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A call to reboot capitalism and preserve $85 trillion in retirement savings for their owners—not for use as the financial industry’s ATM
Each year we pay billions in fees to those who run our financial system. The money comes from our bank accounts, our pensions, our borrowing, and often we aren’t told that the money has been taken. These billions may be justified if the finance industry does a good job, but as this book shows, it too often fails us. Financial institutions regularly place their business interests first, charging for advice that does nothing to improve performance, employing short-term buying strategies that are corrosive to building long-term value, and sometimes even concealing both their practices and their investment strategies from investors.
In their previous prizewinning book, The New Capitalists, the authors demonstrated how ordinary people are working together to demand accountability from even the most powerful corporations. Here they explain how a tyranny of errant expertise, naive regulation, and a misreading of economics combine to impose a huge stealth tax on our savings and our economies. More important, the trio lay out an agenda for curtailing the misalignments that allow the financial industry to profit at our expense. With our financial future at stake, this is a book that analysts, economists, policy makers, and anyone with a retirement nest egg can’t afford to ignore.
- Sales Rank: #637894 in Books
- Published on: 2016-05-24
- Original language: English
- Number of items: 1
- Dimensions: 8.25" h x 1.00" w x 5.50" l, .0 pounds
- Binding: Hardcover
- 296 pages
Review
“This excellent and well written book exposes the multiple leakages to various agents operating between savers and pensioners and the companies they are invested in as well as the problems of collective industry failure. It does not just make clear the problems and the often perverse incentives in the current system, but with clear “takeaways” after each chapter, the authors propose practical solutions from greater transparency to systemic regulation, with an outline of what a “People’s Pension Plan” and a “Common-Sense Bank” would look like. The book has insights for the individual investor as well as those in the industry interested in making the investment process fairer and more responsible.” -- Sir Mark Moody-Stuart, former chairman of Royal Dutch Shell (Sir Mark Moody-Stuart)
“For those wishing to know what’s right with our financial system and how it can go wrong—or what’s wrong with it and how it can be set right, this is the book for you. Its return to common sense and the basics of finance is refreshing in a world too often characterized by obfuscation and complexity. Clear, concise, sensible, and incontrovertible.” -- Steve Lydenberg, Founder and CEO of The Investment Integration Project (Steve Lydenberg)
"This book brilliantly describes what finance is for and shows how we, the people, who are the ultimate owners, can influence the system to meet our long-term needs."--Dame Barbara Stocking, President, Murray Edwards College, Cambridge (Barbara Stocking)
"Davis, Lukomnik and Pitt-Watson paint a bleak picture of an out-of-control financial system that fails to serve the aspirations of ordinary individuals. Not content simply to identify the problem, the authors propose creative (principles-based) solutions. If you care about the role of finance in today’s economy, read this provocative, compelling book." -- David Swensen, Chief Investment Officer, Yale University (David Swensen)
This fine book provides remarkable insights into what has gone wrong in our financial institutions and markets. In its call for action by us--we investors who collectively own corporate America--the authors offer clear and actionable steps that we can take to build a corporate world that serves our own interests, not Wall Street's.--John C. Bogle, founder and former chief, The Vanguard Group (John C. Bogle)
“This is a clear and persuasive analysis of what is wrong with the financial system. The good news is that much of it is fixable, and this excellent book gives a compelling account of how.”—David Walker, Chairman of Winton Capital, former Chairman of Barclays (David Walker)
"As only insiders can, Davis, Lukomnik, and Pitt-Watson shine a spotlight on hidden cracks in the system that can still put hard-earned savings at risk. This is a vital book for anyone concerned about how to make the finance industry generate wealth for all of us.”—Former U.S. Senator Christopher Dodd (Christopher Dodd)
"Uncompromising in its critique and optimistic in its vision, What They Do With Your Money not only addresses the problems in the finance industry but offers practical solutions that can change the world for the better." -- Gordon Brown, former Prime Minister of the United Kingdom (Gordon Brown)
"....the interests of the underlying clients of the finance industry—the depositors, the workers and the pensioners—should come first. Everyone is a capitalist these days. That means keeping a much closer eye on those who manage that capital"—The Economist (The Economist 2016-06-10)
“A new book by three of the best thinkers in financial sustainability . . . does an outstanding job of fusing the public necessity and investor rationale for sustainable investment. . . . The timing of this book is impeccable, and it is required reading.”—Hugh Whelan, ESG Magazine (Hugh Whelan ESG Magazine)
“A thoughtful, meticulously documented, and downright infuriating indictment of the American financial services industry.”—Nell Minow, Huffington Post (Nell Minow Huffington Post)
About the Author
Stephen Davis is a senior fellow at Harvard Law School’s program on corporate governance. Jon Lukomnik is executive director of the Investor Responsibility Research Center. David Pitt-Watson is the former head of the Hermes shareholder activist funds in Europe and an executive fellow of finance at the London Business School.
Most helpful customer reviews
2 of 2 people found the following review helpful.
Easy Read, Packed With Insights and Great Actionable Advice
By JamesMcRitchie
What they do with your money is central to many issues of citizens around the world. This wonderful new book by Stephen Davis, Jon Lukomnik, David Pitt-Watson helps readers connect the dots. While its focus is on the financial system, its purpose is empowering individual citizen investors and those who would be investors if that system were redesigned to serve us all.
Fixing the system won’t be easy. We can’t count on most of those those benefiting from the system to initiate needed changes but the authors provide a roadmap of how needed reforms can be accomplished.
RAND recently asked a representative sample of Americans if they agreed with the statement “people like me don’t have any say about what the government does.” Responses among likely Democratic voters didn’t significantly correlate with support for either Sanders or Clinton. Likewise, there was no correlation with supporters of most Republican candidates… except Donald Trump. People who “somewhat” or “strongly” agreed with the statement were 86% more likely to prefer Trump over other candidates.
“This increased preference for Trump,” RAND explains, “is over and beyond any preferences based on respondent gender, age, race/ethnicity, employment status, educational attainment, household income, attitudes towards Muslims, attitudes towards illegal immigrants, or attitudes towards Hispanics.” Desperate people are willing to take desperate actions, even voting for a megalomaniac. Who knows? Maybe it will work out better than the current situation, they may be thinking... or maybe they aren't thinking at all but just reacting.
Those voting for Brexit may have also agreed they have little say in what the European Union does. What about supporters of Islamic State of Iraq and the Levant? A person must feel powerless if they think their best option is to take such drastic measures. Who thinks they have a say over the direction of the financial system and corporate governance? Where are the levers for influencing mutual funds? Alienation might drive a lot of behaviors not explained by self-interest.
What They Do With Your Money examines the financial system from the standpoint of an average person, explains why it isn’t working for us and, most importantly, provides solutions, including a Magna Carta for citizen investors.
We can have a say in how the financial system is operated and whom it serves. Just don’t expect your bank, mutual fund or Congress to take the initiative in making it work for us. The authors of the book aren’t insightful unengaged scholars observing the world from ivory towers. They are highly engaged individual citizens working to set up the institutional framework that will be required for transformation. Buy and read the book. Join us.
First these well qualified experts look as what the financial system is supposed to do, breaking it down into four important functions as follows:
- Safe custody of wealth.
- Convenient payment system
- Intermediation between lenders and borrowers
- Reducing risk, like insurance
Then they discuss the problem of incentives, among other causes of misalignment. Our capitalist system is supposed to be about those with capital deciding who will run our companies. However, we generally have so many intermediaries between investors and company managers, all taking a little slice of our money, that real monitoring goes by the wayside. We may invest a little in our 401(k) plan every month but how many are taking a little slice for administration?
We pay record-keepers to check that our savings are going to the right place; mutual-fund managers and staff; third-party research firms and databases to help managers choose which stocks to buy; another set of advisors to help vote all those proxies; listing platforms so investments in the mutual fund can be bought and sold; brokers who handle the fund’s orders; transfer agents to look after those securities; agents to price them for reporting purposes; on and on and that doesn’t even touch on many of the more obscure aspects of our financial system, such as the fact that mutual fund are buying derivatives, not actual stock. All those small charges add up to reduce pensions of 25% to 40%. Most costs are hidden but the authors lift that veil.
A real eye opener for me is that costs in the finance sector (generally around 1.5% – 2%) are the same as they were when the transcontinental railroad was built. Yes, there have been increases in productivity and efficiencies but those gains have gone to the industry itself, not investors. Financial sector income accounted for 4% of GDP in 1950 but 8% by 2010. While making up only 7% of the economy and creating a mere 4% of all jobs, the financial sector generates more than a fourth of corporate profits. Makers and Takers: The Rise of Finance and the Fall of American Business
Asset managers are typically compensated based on the amount of money they manage, not on how well they do with it. Similarly, loan originators were paid based on the number of loans, not their quality. The misaligned incentive helped bring on the Great Recession.
I am reminded of a discussion I had with a friend’s father back in the early 1960s. As a consultant to Anheuser Busch, he got them to stop paying their sales force based on gallons sold. Instead, they were paid based on dollar volume. It was the birth of popular premium beers in America. How incentives are structured can make all the difference.
The authors of What They Do With Your Money describe how similar disincentives apply to managers of mutual funds and corporations. For example, maximizing near-term share price, rather than intrinsic corporate value, leads to a raft of economic inefficiencies as well as lowered financial returns. It also incentivizes managers to externalize costs off onto the environment and taxpayers.
Similar criticisms are levied at mainstream economics, which assumes away real world complications by treating people as economic robots in order to improve pseudo-precision. In mainstream economics if the model doesn’t fit reality, make reality fit the model. The answer is economics based in real people, accounting for their real values and actual behavior.
Frequent readers of my blog will find much that is familiar. For example, the authors cite many of the same studies, such as that by Gilson and Gordon, "The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights," which discusses why most mutual fund managers don’t monitor corporate governance. Another important study we cite is "Executive Superstars, Peer Groups and Overcompensation: Cause, Effect and Solution," by Elson and Ferrere, documenting the lack of a robust market for CEOs.
Like me, the authors offer a long list of practical solutions. Most, such as repealing IRS section 162(m), require collective action. Paying cash instead of restricted stock or options may make sense but lazy corporate boards and regulators can interpret a rise in stock value as a performance metric meeting the requirements of 162(m), whereas devising other performance measures to meet those requirements would take a modicum of work. Maybe if more directors were actually nominated by shareholders, they would be willing to put in the time effort and repeal of 162(m) would not be necessary.
A Few of My Favorite Recommendations
- Trust must be built into the financial system by every intermediary assuming fiduciary responsibility, putting client interests before their own.
- Focus on good governance, rather than excessive rules.
- The first step in designing a twenty-first-century retirement plan is a capable, accountable and representative board.
- Give us the names and email addresses of all those intermediaries between us and our investments who are supposedly representing our interests. We want to be able to contact them to ensure they are acting on our behalf.
- Funds should be asking their investors what we want in terms of types of investments (I don't want to invest in coal) or how to vote my proxy (I think most CEOs are paid far too much).
- Social media should focus not only on corporations but the institutional retail investors that own them. (Thanks for the shout out on many useful websites, including meh own as “the granddaddy of social media in corporate governance")
- Joining together with others through social media or an American equivalent of the UK's ShareAction is critical. We can’t transform the financial System on our own. I am hoping the authors will start such an organization. How about you? Are you ready to join? Maybe lead?
I recently contributed a chapter to The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members on "The Individual’s Role in Driving Corporate Governance." Most of that book is aimed at corporate directors, managers and their advisors. However, several chapters, including mine, are relevant to the role of individual investors and how we can take personal responsibility for transforming corporations into more democratic institutions. What The Do With Your Money and The Handbook of Board Governance have areas of overlap but each calls out unique perspectives and actionable solutions. Read both and get involved in putting an end to corporations as democratic-free zones.
1 of 2 people found the following review helpful.
Excellent explanation Easy to read truly education
By Patricia B Davidson
Excellent explanation
Easy to read truly education
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