At the end of 2011, the Occupy Wall Street protesters left behind an important question: Why are there firms paying their executives so much money and creating so much damage, rather than creating a better economy? The answer, argues Roger Martin, has its roots in corporate stock-based compensation practices, a financial services industry that conducts trades based on expectations rather than performance, and a lack of government regulation.

Martin, the author, most recently of Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL, discussed these and other issues in an interview with Monitor’s Steven Goldbach in the firm’s New York office, close  to where the protesters occupied Zuccotti Park in Manhattan during the fall. Martin outlined his ideas for changing executive compensation, financial services regulation, and tax policies to rebuild an economy that generates prosperity and growth.

The interview is part of Monitor’s “Insights from the Field” series with leaders sharing their perspectives on important issues.

The following are video excerpts from their conversation.

Wall Street Focuses on Expectations Rather than Performance
Roger Martin notes that the Occupy Wall Street protesters—who had been gathering in New York near the site of this interview—had raised an essential question: Why are these firms paying their executives so much money and creating so much damage, rather than creating a better economy? Martin says we have seen financial firms excel by trading value rather than creating value. We also have seen stock-based compensation policies provide incentives for executives to make short-term decisions to beat market expectations and improve their stock performance rather than build long-term growth for their companies and the economy.

Martin Argues Wall Street Regulators Should Learn from NFL
Business analysts and investors default to examining a company’s income statements and balance sheets because they have not found more sophisticated ways to evaluate and discuss corporate strategy, Roger Martin observes. This is another challenge standing in the way of economic progress, because it leads to investments based on expectations and to misconceptions about corporate performance. People on Wall Street spend more time trading value than building it, Martin says. Wall Street firms invest in building data pipes that give them trade data one millisecond sooner than the competition.
As a solution, Martin argues that financial regulators should emulate the National Football League in its approach to setting rules. Whenever an innovative team figures out a way to create a great advantage—such as by inventing a new approach to offense or defense—the NFL’s competition committee changes the rules to maintain the integrity of the game and the fan experience.

Imagining Quarterback Tom Brady on a CEO’s Quarterly Earnings Call
In this clip, in which author Roger Martin responds to questions, he notes that in his native Canada, personal bankruptcy rules and banking policies protected the country from diving into a subprime mortgage fiasco as occurred in the United States. Martin also explains that privately-held companies have fewer problems than publicly-traded firms when it comes to aligning interests with investors, but he notes that private equity investors still want very large payoffs from going public in the stock market. He lauds one company’s promise to provide a fair return (as opposed to a maximal return) to shareholders. And Martin imagines what would happen if Tom Brady, the New England Patriots quarterback, had to apologize for winning—but not beating the expectations game of the point spread. “That is the joke played on CEOs every quarter,” he says.

Roger Martin is Dean of the Rotman School of Business at the University of Toronto. He is the author of, most recently, Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. He is an advisor on strategy to the CEOs of several major global corporations. Learn more at his website.

Steven Goldbach is a Partner at Monitor and leads the firm’s North American CPG practice. His work with consumer-oriented companies focuses on helping them become more prepared to engage with consumers in a highly connected world. He can be reached via e-mail at Steven_Goldbach AT Monitor DOT com.