The Battle for the Soul of Capitalism
By John C. Bogle
With Forward by the Honorable Peter G. Peterson

Summary by Jennifer G. Cuthbertson, Business Book Summaries

Corporate scandals, under-funded pensions, and the arrest of top executives are all a part of modern corporate culture. But, it has not always been this way, and it does not have to be this way today. In The Battle for the Soul of Capitalism, John C. Bogle details how the financial system undermined social ideals, damaged trust in the markets and robbed investors of trillions. He also outlines the steps that need to be taken to put the governance of the nation's corporations back on track. Both institutional and individual investors will have to change their mindset and once again treat stocks as a long-term investment. Corporate leaders will also have to change their mindset and remember who they work for and what they are responsible for. This book is must reading for executives and investors alike.

Bogle begins the book by discussing events that occurred long before the United States' corporate culture took a turn for the worse. Specifically, he begins by asking, "Why did the Roman Empire fall?" The answer that he gives is that Roman citizens made an unprecedented demand for material goods that was accompanied by the self-indulgence of the civic order; the acceptance of money as the measure of their worth, their wants, and the value of their property; their need for honor and recognition, even as their vision of freedom, liberty and greatness was fading.

In short, no nation should take its greatness for granted. Bogle states, "There are no exceptions. So I am concerned about the threats we face, not only the external threats to America's greatness in this present world, but the internal threats we face at home." He goes on to say that in this book he is seeking to address what he sees as one of the biggest threats--the erosion in the past twenty years of the conduct and values of our business leaders, our investment bankers, and our money managers.

The "pathological mutation," as Bogle characterizes the shift from owner's to manager's capitalism, is a key part of the analysis of what went wrong with corporate America. Business was built on a system of trusting and being trusted, but has shifted to a "bottom line" approach. The attributes of this system include excessive executive compensation, stock options and a transfer of wealth from individual investors to business leaders, corporate insiders, and financial intermediaries.

One of the many changes in the world of investment has been the introduction of institutional investors. This has led to the diffusion of ownership and to corporations being run for the benefit of managers rather than owners. In the 1950s financial institutions began to make up a larger percentage of investors than individuals did.

By the 1960s, private retirement plans owned $16 billion worth of stocks or four percent of all shares outstanding. By 1970, they owned $67 billion or eight percent of all shares. By 1990, $631 billion or 20 percent of all shares were owned by private accounts, and today, that amount has grown to $2.4 trillion or 17 percent of all equities. Another eight percent is now owned by state and local retirement plans. This means today that a grand total of $3.7 trillion or 26 percent of U.S. stocks are owned by public and private retirement plans.

This change coincided with the move away from traditional corporate pension plans and toward profit-sharing and 401(K) plans. This rise in defined contribution plans played a major role in the growth of the mutual fund industry, and both of these developments have heralded the institutionalization of investment in corporate America.

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