plodder wrote: ↑Tue Feb 11, 2020 5:43 pm
Apologies if I missed anything important here, I've not had a huge amount of time:
The first paper suggests that a focus on shareholder value became popular after the inefficiencies and cronyism of the period running up to the 1970s were exposed, especially with the wide roll-out of private pensions e.g.
Agency theorists argued that, because corporate managers were undisciplined by the market mechanism, they would opportunistically use their control over the allocation of corporate resources and returns to line their own pockets, or at least to pursue objectives that were contrary to the interests of shareholders. Given the entrenchment of incumbent corporate managers and the relatively poor performance of their companies in the 1970s, agency theorists argued that there was a need for a takeover market that, functioning as a market for corporate control, could discipline managers whose companies performed poorly. The rate of return on corporate stock was their measure of superior performance, and
the maximization of shareholder value became their creed
We can only assume what would have happened to employment figures had that approach been allowed to continue.
What you've done is taken the description of the agency theorists' ideological position and presented it as a description of what happened, which it is not.
plodder wrote: ↑Tue Feb 11, 2020 5:43 pm
It's far more complicated (as the first paper makes clear) than simply saying manufacturing job losses are due to corporate governance. What the paper argues is that, rather than retain wealth in a corporation that can't find a way to invest it to boost the share value, it's better to return that money to investors, who will then find a better way to invest that money (p.18), e.g.
According to the logic of shareholder value theory, if corporate managers cannot allocate resources and returns to maintain the value of the shareholders’ assets, then the ‘free cash ow’ should be distributed to shareholders who can then allocate these resources to their most efficient alternative uses. Since in the modern corporation, with its publicly listed stock, these shareholders have a market relation with the corporation, the economic argument for making distributions to shareholders is an argument concerning the efficiency of the replace- ment of corporate control over the allocation of resources and returns with market control. Shareholder value advocates, moreover, point to the stock-market boom
throughout the 1990s and the prosperity of the US economy in the late 1990s as proof positive of the economic benefits that the pursuit of shareholder value has delivered. Theory, they argue, has been borne out by practice. (examples follow)
So again, to make a fair comparison, we need to look at what employment rates would look like if this liquidity had been prevented. The USA is the richest country on earth for a reason, and innovations in capitalism are undoubtedly big factors.
Again, you've taken a description of an ideology, shareholder value theory, and misinterpreted it as a description of events, which again, it is not.
plodder wrote: ↑Tue Feb 11, 2020 5:43 pm
On to income inequality. Certainly the increased flexibility demanded by companies has been a factor in eroding employment rights etc. p.20 starts the focus on training and skills, and points out that investment dropped right off from the 1970s (before shareholder value was a 'thing'). It also notes the importance of highly skilled workers in competing globally, and attributes this focus to the subsequent boom in silicon valley in the 1990s. There's then a bit of a sleight of hand as they try and claim that this is a cause of income inequality, although funnily enough the authors neglect to mention the huge rise in cheap overseas "blue collar labour" as being of any importance, which is a major omission from my perspective, but perhaps it's just something that doesn't chime with their hypothesis.
Then there's a bit about how everyone's pensions depend on long-term shareholder value strategies, and a gloomy postulation that Microsoft probably wouldn't survive a stock market crash, and if you pay employees partly in shares they'd probably be f.cked. Lol.
So, again, I'm still not sure why our corporate governance has led to income inequality, although now I'm a bit more confident that people are voting for Trump, Brexit and Sinn Fein nutters because of Chinese ascendance.
What the paper says is that US businesses used to take a 'retain and reinvest' approach:
These corporations tended to retain both the money that they earned and the people whom they employed, and they reinvested in physical capital and complementary human resources. Retentions in the forms of earnings and capital consumption allowances provided the financial foundations for corporate growth, while the building of managerial organizations to develop and utilize productive resources enabled investments in plant, equipment and personnel to succeed
But that started to fall over as corporations got too big to manage...
Through internal growth and through merger and acquisition, corporations grew too big with too many divisions in too many different types of businesses. The central offices of these corporations were too far from the actual processes that developed and utilized productive resources to make informed investment decisions about how corporate resources and returns should be allocated to enable strategies based on ‘retain and reinvest’ to succeed.
....and as they faced stiffer competition from Japan.
Japanese competition was, of course, particularly formidable in the mass- production industries of automobiles, consumer electronics and in the machinery and electronic sectors that supplied capital goods to these consumer durable industries.Yet these had been industries and sectors in which US companies had previously been the world leaders and that had been central to the prosperity of the US economy since the 1920s.
The US also started to suffer because they weren't producing a well-educated working force, and were indeed disempowering their workforce as much as they could (in part because of a belief in the agency theory which boils down to 'you can't trust anyone'):
US companies tended to use their managerial organizations to develop and utilize technologies that would enable them to dispense with shop-floor skills so that ‘hourly’ production workers could not exercise control over the conditions of work and pay.
During the 70s you see a transition to shareholder value, along with financial deregulation that
permitted pension funds and insurance companies to invest substantial proportions of their port- folios in corporate equities and other risky securities such as ‘junk bonds’ and venture funds rather than just in high-grade corporate and government securities.
This and the ability to issue junk bonds leads to the hostile take-over boom of the 80s, wherein a takeover could be orchestrated:
by gaining commitments from institutional investors and S&Ls to sell their shareholdings in the target company to the corporate raider, when the target company was taken over, to buy newly issued junk bonds that enabled the company to buy the raider’s shares.
These takeovers resulted in the business acquiring a lot of debt, which meant that:
These takeovers also placed managers in control of these corporations who were predisposed towards shedding labour and selling off physical assets if that was what was needed to meet the corporation’s new financial obligations and, indeed, to push up the market value of the company’s stock. For those engaged in the market for corporate control, the sole measure of corporate performance became the enhanced market capitalization of the company after the takeover.
So
In the name of ‘creating shareholder value’, the past two decades have witnessed a marked shift in the strategic orientation of top corporate managers in the allocation of corporate resources and returns away from ‘retain and reinvest’ and towards ‘downsize and distribute’. Under the new regime, top managers downsize the corporations they control, with a particular emphasis on cutting the size of the labour forces they employ, in an attempt to increase the return on equity.
Since 1980, most major US corporations have been engaged in a process of restructuring their labour forces in ways that have eroded the quantity of jobs that offer stable employment and good pay in the US economy. Hundreds of thousands of previously stable and well-paid blue-collar jobs that were lost in the recession of 1980–2 were never subsequently restored.
And then,
While US corporate managers became focused on downsizing their labour-forces in the 1980s and 1990s, they also became focused on distributing corporate revenues in ways that supported the price of their companies’ stocks.
Now then,
Prior to the 1980s, during a stock-market boom, companies would often sell shares on the market at inflated prices to pay off debt or to bolster the corporate treasury.
But when business was booming, companies bought back the stock to help inflate their stock price, rather than reinvest that money into training, staff, equipment, etc. Indeed:
In 1998, for example, the widespread use of stock options to attract and reward employees meant that Intel spent more than twice as much on stock repurchases than on R&D (Intel 10K 1999). During the same year, Microsoft’s stock repurchases were almost equal to its in-house spending on R&D (Microsoft 10K 1999).
Add to this the trend of giving top management stock options, and you have an incentive structure that privileged stock price over everything else.
As you say, it is more complicated though, and they talk about a lot of other factors, but I'm running out of time this evening, so I'll just give the authors the last word, (my bold):
The experience of the United States suggests that the pursuit of shareholder value may be an appropriate strategy for running down a company – and an economy. The pursuit of some other kind of value is needed to build up a company and an economy.