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FROM THE MOYERS FILES: Bill Moyers talks with John Bogle

MOYERS: Reforming tax havens is slowly catching on in Congress. The Senate Finance Committee has passed legislation to let the government continue collecting federal taxes even if a company changes its address.

Over in the House of Representatives, Democrats are trying to force a vote on a bill that would deny tax breaks and federal contracts to any company moving to a haven like Bermuda.

A Republican bill would halt off-shore incorporations, but only temporarily. And the lobbyists are lined up knee deep to make sure that whatever emerges looks and smells more like Swiss cheese than reform.

Here to talk to me about the crisis of confidence in corporate America is one of the investment industry's "four giants of the 20th century." That's how FORTUNE magazine describes John Bogle.

Back in 1974, Mr. Bogle founded the Vanguard Group, which he then grew into one of the two largest mutual fund organizations in the world. After 25 years as Vanguard's chairman, he founded the Bogle Financial Markets Research Center and continues to serve as its president.

In addition to writing books — this is his latest — and spending time with his 12 grandchildren, John Bogle has been speaking out for strong measures to curtail corporate abuses.

Welcome to NOW.

BOGLE: Great to be here with you, Bill.

MOYERS: Tax havens, accounting fraud, inside dealing, astronomical salaries without merit.

What else can go wrong with corporate America?

BOGLE: Well, I think we must be getting pretty much to the bottom of the ill-doing barrel by this point.

I don't think too much else can go wrong, but I think there's probably some very important systematic changes we've got to make in the way American corporations are governed.

MOYERS: Well, why were so many corporate executives and boards of governance blind to what they were doing to the country and to the ordinary people who invest in your mutual funds?

BOGLE: Well, I think you'd have to agree with Chairman Greenspan, it was greed.

MOYERS: Infectious greed.

BOGLE: Infectious greed, to follow irrational exuberance.

MOYERS: But what happened to the watch dogs?

BOGLE: Well, the watch dogs didn't do a very good job.

Among the biggest watch dogs, and we haven't heard or read very much about any of this, are the owners of all these corporations themselves. And by and large, you can focus down on 75 large financial institutions that own 44% of all the stock in America.

MOYERS: You mean like mutual funds...

BOGLE: Mutual funds.

MOYERS: Pension funds.

BOGLE: Pension funds, exactly.

MOYERS: What do you mean we haven't heard from them?

BOGLE: And we don't hear a thing from them.

The... I call it the silence of the funds, and the reason for that I think is that we're so focused in this recent era on the price of the stock rather than the value of the corporation.

MOYERS: You saw our report on offshore tax havens.


MOYERS: What do you think about that?

BOGLE: Well, I thought your report was right on the mark, but I would add this. And that is, when companies have gone to Bermuda, say, they have not told their stockholders, adequately informed their stockholders that their shareholders' protections there are by most legal opinions considerably less strong than they would be in the U.S.

MOYERS: What does that mean?

BOGLE: That means that if a shareholder wants... A shareholder wants to go to court to enforce his or her rights against the corporation, that the governance standards down there are weakened.

There's even some question about whether certain S.E.C. rules apply to corporations who are headquartered outside of the United States.

MOYERS: do you think they're then doing it just because they want to save taxes for short-term advantage?

Or is there some larger mission that they get?

BOGLE: No, I think tax saving as it were is the basic mission that they're trying to follow, but it seems so absurd to say you can move a mailbox to Bermuda and say you're incorporated there.

And I think at that point the government ought to step in and change the law to make that not possible.

MOYERS: Well, even as we talk, Mr. Bogle, that's what the government is trying to do.

There's a bill in Congress as we talk designed to end these tax havens, but there's a strong pressure from corporations and others behind the scenes to make sure that that reform doesn't happen.

BOGLE: You're asking me to explain something that I find inexplicable.

You know, we have responsibilities as citizens of the United States.

Corporations have responsibilities as corporate citizens. And those responsibilities are heavy responsibilities. They're not just rights.

They're an obl... We have some ethical obligation, some fiduciary duty to do the right thing in America, and I think corporations have ignored that to too great an extent.

MOYERS: But there is an argument that capital is politically neutral, that capital goes where it can serve its own interest irrespective of national or political boundaries. What do you think about that?

BOGLE: I don't think that's true. I think there's huge accumulation of capital that we've seen by executives in corporations has for one thing, been used for political purposes that I find quite disturbing.

The role of corporate giving in our political system is not a good role.

Corporations are able to buy things that you shouldn't...

That shouldn't be for sale in this country.

MOYERS: Such as...?

BOGLE: Well, favorable tax treatment... Favorable votes on things that affect their business, things of that nature.

MOYERS: Even as we talk, members of the senate and the house are meeting to work out some kind of compromise on legislation to prevent some of these scandals from happening again. Would it surprise you if I told you that the politicians on that committee have received more than $1.3 million from the big five accounting firms in its trade group?

BOGLE: No, it doesn't surprise me at all.

And if you think about corporations who invest capital to get a return on capital, I can assure you there is no capital investment with a higher rate of return than political contributions. You know, you've probably got a 300% rate of annual return on political contributions, just to pick a number out of the air, where 20% or 15% might be the going rate for building a new plant. It's a big difference.

MOYERS: That seems to me to be the fundamental way in which capitalism has changed. I mean, we've always had predators, but we now have a predator class that has enough political clout and enough control of the media to keep the government from protecting the public interest. That seems to me to be the big change.

BOGLE: I think it is a big change, and I think the political reform, contribution reform, will help.

But I really think it's a question of restoring some sort of an ethical sense in American business.

I believe that the government is not in a position to do that.

I believe that what we need to do is have the owners of the stock speak up, the mutual funds speak up, the other institutional investors. And they've got to have more of an investment focus compared to a speculative focus, and they've got to finally get to a stage where they realize that corporations should be treated as part of their stewardship responsibilities and not as part of their marketing responsibilities.

MOYERS: But when these big institutional mutual funds and pension funds speak up, what should they be saying?

I mean, because they have been relying upon data provided them from corporations that were deceiving them.

What should they be asking for?

BOGLE: Well, first of all, i'll just envision this group of 75 institutions owning 44% of the stock, and envision that as one institution, say they could speak as one in certain ways.

If you go into the president of the corporation and say, "i want you to open the books for me," The president of the corporation will say, "yes, sir."

That's what you say to a 44% owner, but not to 11 4% owners.

MOYERS: What do you think the government should do?

Right now, as we talk, again, there's this epic battle being waged over corporate reform. Democrats in the Senate want very tough measures. Republicans in the house are trying to dilute those measures.

They say that if you go too far in regulation, you'll kill the goose that laid the golden egg.


MOYERS: What do you think the government should do now?

BOGLE: Well, first of all, I think the government ought to speak out and demand that investors, and particularly institutional investors, take the responsibility that's theirs. Why on earth aren't the investors who own these corporations doing more?

MOYERS: Well, why aren't they? That's what I need to know.

BOGLE: Well, first of all, because they're engaged in short-term speculation on stock price rather than the long-term corporate value, and second, because they had this conflict of interest, and third, truth told, there's not only a usual inertia about proxy voting.

It's kind of a slow process that needs some improvement, but there's also the fact that the governance standards in the mutual fund industry are even lower than the governance standards in corporate America.

So I call it the "people who live in glass houses shouldn't throw stones" kind of a syndrome. So there have got to be more of us that stand up and be counted.

MOYERS: I und... I take that and believe in that.

But in addition to that, what do you think the government should do?

BOGLE: Okay. I think the government, one, should make sure that stock options are accounted for in a proper way, expensed.

I've heard compensation consultants say the wonderful thing about stock options is they're free.

Well, that's ridiculous.

They cost a lot of money to investors.

Corporations go out and buy their own stock with cash when the executives exercise those options, by the way.

So there's a lot of money changes hands here. And that would be the first thing: make sure the cost of stock options is accounted for.

MOYERS: And Coca-Cola announced this week and the WASHINGTON POST announced this week it would... They would in fact do...

BOGLE: And that will, of course, result in the reduction in reported earnings, but it's a reduction that should have taken place all along.

MOYERS: It's a realistic...


MOYERS: then. All right, what else?

BOGLE: Okay, second thing is I think the bill before the Sarbanes Committee should be even strengthened and put into law, which is to create self- regulation has failed in the field of public accounting.

That's all there is to it. We may wish it had not failed. I'm not a big government interventionist. But if it fails in the private sector, the public sector has to take over.

So I'd say the federal... A federal accounting standards board set principle based accounting standards would be a big help in all this. I think some of the things the government is doing, I think tougher jail penalties are in order.

I think that's wonderful.

Hopefully they will be in real prisons and not in these country club kind of prisons.

I think immediate reporting of executive transactions, which the S.E.C. is now starting to get to, is another important thing. But mostly I think it's the private work backed up by the public support.

MOYERS: But the securities industry on the whole and the accounting industry and the business roundtable and the chamber of commerce do not want the public sector, the federal government, looking out for the public interest. They're up there lobbying, no matter what they say publicly right now, they're up there lobbying to dilute the Paul Sarbanes bill that's come over to the house from the Senate.

BOGLE: They certainly are, and we've just got to get over that.

We have to have Congress stand up, and we are now getting... I think we see in the public mood a real antipathy to what's going on.

If the public speaks and if investors start to vote with their feet, you will see a lot of change in this system, but it can't happen without a sense of public outrage, and I think that's starting to develop.

MOYERS: I don't know what your politics are, Mr. Bogle, but what do you think about the fact that Washington seems to be run right now by people who have the mentality and follow the model of a Fortune 500 company?

BOGLE: I think private enterprise is one thing and public duty is quite another, and I don't think we should mix the two very much. I mean, certainly the government has some aspects of a corporation and a chief executive and a marketing director and all those things, a finance director.

But the government is invested with a far bigger responsibility than just simply looking to some distant bottom line.

The government has a public duty. Our founding fathers had principles that I think would leave them appalled at what's going on today.

MOYERS: The moral philosopher Adam Smith or the founder of modern capitalism, he thought commerce and finance should be grand and noble enterprises.

BOGLE: Yes, I recognize the quote.

MOYERS: Do you think he would be turning over in his grave today?

BOGLE: I think he would be. He wouldn't recognize what is being done in some cases, paradoxically not being done in his name today.

You know, he didn't just write THE WEALTH OF NATIONS, he wrote the THEORY OF MORAL SENTIMENTS. And that was a book where he expressed the reason, the conscience, the inhabitant of the breast guiding us in doing the right things for our fellow man.

And we all know that's what we should do, but we'd gotten off that track in America.

MOYERS: Thank you very much for being here today, and thank you very much for speaking out.

BOGLE: Great to be with you.

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