Granted, what has occurred amounts mostly to stabilization, rather than revitalization. While the Dow may have (briefly) poked its head above the 10,000 mark, and while industry leaders such as Goldman Sachs may have returned to their glory days, mass unemployment, a weak dollar, and a thoroughly rattled financial sector should serve as proof that the crisis has been averted and there is still work to be done, but the central goal of recovering shareholder value remains unfulfilled. So although turkeys and stockings alike may be less stuffed this year, NACD Directorship readers will also be glad to have made it to another holiday season.

The following titles, according to our editors, contain collectively all the answers that you may want about what happened and how to do it better the next time around: hence, our review of the year’s best business books. If you haven’t yet found time for them, we urge you to do so.

Today’s corporate education programs have attained a level of diversity and comprehensiveness unimagined by previous generations of executives. The modern global business climate has opened up vast sections of fertile territory for new exploration and interaction. The complexities of modern markets have necessitated a new approach to mastering the ever-expanding requirements of finance, risk, and strategy. Technological innovation presents numerous opportunities for growth and expansion as well as challenges. In short, the business world has changed and continues to change at an impressive rate, and the continual accumulation of new knowledge is and will always be an absolute necessity.

The most important reason to look towards executive education programs, however, may not be entirely based on enhancing the skill set of executives and directors, but rather on the all-important goal of appeasing their bosses: the shareholders.

A significant lasting effect of the financial crisis has been that shareholders have become increasingly concerned about the qualifications and personal character of those board members and executives in whom the well-being of their portfolios is entrusted. Now directors and C-suite executives are being called upon, either directly or indirectly, to prove their worth as leaders, and executive education programs can be a valuable tool in demonstrating to shareholders the development of new and relevant skills necessary in a changing economic landscape.

Making the Grade
In fact, executive education’s new justification may be one that the architects of such programs themselves are just beginning to come to grips with: regulators may require these programs. As shareholders watched resentfully, and sometimes vocally, as their portfolios diminished, the first scapegoats often have been directors and executives. Clearly, directors and executives have to prove themselves in different and more convincing ways than pre-Lehman collapse.

The backlash stemming from the financial crisis is that shareholders and regulators are pushing for increased disclosure of the background and qualifications needed for service in the top ranks of a public company. The Securities and Exchange Commission’s proposed Proxy Disclosure and Solicitation Enhancements would require directors to provide more information on their backgrounds and qualifications on proxy forms. With this in mind, the kind of development offered by executive education programs may be just what directors need to prove their mettle to the company’s owners.

“No one school can teach all that’s required to be a director…If you have a board, and you want to make it work more effectively, we can do that.” —Harvard Professor Jay Lorsch

“The issues facing director accountability are very broad, but [executive education] may be persuasive to some shareholders in establishing a director’s value,” says Stanford University Professor Joseph Grundfest. Though directors may face skepticism from shareholders who doubt a company’s management capabilities, enhancements offered by executive education programs can go a long way in convincing shareholders about the commitment and training of their directors.

Harvard’s Jay Lorsch is more skeptical: “No one school can teach all that’s required to be a director.” Lorsch says that while his school’s programs are invaluable in sharpening the skills needed to serve on a board, there is no replacement for years of on-the-job experience; in fact, he says, shareholders may not take such programs into consideration when evaluating directors. “If you’re on the board of a bank, and you don’t know anything about banking, we can’t fix that,” says Lorsch. “If you have a board and you want to make it work more effectively, we can do that.”

One significant, tangible perk of executive education is that many agencies actually will endorse certain programs by granting higher rankings to boards whose directors have participated in such educational opportunities. In fact, ISS Corporate Governance Services, which administers proxy ratings for RiskMetrics, bases its proxy ratings in part on a board’s completion of approved educational programs. (ISS credits can also be earned by attending programs provided by the National Association of Corporate Directors and by Directorship.)

Peer Exchange
For executives with years of experience in a high-pressure daily working environment, time spent on the job is certainly more valuable than hours spent in a classroom setting. There is no substitute for experience, but the vast possibilities offered by new and innovative means of learning can add a new dimension to experience. One significant advantage to executive education, for example, is the opportunity to connect with new people and ideas. “The peer element is crucial,” says Gordon Armstrong, director of marketing at Duke Corporate Education. “Just engaging these smart people in conversation and giving them new ways of thinking about what they already know is very valuable.” Stanford’s Grundfest agrees: “Directors learn a great deal from talking with other directors, and these interactions are a very important element of the work.” It may simply be a matter of new ways of viewing things, says Assistant Dean Whitney Hischier at the UC Berkeley Center for Executive Education: “Oftentimes, if people have been in a particular industry or company for a while, they may have not been exposed to differing points of view. There is a humbling aspect to realizing we don’t all know everything.”

In addition to the engaging minds found among classroom peers, the range of professors in today’s executive education programs is broad—and doesn’t necessarily follow the traditional mold of yore. Though most schools do rely on a core faculty, more often they are bringing in specialists from a variety of fields. “Our professors come from real-world arenas, including international politics, securities studies, environmental politics, and international law,” says Dean Deborah Nutter of the Fletcher School at Tufts University. “And they all bring with them a vital international perspective.”

Engaging the Globe
The curriculum offered by today’s executive education programs reflects the diverse challenges facing today’s executives, directors, and middle managers in a complex and interwoven business environment. The issues of risk management, regulatory compliance, teamwork, problem solving, audit, crisis management, succession planning, asset allocation, and executive compensation that confront today’s business leaders are those which an educational faculty can help tackle. “The world is changing very rapidly,” says Nutter, “and we’re always staying on top of changes in the world to help shape our curriculum.”

Besides the unique educational and networking opportunities afforded by the collaboration of savvy business minds, today’s director education programs focus intently on the new global business frontier. A majority of these programs display an international character, with faculty and curriculum directed towards the possibilities offered by the worldwide market. “We once led a program for Ericsson,” explains Armstrong, “where the executives were faced with a new market in South Africa that they were not at all familiar with. We had them meet with leaders of South African NGOs (non-governmental organizations) and really gain a new cultural understanding they otherwise wouldn’t have had access to.”

“It’s absolutely valuable to do a little exploring of the unknown,” says Hischier. She describes one program in which executives from a Norwegian petroleum company were taken to Brazil, one of their countries of operation. While there, the executives were taken into the field to meet with local oil suppliers, officials with the energy ministry, and community organizations to better understand the day-to-day life of a country that before had been merely a source of product. The field experience, far removed from the confines of the classroom, allowed company executives to see first-hand the reality of a country that until then had been an abstraction.

“If the world were stable, then our programs wouldn’t do much,” says Grundfest. “But the business world now changes so rapidly that even the most experienced directors have more of a reason to spend time educating themselves about these new developments.” Grundfest likens the new opportunities for directors to those available to an experienced surgeon: new techniques, instruments, and drugs that are constantly being developed make continual education a necessity.

Looking Ahead
While traditional educational pathways focus on the lessons to be learned from the past, executive education programs are very much designed towards the future and its possibilities. With the world in flux thanks to a generation-defining recession, directors, executives, and managers at all rungs on the corporate ladder must acclimate themselves to the unique challenges posed by a global marketplace and a regulatory environment far less forgiving than that which nourished the downturn. “There is a broader scope of content to cover now,” attests Hischier. “Our programs are becoming more multidisciplinary in response to a changing world.”

“The job of a director is dynamic and the obligations are changing rapidly, especially in terms of legal exposures,” says Grundfest. “As a result, our programs are changing. We reinvent them every year in response to what’s changing in the world.” While most program directors are still determining how their curriculum will be updated in response to the changes in the market, the most obvious impact is a greater emphasis on risk and its related disciplines. As director and executive education programs change, tomorrow’s leaders would be wise to consider such programs to stay abreast of new and valuable methods of adaptation, innovation, and success.

Such is the case with the iconic business duos presented here. These eight famous pairings—one of them infamous for its failure in the final act—present a spectrum of the unique qualities and dynamic teamwork necessary for the effective management of extremely innovative, complex organizations. A variety of top-tier combinations reveal several variations on the theme that two heads are better than one: some, like Richard Sears and Julius Rosenwald, were marriages of necessity; others, such as Sanjay Jha and Greg Brown, co-CEOs of Motorola, were partnered in hopes of salvaging an ailing organization; still others, like Warren Buffett and Charlie Munger, seemed fated to cohabitate in the same corporate host.

The delicate balance required for a successful top-level tandem power structure is no easy achievement, as evidenced by a string of dissolutions; keeping two big personalities in harmony requires a set of unique personality traits on both sides. “It all depends on how they behave and if they can keep their egos in check,” says Harvard Business School Professor Joseph Bower, author of The CEO Within. “It works remarkably well if you also have strong board members who are able to make it work.” The challenge, as Bower sees it, is living up to the age-old adage of “diversity in counsel, unity in command”: however many leaders a company has, it has to move forward decisively. But while having a single visionary at the helm is often just what a company requires, the breadth of experience and wisdom offered by a pair of equally guided leaders can also have its advantages. “As long as there is cooperation, a pair will bring greater assets than can come from one person’s intellect,” adds Bower.

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”  – Warren Buffett, chairman and CEO, Berkshire Hathaway

Today’s activist shareholders urge boards and CEOs to seek a second opinion or appoint a devil’s advocate that can result in what some believe is a bifurcated structure, as evidenced by the recent push for splitting the roles of CEO and chairman. One of the common arguments for not splitting the roles is that it creates confusion about exactly who is in charge. Another is that it hinders the company’s leadership to communicate with one, clear voice. Yet another is that the two get in each other’s way, one reining in the other, forcing a compromised and dulled strategy. However, great business duos learn to sidestep these traps and work together for the greater good of the organization. They improve each other’s ideas without watering them down. They move in concert without stepping on each other’s toes.

The question of what is the optimal executive leadership structure is one the board must answer and be answerable for (though many of the following examples took place before the boardroom had the significance it has today); a director could not find a better starting place from which to view the issue than by looking at the following examples of tandem business success.

“Communication is the cornerstone,” says Belmont University Prof. Jeff Cornwall, who studies business organizational structure. “Successful partners are able to feel comfortable tackling difficult issues without being afraid of hurting each other’s feelings.” Certainly, when addressing high-impact challenges on a day-to-day basis, the best pairings have had a tendency to avoid sugarcoating the issues at hand, and a no-nonsense approach is also required. Says Cornwall, “Partners must have a similar work ethic, and they should have similar values, but not necessarily similar personalities.” Such advice, along with the examples offered below, affirms John Rockefeller’s maxim that friendship founded on business is preferable to business based on friendship. With such an appropriately sober attitude in mind—and with the implicit advice offered by history’s great duos—one should move confidently in building a capable leadership team.

Warren Buffett and Charlie Munger: Berkshire Hathaway
The partnership between Warren Buffett and Charlie Munger has been well documented throughout the pair’s 50-year professional relationship, but for traders, investors, and general profit-seekers at large, their formula for success remains elusive. In their leading roles at Berkshire Hathaway, the two have led investors (and themselves) to steady returns virtually unparalleled in the investment community. Their methods, as the two attest, are deceptively simple, yet their successes have been without peer.

Buffett and Munger are unified in their ability to generate profit for investors in their funds, and the two men share similar investing values that revolve around the simple tactic of targeting undervalued assets and obtaining them. As Chairman and CEO Buffett put it in last year’s letter to shareholders, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” However, the individuals behind Berkshire’s success have demonstrated their unique characters, even as they have waged a common investment crusade. Buffett, with his tireless, common-sense approach to investing, his emphasis on wise governance, and his seemingly infinite humor and wisdom, is the prototype for would-be fund kings. His annual shareholder letters offer up world-class insight into the methods by which steady returns are generated, all tinged with the folksy warmth that is no small part of the man’s appeal.

Just as capitalism thrives through the collective efforts of its individual participants, getting the economy back on track will require business leaders of all stripes to put their shoulders to the wheel. To be sure, the future will look a lot different than the recent past, as regulators and business leaders alike create mechanisms to avoid making the same mistakes. In a sense we are not simply rebuilding the economy; we are renovating it. With this innovation-friendly attitude in mind, these three new titles (and one classic) provide sound fundamental advice for executives and directors looking to recover from and renovate the shaken economic landscape.

On the Road to Recovery
In times of uncertainty and confusion, there is no shame in appealing to the wisdom of greater minds for guidance. Given the challenges presented by the unstable market, this principle is “by itself good reason to reflect on the careers of Warren Buffett, George Soros, and Paul Volcker,” says Charles R. Morris, author of The Sages: Warren Buffett, George Soros, Paul Volcker, and the Maelstrom of Markets. Morris’s book examines in depth the careers and fundamental market beliefs of these three powerful economic thinkers and points out what their principles can teach us about the current rough waters of the global marketplace. Morris examines each man’s approach to the free market, drawing out in detail their individual opinions on such topics as financial regulation, market movements, the current presidential administration, and sound governance. Buffett, for example, speaks of the delicate interpersonal balance that accompanies the compensation debate in typical Buffett fashion: “When the compensation committee—armed, as always, with a report from a highly paid consultant—reports on a mega grant of options to the CEO, it would be like belching at a dinner table for a director to suggest that the committee reconsider.”

Morris allows his subjects to speak for themselves, quoting at length a broad selection of speeches and texts by each. While his analysis of the men’s approaches is relatively thin—most of the book is presentation rather than critique—he does provide a substantial postscript that explains “how much has gone wrong and how fast it happened.” As Morris is a respected voice in the business community, his own musings are worth a look, but, ultimately, it’s his three wise men who deliver a much-needed helping of sage advice.

Leading by Example
Looking for an economic mind closer to the boardroom than to the stock ticker? Then you will find plenty to like in David Magee’s Jeff Immelt and the New GE Way: Innovation, Transformation, and Winning in the 21st Century, a comprehensive profile of the chief executive’s revolutionary tenure at General Electric. Immelt, who had a tough act to follow when he succeeded GE icon Jack Welch in 2001, quickly silenced doubters by leading a campaign of overwhelming innovation throughout the company, boosting revenues and shareholder gains, and making a name for himself that rivaled that of his predecessor.

Although GE’s stock has languished recently and some of the gleam of Immelt’s tenure has dulled, his three core principles of integrity, performance, and change remain as relevant as ever. In his conversations with Magee, Immelt stresses the importance of continual innovation, and the dangers of inertia, emphasizing that his company “teaches its people how to perform, problem-solve, and drive change, regardless of the circumstances.” Indeed, no matter the challenges posed by a difficult market climate, business leaders should look to forge an active course based on innovation and a refusal to succumb to adversity.

Magee’s recounting of Immelt’s successes at GE is comprehensive, including Immelt’s major decisions as well as his day-to-day management of the company’s 300,000-plus employees. Magee structures his book in 15 individual “lessons” that explain Immelt’s approach to leadership while describing the company’s history over the last eight years. The lessons gleaned from Immelt’s experience will be invaluable to managers looking to pull themselves out of the recessionary deep.

New Rules
Professional leadership consultant Ram Charan, whose résumé includes behind-the-curtain stints at GE, Bank of America, Dell, and a host of other Fortune 500 firms, knows well that it’s easier to dispense advice on sunny days than in the midst of an economic storm, but his latest offering seeks to accomplish the more difficult of the two. Leadership in the Era of Economic Uncertainty: Managing in a Downturn is a primer for executives looking to keep their businesses strong in the midst of tremendous economic challenges.

As is his custom, Charan emphasizes strong, confident leadership coming out of the recession, but he also advises executives to take an unprecedented command of their companies’ day-to-day operations, what Charan labels “management intensity,” or “hands on, head in.” For boards, Charan stresses the importance of risk management, healthy shareholder relations, and wise compensation policies. Like most of Charan’s books, Leadership is more specifically geared toward executives, directors, and other upper-level managers, but business leaders on all levels stand to benefit from the world-class consultant’s sound advice.

Simple Advice for Complicated Times
Just as the classics of literature resonate no less powerfully in the minds of each generation, the lessons of classic business management guides can be applied to the challenges faced by today’s executives. Case in point: Robert Townsend’s Up the Organization: How to Stop the Corporation from Stifling People and Strangling Profits, which, almost 40 years after its debut, is still one of the most admired resources for management that exists, and certainly one of the more accessible. Structured in a no-nonsense, easy-to-read format, the book takes to task classic assumptions about organization, labor, and day-to-day leadership challenges, offering a pragmatic, often wickedly funny outlook on successfully managing a company.

Townsend’s attitude may be mistaken for cavalier, but at heart his advice is sound and cogent. With topics ranging from “Conflict Within the Organization” to “P.R. Department, Abolition Of,” Up the Organization is as valuable to managers as it is enjoyable. And though it doesn’t offer anything specifically relevant to the crisis at hand—a section on “Mortgage-Backed Derivatives Packages” wouldn’t have meant much in 1970—it is a solid grounding point for managers looking to disentangle their organizations from the bureaucracies and over-complexities wrought during the first decade of the 21st century.

Dellacamera representatives were unhappy with the terms of Buchalter’s contract, which, besides stipulating large compensation and severance packages, mandated that the CEO receive a year’s notice prior to being fired, making him almost impossible to squeeze out. Dellacamera’s Delaware case would have sought to amend Enzon’s bylaws so as to allow the removal of its CEO by shareholder vote. Such a end-run of the board has never been sought before.

Though Buchalter will remain the company’s president and chief executive, Enzon has named existing director Dr. Alexander J. Denner as its new chair. Denner, a Carl Icahn ally, is a managing director at several of Icahn’s funds. Also part of Enzon’s agreement was the naming of a new director, Harold J. Levy, an executive at Iridian Asset Management, which itself owns 18 percent of Enzon.

“I look forward to Alex Denner’s and Harold Levy’s contributions in their new roles and appreciate their ongoing confidence in our strategy,” said Buchalter in announcing the changes. “Enzon is well positioned today thanks to the efforts of our management team, employees, and board of directors. I remain committed to leading Enzon through the next steps of its development.”

The SEC’s proposal, if adopted, would forbid private equity funds from using third-party placement agent services to solicit investment dollars from state and municipal pension plans, thus bringing to a halt the widely practiced use of such agents. The proposal would also block political contributions from parties seeking investments from those government entities, a shadowy, but not altogether uncommon, practice among private equity firms. “There are just a few small players in the country that have the political connections to do this,” says Charles Eaton of placement house C.P. Eaton Partners. “If the SEC bans political contributions, we would be happy to see these two-bit finders go away.”

The use of placement agents has become commonplace in private equity, with 54 percent of PE firms using their services in 2008, up from just 40 percent two years previously. The agents, who deduct their fees from the firms themselves, are responsible for a large portion of the investment that has flowed through private equity in recent years—illiquid “alternative assets,” which include PE deals, composed about 18 percent of U.S. pension fund assets at the end of last year.

The SEC’s major objective in its controversial proposal is to staunch the prevalence of “pay to play” tactics that have marred the PE landscape in recent years, with the ban on placement agents a largely secondary, but no less crucial, aspect of the proposal. “Pay to play” refers to the use of political donations (or, as in some notable cases, even more blatant financial offerings) on the part of third-party solicitors to curry the favor and investment dollars of state and municipal pension funds, which, nationally, hold $2.2 trillion in assets.

“Private equity is already laying lifeless as it is. If the proposal goes through, it’s going to make it even tougher for PE funds to raise money from governmental entities.”  -Paul Denning, private equity firm Denning & Co.

The SEC reasons that by stopping third-party placement agents, as well as explicitly forbidding political contributions within the investment advisory sector, there will be less of an opportunity for the kind of shady politically linked financial deals that have as late been an embarrassment for the private equity industry. As the SEC announced its proposal, “Investment advisers that seek to influence the award of advisory contracts by public entities, by making or soliciting political contributions to those officials who are in a position to influence the awards, compromise their fiduciary obligations.”

The most infamous breach of such obligations between funds and the solicitors that seek to win their business is that which was uncovered earlier this year in relation to the New York state pension fund. A pair of aides to former New York Comptroller Alan Hevesi are alleged to have funneled millions—including $30 million straight to the pocket of Hevesi consultant Hank Morris—in fees from companies that won pension investment from the state fund. “Morris was essentially masquerading as a placement agent,” says Paul Denning of private equity firm Denning & Co., who notes that Morris’s standards of professional conduct were much lower than industry standard. “Our hit rate is like 7 or 8 percent, whereas Morris’ guys were at 100 percent. There were no standards.”

The SEC’s reasoning in its efforts to stomp out pay to play is multifaceted, and largely supported by the private equity community. The effects of pay to play are harmful to pension funds and independent brokers alike—and are more a matter than mere reputation. Qualified advisors and the advisory community at large are hurt when certain parties can simply buy the business of those funds whose investment dollars they seek, leading funds to invest in companies that may not be an ideal match. The pension plans themselves will pay higher fees to compensate for the corrupt advisor’s expenditures—and the advisor has a greater ability to squeeze other monetary rewards out of the pension fund. And, of course, the actual beneficiaries of the pension fund—state and municipal workers—aren’t happy to know that their retirement dollars were pushed in inappropriate investments, especially if these investments underperform.

“The important thing from the funds’ point of view is that they will no longer see many small- and medium-sized fund managers that placement agents do a lot of work for.”  -Charles Eaton, placement house C.P. Eaton Partners.

“The ultimate goal of the SEC’s proposal is to protect public funds from abuse,” says Richard Marshall, counsel at Ropes & Gray. “But the question is whether the approach that they’re taking with this proposal will help public plans or hurt them.” Indeed, the critics of the SEC proposal have come out in droves during the document’s 60-day comment period, with many claiming that such changes will damage an already-fragile private equity climate. “Private equity is already laying lifeless as it is,” says Denning. “If the proposal goes through, it’s going to make it even tougher for PE funds to raise money from governmental entities. It’s also going to hurt those newer funds that don’t have the access to capital that the big guys have.”

Many critics have pointed out that the banning of placement agents is going to have a disparate effect across the PE field, with smaller firms bearing the brunt of the damage. Because the proposal allows a loophole—placement agents are allowed if they have an exclusive relationship with the capital-raising firm—it will be those smaller firms, who cannot afford in-house fundraisers and must outsource, that will suffer. “The rule has an asymmetry,” says Marshall. “And the question is, does this give an unfair advantage to the largest entities?” There is also the fact that placement agents do indeed offer a valuable service to smaller private equity or venture capital groups that don’t have the necessary professional contacts to get an audience with large pension funds, all of which are constantly besieged by deal proposals. “The important thing from the funds’ point of view,” says Eaton, who has spurred a Washington lobbyist group to attempt to stymie the bill, “is that they will no longer see many small- and medium-sized fund managers that placement agents do a lot of work for.”

But the regulatory proposal, however unpopular, isn’t without precedent. A similar pitch, made under Arthur Levitt’s SEC in 1999, would have placed a two-year ban from accepting pension fund fees on investment firms that used third-party placement agents. The 1999 proposal died, but, ten years later, numerous pay to play scandals have forced regulators to consider the harsher measures of its latest proposal. Though the egregious abuses allegedly committed in New York were the most highly publicized, they were by no means singular, with similar cases having been brought to trial in New Mexico, Connecticut, Illinois, Ohio, Florida, Alabama, North Carolina, and other states. The sheer volume of wrongdoing mandates some degree of policy change, says Marshall. “There have been a number of speeches that have been given that have identified this issue as a priority for the SEC. Clearly, the SEC will adopt something.” What remains to be seen—and what depends highly on the influence exerted by private equity groups and their attendant lobbyists—is just what kind of balance can be struck between fair play and a balanced, self-correcting market. The risk of overreaction, says Eaton, could wreak havoc within the industry: “We’re praising the SEC for coming to grips with pay to play, but we’re saying that if you go so far to ban the entire industry, you’re going to have a lot of unintended consequences.”

The challenge facing VC at the moment is twofold: excess capital commitments and investments have clogged the market; and extremely limited returns on this capital have punished investors for their patience. Since 2000, there has been approximately $250 billion in committed capital circulating through the market, with around $25 billion to $30 billion invested during each year in the past five years. These figures dwarf the ten-year period leading up to the dot-com explosion, when total capital commitments hovered around $50 billion, with annual investments not breaking $20 billion until 1998.

The inflated investment figures have only led to trouble, says Steve Dow, a general partner at Sevin Rosen Funds: “Venture capital is a lot like musical chairs; there’s only room for so many people to sit, no matter how many people are playing.” Indeed, the number of participants in the game—all $250 billion worth—has remained relatively stable since 2001, while the number of winners has dramatically decreased—five-year returns have rotated around the zero percent axis since 2004. When compared to the years leading up to the dot-com revolution—during which investment figures were low, but returns were high—the last five years have marked a remarkable depression from VC’s former profitability. “Before the dot-com bubble, the ratio of winners to losers was such that the winners were making much more than the losers lost,” says Dow. “Now, the sector isn’t so consistent.”

“Venture capital is a lot like musical chairs; there’s only room for so many people to sit, no matter how many people are playing.” -Steve Dow, general partner, Sevin Rosen Funds.

The poor returns for VC stem from a remarkably poor exit market, during which IPOs and M&A transactions have netted very little for the industry’s investors, with the average exits steadily decreasing. “We haven’t had a normal IPO market in a while,” explains Paul Kedrosky, senior fellow at the Ewing Marion Kauffman Foundation, which released a report in June pointing to the need for a “right-sizing” of the VC industry. “Without a solid IPO market, returns in venture are horrible; the exits have been terrible in the public markets and the private markets can’t compensate.” “You’re essentially taking one of two exit routes and shutting it down,” says Matt McCall, co-founder and managing director at Draper Fisher Jurvetson Portage Venture Partners. “You lose half of your ability for liquidity.” While IPO market conditions look to be improving, it may be a case of too little too late for many venture capitalists.

Compounding the weak state of IPOs are tight credit conditions, which have made it more difficult for venture funds to raise money. “VC investors are now worried about the solvency of their backers; they don’t want to make capital calls and find that their investors are backing out,” says Kedrosky. “So, rather than making investments, the VCs are just holding off on the whole thing.”

Clearly, VC is in a perilous state. A poll administered by executive search firm Polachi found that 53 percent of respondents—the majority of whom were partners or managing partners of their VC funds—agreed that the industry as a whole was “broken.” The same poll found that 92.7 percent of these executives said they were concerned about the weak state of exit markets. The consensus view on how to fix VC is that the industry must undergo a real downsizing, with committed capital and new investments both declining to a manageable level.

According to “Right-Sizing the U.S. Venture Capital Industry,” Kedrosky’s report for the Kauffman Foundation, “whether it realizes it or wants to, the venture industry has to change…it seems inevitable that venture capital must shrink considerably.” Such a view is reinforced across the industry, with nearly all VC players gearing up for such a change. “Less funds will be raised,” predicts Dow. “And the venture firms, living off the fees from previous years, will slowly fade away as they fail to raise what they need.”

“Every venture capitalist feels that this [adjustment] should happen, but of course no one wants to do it themselves.”  -Paul Kedrosky, senior fellow, Ewing Marion Kauffman Foundation

The general assumption across the industry is that VC needs to shrink to half its current size in order to remain viable. The Kauffman report concludes that VC investment will fall by half to around $12 billion annually, with committed capital under management dropping about $100 billion from its current level of about $250 billion. Draper Fisher’s McCall predicts that much of the fat will be cut from middle-sized funds of between $150 and $300 million, but that all funds will see their capital pools diminish.

The need for an adjustment in the size of the VC industry is not ignorable, says Kedrosky: “Every venture capitalist feels that this [adjustment] should happen, but of course no one wants to do it themselves.” But, as is the case with most shifts within the greater capitalistic structure, an exit from the VC sector may be inevitable for many. “The dot-com boom was a distortion,” says Kedrosky. “Before long, we’re going to see an inflation-adjusted version of the period just before that.” McCall predicts that stabilization of the industry could take between five and eight years, but that IPOs will likely reinvigorate themselves before then—which means that VC funds will have to maintain a disciplined investing approach if they are to make it to greener pastures. “The industry as a whole fluctuates between fear and greed; when there’s greed, in a strong IPO market, that’s when people start acting unwisely.”