The Modern Corporation and Private Property. What is often called the Berle-Means Thesis was that stockholders do not effectively control a corporations management, who are for that reason irresponsible (in that they are cut loose from accountability). This separation is one of Bogles principal reasons for thinking capitalism to have gone astray. He enumerates what he thinks to be Berle and Means main points, but overlooks that there is a sharp difference between what he concludes from the separation and what Berle and Means recommended because of it. Bogle wants reforms to bring the owners back into the picture, whereas Berle and Means called for putting corporations under the wing of government. It ought not to be surprising to find that both the observation of ownership-control separation and the desire for government control had been a part of socialist thought long before Berle and Means 1932 book, going as far back as Marxs Das Kapital and G. D. H. Coles Labour in the Commonwealth. (See also Thomas Kirkups History of Socialism, published in 1909.) Nor is it surprising that after World War II the European social democratic parties picked up on the idea with their concept of codetermination. The absorption of large corporations into government has been a recurrent theme in socialist thought and practice. Observations of this sort remind us that it is always worthwhile to bring a detached perspective to what we are reading. The fact that there are additional things to say does not, however, detract from what Bogle has to impart. Those of us who agree that indeed a battle for the soul of capitalism is at the heart of todays American predicament will find much value in each of Bogles books (including the five others he has written). They are easy books to read, but no less profound for that reason. Dwight D. Murphey