The takeover of British confectioner Cadbury, with its long and honourable history in British industry, from its Quaker origins to its death throes earlier this year, has been featured as the main topic of two posts on this site, and mentioned in passing on five others. It is a compulsive story which celebrates the satisfaction of greed, the naïve stupidity of ideologically driven government, the destruction of Britain’s real economy and its real jobs, and the fatalistic acceptance of all this by the population at large.
Category Archives: Shareholder Value
The focus on maximising shareholder wealth at the expense of the company and its other stakeholders
Shareholder tyranny in post-mature economies
A recent article in The Economist pointed out that Britain, the original industrialiser for long in relative economic decline, owned 45% of the world’s foreign direct investment in 1914, but now has substantially less than 10%. The United States’ foreign direct investment peaked at around 50% in 1967 and is now less than half that. Today China (including Hong Kong and Macau) has a share of just 6%, but is growing fast. Britain and the United States might best be described as in the post-mature phase of their economic development. Such characterisation is also confirmed by the Anglo-American emphasis on finance and wealth ownership, rather than technology, customers and wealth creation. Those latter are the concern of more dynamically positioned economies, such as China and India, which are in the early growth stages of their development.
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The Root Flaw in Economic Thinking
The idea of economic man, sometimes given a Latin nomenclature to increase its gravitas, is the real cause of economics’ more recent failures. Forty years ago it was referred to as a nineteenth century idea, as though the study of economics had moved on since that primitive Victorian era. But with Friedman’s shareholder primacy in the ascendancy with its supporting “theories” of agency, transaction costs and the market in corporate management, economic man resurged and is still dominant today, and wreaking its massive destruction.
Unpicking Shareholder Primacy
The idea that companies, if not all economic activity, exists to maximise the wealth of shareholders or owners, dominates the world of corporate governance and much else. Bankers and traders believe it. Industrial managers have been led to accept it. Universities and business schools preach it. It is part of the free market ideology, often identified by its origins, as the Anglo-Saxon or Anglo-American approach. And its many adherents claim it is the only system that really works. Shareholder value is, for them, the acid test, all that matters. All this is despite clear evidence to the contrary from Germany, Japan, China, India and many other jurisdictions.
Much of the literature on corporate governance argues that these other approaches are in fact converging on the Anglo-American model and even assesses the level of their maturity in terms of how closely they comply with the Anglo-American line. It’s all nonsense.
Moral Responsibilities of Corporate Officials
The corporate monster is destroying the world, tearing up its soil to gobble up its precious resources, fouling its air, polluting its water and damaging its climate, while rewarding the few with untold riches, but leaving the masses in poverty. That’s how things work, unless they are prevented. Free-market ideology is having a hard time right now. But maybe not hard enough.
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Ultra-Fast Destruction of Real Economy Firms
Around 80% of publicly quoted shareholdings are now controlled by financial institutions, rather than the end shareholders. The traders acting for these institutions have quite different objectives from those of the ultimate shareholders. Members of a company pension scheme, for example, are likely to have a personal desire for the survival and longevity of their employing company. However, unbeknown to them, the investment decisions made on their behalf for their pension fund, are made on the basis of short term gains, which may well be best served by the acquisition and break up of that same company and the redundancy of most of its employees. But it is worse than that.
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Vince Cable’s Fight
Vince Cable’s closing speech to the Lib-Dem’s first in-government conference has been greeted by City and business types as ‘intemperate’, as ‘emotional language’ and ‘playing to the gallery’. But he is surely right to suggest that good real economy businesses are being destroyed for the short term gain of City speculators and their ‘accomplices’ who make fat fees from takeover deals. Cable is merely making a statement of truth, which has been highlighted several times on this site regarding particular situations such as the Kraft takeover of Cadbury.
Moreover, he is also right to suggest that, left to its own devices, capitalism tends to the establishment of monopolistic positions. Again, as is highlighted elsewhere on this site, you can have free markets, or you can have competitive markets. But you can’t have both. Competition has to be protected, or it will be destroyed by those same speculators and their accomplices.
Limits of Economic Advice to the Coalition
David Cameron’s special advisory committee of ten on economic strategy includes five business graduates, five knights of the realm, three retailers, three asset strippers, two accountants, a banker, a lord, an advertising exec, a publishing exec, and Sir James Dyson. Only the last named has a background in manufacturing and is likely to have got his hands dirty at work.
The Alternative to Friedman’s Ideology
The Hayek / Mises argument that any small step to the left leads inevitably to full on totalitarian socialism, might have had something going for it when the world was beset by Hitler, Stalin, and the fascist governments of Spain, Portugal and Southern America. And later, when national-socialism and fascism had become history, but communism seemed to be prospering under leadership from the Chinese as well as the Soviets, fear of centrally planned totalitarian socialism was not wholly unreasonable. But since the collapse of communism, there seems to be a rather limited rationale for fearing any initiative which might betoken even the slightest move to the left. Centrally planned totalitarian government really is not inevitable, or even feasible.
The Institutional Truth of Transaction Costs
Since Adam Smith’s example of the pin factory, economists have never been able to produce a satisfactory theory of the industrial firm. They’ve thought of it as a black box, expressed it as a production function involving such illuminating variables as price and quantity, and they’ve reduced it to the agency relationship falsely claiming managers to be the agents of shareholders (see other postings on this site). This inadequacy may be part of the reason why, despite Adam Smith, mainstream economists give markets pride of place over the firm.
Belief in the extreme power of market forces, so long as they were free from regulation or any other form of interference, led to the curious belief that the market could produce any item at some cost: the costs of transactions in the market. Only if a firm could produce cheaper than the cost of market transactions, would the firm be justified in production. This fertile thread of economic theory, originated in an article by Coase in 1937, but was developed in the 1960s by a group led by Williamson – last year’s joint Nobel laureate. It challenged the legitimacy of managerial decision makers, arguing the power of market forces to decide.
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Fighting for Fairness by Remaking the Real Economy 