Roger L. Martin’s love affair with capitalism is a tarnished one, like that of a lot of economic thinkers these days. Hair-raising booms and busts chip away at any faith that the free market is self-correcting. Growing wage inequality — compounded by stagnant middle incomes — erodes the tenet that a rising tide lifts all boats.
Martin, an influential and prolific thinker who is dean of the University of Toronto’s Rotman School of Management, believes the way to “fix” capitalism is to change the way markets are regulated. No, he’s not arguing for more rules. In fact, he’s a harsh critic of Sarbanes-Oxley and its offspring, the 848-page Dodd-Frank. He thinks both laws are expensive overreactions to financial crises and solve little by trying to solve all.
Instead, Martin, who specializes in “integrative thinking” — essentially a holistic approach to working through business problems — wants our regulators to take a page from the National Football League. That’s right, the association that oversees America’s favorite big-dollar, helmet-smashing pastime.
Martin starts by distinguishing between a real game (producing winners and losers) and the “expectations game” (run by bookies). The NFL bans for life any player or official who engages in the expectations game of betting on a team’s performance. But in capitalism, the real game of building a winning business — focusing on products and customers — has gotten swamped by a market expectations game dictated by Wall Street.
Regulators should delink the two, starting with putting an end to stock-based executive compensation — at least before retirement. As a CEO, “you’re either in the real game or the expectations game; you can’t be in both,” Martin argues. Since stock prices are “based not on actual performance but on how people think the company will perform in the future,” he says, stock-based compensation encourages executives to hype their companies’ stock with Wall Street, even in some cases playing hanky-panky with accounting, rather than building formidable, valuable companies. “We’ve increasingly seen the gaming of executive compensation,” he says. “It’s a big factor behind the boom-and-bust cycles.”
Since hedge funds thrive on the volatility of the expectations game — not on building real value — Martin likewise wants to limit their power. He’d start by banning pension funds from investing in them. “This is like war,” he says. “Cut off their supply lines.”
The other thing Martin likes about the NFL is how the league tweaks its rules to maintain parity between offense and defense — understanding that football’s long-term financial success rests on maintaining a rich fan experience. Astute capitalist players will always seek to game the system. The trick for regulators, says Martin, is to stay one step ahead and to constantly fine-tune the rules to keep the playing field even.
But today’s financial regulators simply aren’t equitable. The New York Stock Exchange’s Mahwah, N.J., facility leases space to high-speed traders — who now enjoy a millisecond edge on their competitors because of their proximity to the NYSE server. “And you’re supposed to be neutral?” he asks. (An NYSE official points out that anyone can pay extra for these co-location services, so the exchange is not engaging in favoritism.)
Martin and I talked about his ideas in multiple conversations leading up to a session we conducted for an audience at the World Economic Forum in Davos, Switzerland. As groundbreaking as his ideas are, though, I had trouble envisioning any of them translating into policy in Washington. Ask Congress to “tweak” rules instead of telling voters that their insight and brilliance has produced a grand plan to prevent the next financial crisis? Take direct aim at powerful interests like hedge funds and corporate boards? Good luck!
Martin is undeterred; he is stepping down from his dean’s post this spring to devote his career to a project on the future of democratic capitalism. “If we continue to say that trading value is more important than building value, we’re going to be messed up,” he says. Washington might start by appointing the first NFL commissioner of finance.
This story is from the March 18, 2013 issue of Fortune.