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From shareholder value to present-day capitalism./ Karel Williams

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Economy and Society ISSN: 0308-5147 (Print) 1469-5766 (Online) Journal homepage: https://www.tandfonline.com/loi/reso20 From shareholder value to present-day capitalism Karel Williams To cite this article: Karel Williams (2000) From shareholder value to present-day capitalism, Economy and Society, 29:1, 1-12, DOI: 10.1080/030851400360532 To link to this article: https://doi.org/10.1080/030851400360532 Published online: 02 Dec 2010. Article views: 3634 View related articles Citing articles: 12 View citing articles Full Terms \& Conditions of access and use can be found at https://www.tandfonline.com/action/journallnformation?journalCode=reso20 Economy and Society Volume 29 Number 1 February 2000: 1-12 2 Economy and Society From shareholder value to present-day capitalism Karel Williams Abstract This article introduces a journal special issue which examines how shareholder value and financialization have changed priorities and behaviours in present-day capitalism. This article opens the debate by reviewing three key issues: first, it considers the impact of shareholder value on national capitalisms in France, Germany and the USA; second, it analyses the effects of financialization on corporate strategy and sectoral performance; and, third, it reviews current conjectures about a finance-led macroeconomy and the possibility of a wealth-based growth regime. Keywords: Shareholder value; financialization; national capitalisms; strategy; sectoral performance; wealth-based growth regime. The term 'shareholder value' was introduced in the 1980 s by US consultants who were selling value-based management to companies already under stockmarket pressure to increase returns. Shareholder value was subsequently used in 1990s Britain and USA as a management justification for the corporate restructuring and downsizing which promised to deliver increased rates of return. In France and Germany, it has surfaced as a threat and promise about a change in priorities which can deliver a different and more carnivorous type of capitalism. The term is familiar from the financial pages and the business press and has been discussed by corporate finance specialists but otherwise has largely been ignored by academic social scientists. Shareholder value should be of interest to this broader group of social scientists because the term is used at many key points of change and choice in presentday capitalism. Specifically, shareholder value directs attention to three kinds of issues about change: first, issues about different national types of capitalism and their principles and possibilities of transformation; second, broader issues about Karel Williams, Graduate School of Social Sciences, Williamson Building, University of Manchester, ManchesterM13 9PL.E-mail: Karel.Williams@man.ac.uk Copyright (C) 2000 Taylor \& Francis Ltd 0308-5147 the forms of competition as the priorities of financialization overlay and partly supersede those of globalization; and, third, macro questions about the emergence of new kinds of growth regime under late capitalism. By highlighting these issues, shareholder value can help us develop and refocus our analysis of presentday capitalism. Hence the importance of the Royal Holloway/University of Manchester workshop on the political economy of shareholder value in May 19991 and the subsequent project of a special issue of Economy and Society which would collect some of the papers from that workshop. The papers explore the three key issues about national transformation, financialization and growth regimes from a variety of theoretical perspectives and cite different kinds of empirical evidence. As this intellectual agenda will be unfamiliar to many English-speaking academics, we have added a specially commissioned review article on the development of the Rgulation School which sets Boyer's workshop paper and Aglietta's comment in a broader context and shows how the French are already moving on. If the collected papers explore the possibility of fundamental changes in a financially driven capitalism, it is important to begin by emphasizing that they do not offer prophecy about a new era. In this respect, they are different from other literatures of novelty, like that on the knowledge-driven economy and the network society, where authors like Evans and Wurster (1997) or Castells (1996) start by asserting or assuming that everything has utterly changed so that the intellectual task is simply to discover and announce new principles of economic circulation and social organization. Instead, many of the contributors to this special issue emphasize the localized and limited nature of the changes in the Western economies as growing volumes of household savings are mobilized for value investment by professional managers in stock-market-quoted corporate business which has difficulty in meeting expectations of return. Shareholder value boosters, like Rappaport (1998), may claim that we are all shareholders now, but that is hardly true when, in Britain and America, only the most affluent 40 per cent of households have significant savings invested on the stock market. And, if Britain and the USA have stock-market-dominated financial systems, much economic activity in both countries goes on outside the quoted and corporatized sectors: as Froud et al. remind us, the personal sector and government account for half of British GDP. In other national types of capitalism, the extent of change is directly limited by a much narrower base for household shareholding and the quoted corporate form: as Jrgens et al. remind us, in Germany only 6 per cent of adults own shares and the stock market is dominated by thirty or so giant companies which account for two-thirds of German stock-market capitalization. These observations were a collective point of departure for the original workshop and for the essays collected in this special issue. The premise is that capitalist change requires new forms of analysis which range across macro, meso and micro levels, analysing linkages and dislocations, as well as roundabout repercussions and contradictions, in theoretical systems and concrete cases. In the workshop's title, the term 'political economy of shareholder value' was used Many of the old cross shareholdings survive for the time being but they no longer have the same system-regulating significance; and, in the next phase, it is the fund holdings in major French firms which will play this role rather than cross shareholdings between French firms. By way of contrast, in Germany, according to Jrgens et al., shareholder value is 'a recent, interesting and ambiguous development in a generally hostile environment' that limits what managers can do and crucially prevents hostile takeover which remains virtually unknown in Germany. Despite a variety of minor changes, the pillars of the German system of corporate governance still stand: bank-based finance, industrial co-determination and productionist management orientations have all obstructed the advance of shareholder value through the 1990s. The impact of change on performance outcomes is unclear from the Morin and Jrgens et al. papers. Morin does not discuss whether return on capital employed has been raised. Instead he presents interview-based evidence of the immediate impact on firm behaviour as top management is required to commit to shareholder value and present an intelligible value strategy to the analysts of the stock market (much as an earlier generation of French bosses would have presented their industrial strategy to ministry civil servants). In the German case, targets for higher rates of return have been set by one-third of the top thirty German firms and more than half of such firms have introduced stock options of an American kind to incentivize senior managers. An interim verdict might be that the French, whose industrial position is much weaker, have positioned themselves to participate in national and Europe-wide restructuring. As for the Germans, they cannot and will not address the problem of high break-even, limited cash generation and low returns on capital employed until they are forced to do so by some combination of a recurrence of industrial recession and the arrival of value investors. If we wish to take the argument further, we need a broader perspective on forms of competition and macro relations as well as a review of what shareholder value has delivered in Britain and America. Generally, these considerations suggest that the pressures for change are unlikely to be contained in the German case, though the effects will probably be complex and contradictory. Forms of competition and financialization: micro and meso perspectives In existing debates the forms of capitalist competition have been appropriated in the 1990s through the concept of globalization, through physical concepts of production such as lean production or flexible specialization and through the schema of the commodity chain which brings product to market. Globalization was announced by the marketing guru Levitt (1983) as an immanent principle which opened the way for critique followed by slow death through a thousand qualifications about the global, the local and their interpenetration. Few critics and qualifiers have questioned the preoccupation with product markets which originated with Levitt. Though concepts such as lean production or flexible specialization added a labour-market dimension, they retained a physical preoccupation with production sites in the form of factories or industrial districts. Even more curious, the concept of commodity chain, as popularized by Gereffi and Korzieniewicz (1994), was widely accepted as unproblematic even though this was a completely inadequate way to represent the financially motivated matrix choices of a firm like Ford which variably combines component production, car assembly, finance, car rental and after-market services. Against this background, shareholder value can move the argument about forms of competition onwards by shifting the balance of attention towards financialization and the impact of the capital market on forms of competition in a triangular analysis which relates capital, labour and product markets. These issues are taken up in the paper on financialization by Froud et al. which offers a general definition of the concept as well as an empirically grounded micro and meso analysis, based on British evidence, of what corporate management can deliver. Financialization reworks the hierarchy of management objectives as it reorients the firm: if firms have to organize process and please consumers in the product market, they must also now satisfy professional fund managers and meet the expectations of the capital market. The result is a new form of (financial) competition of all against all whereby every quoted firm must compete as an investment to meet the same standard of financial performance. The implication is that social science has paid too much attention to the collapse of distance and local protections and not enough to the imperative of at least 13 per cent return on capital employed (ROCE) with no sectoral exceptions. The direct consequences and contradictions of the new form of competition can be understood through accounting analysis of company strategies and sectoral performance based on financial numbers from company accounts which highlight the sectoral limits on cost recovery and cash generation. Froud et al.'s previous work on autos and other sectors emphasizes the disappointing results of productive intervention by management which in competitive product markets gives away the gains it makes at labour's expense. These arguments are now transposed and extended to financial intervention to raise return on capital employed. On British evidence, (even in a good year) most companies struggle to make 13 per cent after tax. The shareholder value of the 1990 s comes mainly not from higher rates of return delivered by corporate managers but from rising share prices which are driven up by the volume of middle-class savings funnelled into the stock market. The implication is that shareholder value, in its current Anglo-American form, is not a realizable project for industrial and commercial company managers whose corporations are caught on a fundamental contradiction between what the capital market requires and the product market allows (at least without specialcase advantages of immateriality or intellectual property rights). The result so far is a redoubling of management effort with an intensification of all forms of restructuring such as horizontal merger, divestment and downsizing, which in different ways swap high and low ROCE activities, reduce the capital base and sweat out labour for usually transient gains. In a second paper on restructuring Karel Williams: From shareholder value to present-day capitalism 7 8 Economy and Society for shareholder value, Froud et al. (1999) 2 offer a more detailed analysis of individual firm strategies which brings out the importance of growth trajectories: if all firms cannot raise their rate of return, the subset of successful firms will include those who achieve sales growth through organic growth or acquisition. Insofar as the stock market sets unrealizable rate of return targets, the longterm prospect is of increasing imbalance between the demand and supply for ordinary shares which intensifies the risk of financial bubbles and instability. If rates of return cannot be raised, as in activities like car dealing, the size of the corporate sector will be reduced as low return activities exit for the less exacting personal sector. Share buy backs can solve the problem for individual firms by reducing their share capital base, but intensify the contradictions about the overall size of the surplus-earning quoted corporate sector which is then financially represented by a smaller number of higher-priced pieces of paper. Accounting analysis highlights the struggle and disorder of late capitalism as a social condition where distributive struggle and increased income inequality are endemic. Nevertheless, Froud et al. recognize that present-day capitalism cannot be understood simply in terms of accounting ratios at micro and meso levels. Indeed, their paper on restructuring (Froud et al. 1999) argues that the impact of this process on labour varies according to the macro context. Hence the relevance of Boyer's paper and Aglietta's comments which take up macro issues from a regulationist perspective and ask a different set of questions about how a finance-led economy would operate. A finance-led macro economy and the possibility of a wealthbased (or patrimonial) growth regime In existing debates, the idea of a growth regime is appropriated through the popular concepts of Fordism and post-Fordism. From an earlier phase of work by French regulationist economists, an Anglo-American audience (of noneconomists) took the idea that capitalist production requires an appropriate institutional armature. This was illustrated by the cartoon account of Fordism in the 'thirty glorious years' where collective bargaining, Keynesianism and the Beveridgean welfare state all supposedly ensured a high and stable level of demand. Post-Fordism was always a more problematic condition inaugurated by 'the crisis of Fordism' as mass markets broke up and institutional stabilizers broke down. It was never entirely clear whether and how coherence could be restored to create another couple of decades of prosperity. Against this background, shareholder value can move the argument on because it immediately connects us to the most recent regulationist work which develops new hypotheses about macro-economic relations and identities in a finance-led economy and raises the possibility of a new wealth-based (or patrimonial) growth regime. Aglietta and Boyer are well able to speak for themselves as they do in this special issue. But, because some Anglo-Saxon readers will be unfamiliar with their current positions, we have included at the end of this special issue a review article by Grahl and Teague which contextualizes the Boyer essay and the Aglietta comment and establishes how these French economists have left behind many of the assumptions and assertions about post-Fordism which now figure in so many doctoral theses and undergraduate primers on late capitalism for sociologists or geographers. If Grahl and Teague clarify the development of the Rgulationist School, almost inevitably they add interpretations which will be controversial. This is especially true insofar as they represent the regulationists as a school which lost a collective wager on the competitive superiority of Europe's social democratic and corporatist models and now faces a world where recent developments (especially the success of the neo-liberal USA) 'undermine' many of their positions. As Grahl and Teague's conclusion hints, it would be more generous to say that Boyer's essay and Aglietta's commentary give us the work of two serious French intellectuals at the height of their powers, imaginatively struggling in middle age to comprehend recent economic developments, secure in the knowledge that they have nothing to lose except an audience which may be unable to follow them. It is also true that this new work is untidy and unsystematic in form and content. While the algebra and half-finished arguments are at times frustrating, they are also exciting because this is work in progress which develops through a series of conjectures about theorized possibilities and current US experience. Originality never comes easily and those who doubt that should remember that Keynes' General Theory, which created modern macro-economics, was itself an untidy abstraction from contemporary economic experience. At the same time, Aglietta and Boyer bear the marks of a distinctively 1970s French Marxist background insofar as they understand intuitively that knowledge is a struggle not for truth but of social representations. From this point of view, their current work puts a new personality and set of relations at the heart of a new kind of post-Fordism. At the centre of Fordism was the organized worker and the employment relation. The centre of post-Fordism was never unambiguously defined by the French, though in the Marxism Today version of post-Fordism the central personality was the consumer, with consumption relations which everything else should serve. If the British are still parked up outside the shopping mall, the French have moved on. In Aglietta's comment and Boyer's essay, the two central personalities of late capitalism are the worker/shareholder and his professional investment manager who are linked through the financial system. Thus Aglietta now conjectures a stage of capitalism where the paramount shareholder is the pooled savings of labour whose investment is delegated to professional managers. The result would be a 'financeled' economy where, as Boyer observes, the financial system occupies the central place previously occupied by the wage compromise. What is the significance of Boyer's 'point in the history of capitalist development when individuals consider stock-market values before deciding between savings and consumption'? Regardless of whether coherence is restored in the form of a new growth regime, this individual consideration of stock-market values inaugurates a finance-led macro economy whose dynamics are very different so that many orthodox macro assumptions about causal relations, cyclical dynamics and policy objects are turned upside down. In such an economy, asset price appreciation is an important influence on economic activity and an increase in household wealth can stimulate consumption if (as Aglietta notes) aggregate supply responds flexibly. As for an increased profit requirement, that impacts on aggregate demand both directly through its impact on wages and indirectly through its impact on asset prices. The most dramatic result is that Keynesian arguments about the benefits of high wages are called into question and we can no longer assume that wage cuts depress economic activity. More broadly, as Grahl and Teague observe, we leave behind the Kaldorian world where positive feedbacks between increased productivity and higher wages can in a virtuous circle of growth guarantee high and stable aggregate demand without inflation. We would now have to model, as Boyer does in his article, a finance-led macro economy in a demand-led short term where increased profit requirements have multiple outcomes. The possibilities include an outcome where wage cuts could be associated with increased aggregate demand if their negative impact was counterbalanced by positive effects arising from asset price appreciation: what worker/shareholders lose through wage cuts could be compensated by the gains of shareholder/workers in asset price appreciation. Our assumptions about policy objectives are also completely overturned. In the long boom, the control of inflation (i.e. of increases in the general price level) was crucial when the policy issue in a wage-earning society was to balance high employment with reasonable overall price stability through collective bargaining and Keynesian intervention. The control of inflation and sound money retain their symbolic significance in the belief systems of European central bankers, who are, however, now in the position of generals fighting the last war. But in the finance-led macro economy, as Boyer observes, the new policy problem is to stabilize the value of financial assets in relation to household income because uncontrolled increases in asset prices threaten disaster when the asset-price bubble bursts and, in a financialized world, the contagion of asset-price fall and illiquidity spreads rapidly and unpredictably. Aglietta and Boyer use nomenclature which is not yet standardized and occasionally is confusing. Readers should however note that they both draw a clear conceptual distinction between a finance-led economy and a wealth-based growth regime. The new macro-economic possibilities discussed above could sensibly be represented as stimulating and provocative conjectures about the behaviour of any finance-led economy (just as Keynes' General Theory theorizes the short-term behaviour of any wage-earning system). There is another much larger question about the possibility of a new post-Fordist 'patrimonial' or 'equity-based' or 'wealth-based' regime of accumulation which would restore coherence and provide a basis for sustainable prosperity for a couple of decades, much as Fordism supposedly did. This larger question is almost certainly unanswerable but nevertheless of considerable interest even for those who do not have a Cartesian rationalist bent. It must be emphasized that Aglietta and Boyer have not announced that a wealth-based regime does exist and are sceptical about whether it can exist. Boyer notes that no previous post-Fordism has 'materialized' in its pure form. Indeed, it is unlikely to exist when their work establishes that, as with much else in economics, this (theoretic) state can be realized only if a fierce series of preconditions is met. As Aglietta forcefully argues, financial expectations of continuous asset-price appreciation are not enough because there must also be an appropriate real productive transformation with increases in capital and labour productivity (stimulated by something like an IT revolution). In some respects, the speculation about a wealth-based regime is most interesting because it leads to questions about sources of instability rather than conclusions about states of stability. As Boyer observes, departure from the zone of stability is more likely in a finance-led system where bubbles and crashes are much more likely than hyper-inflation in a Fordist system. It is also fairly certain that household consumption would become more volatile if the uncertainty of income from employment is reinforced by volatility of asset prices. Boyer's essay models the pure case of a closed economy which quite explicitly does not represent the American case. Nevertheless, any discussion of the putative, new wealth-based growth regime cannot be separated from the American experience of the long upswing and the bull market in the 1990s which sustained rapid growth of consumption and permanently optimistic business expectations. The stock market was stalled and going nowhere by late 1999, but the stock-market rise earlier in the year had produced gains which, if spread evenly, would have made every man, woman and child in the USA notionally some $10,000 richer. As the gains of a decade were not spread evenly, the wealth effect is considerable and at least partly explains the collapse of American saving as households who count on appreciating asset portfolios can spend all their current income. At the same time the American case does not provide us with a set of stylized facts that fit all financialized economies. Thus, the corporate propensity to distribute earnings is currently very high in the USA but not in the UK where distribution rates are no higher than they were in the 1960s. The American experience is also, as Aglietta argues, linked with demographic specifics: the ratio of household net financial wealth to disposable income has risen in every developed country as the post-war baby boomers have aged. The American case therefore mixes national peculiarities, long-term demographics and a stock market which must surely be running out of steam if not heading for a correction (which is the current euphemism for what we used to call a crash). Clearly, the whole argument and our understanding would be changed by even a modest correction where depreciating asset portfolios would have much the same impact as an old-fashioned Keynesian real balance effect. More broadly, our understandings of financialization and the wealth-based economy will inevitably be quickly superseded by events which we do not anticipate or control. After all, if Alan Greenspan had not responded imaginatively to the American crisis of the hedge funds in 1998, this piece might well be a review article on the Great Depression of 1999 not a reflection on financialization. Nevertheless, it is difficult to believe that any kind of correction in Britain or the USA would destroy the attractions of house purchase and a pension fund for