In earlier, traditional models of 'managerial capitalism’, business leaders applied industry knowledge to develop an organisation’s ability to produce products and services that succeed in the consumer market. Financial investors’ role was to provide the long-term capital to fund production and, as an early commentator remarked, ‘where enterprise leads finance follows’.
An organisation’s success and financial value within managerial capitalism came largely from consumer markets, via profit from sales. Financial investors had a claim to future profits, and they also bore the risk of business failure. Managerial capitalism dominated up to the 1980s and employees were a key source of value and success during this time, through their essential role in designing and delivering profitable products and services.
But managerial capitalism has been supplanted in recent decades by 'financialised capitalism' as financial market priorities dominate, and even override, consumer markets as the driver of success. Meeting the short-term needs of investors is the first imperative for business leaders, ahead of meeting the needs of customers. This shift in business priorities is referred to as ‘financialisation’ and a small, open economy dependent on foreign investment like Ireland is deeply immersed in financialised business activities.
Financialisation shapes all our lives, from the housing market to how we work, particularly within organisations such as multi-nationals or organisations owned by private equity. Timeframes have shrunk, and now quarterly earnings are the holy grail.
The now commonplace focus on short-term performance is actually a fundamental shift. Financiers do not see themselves as guardians of the economy’s longer-term stability nor a firm’s success within consumer markets. This makes current investors, who are reluctant to fund long-term growth strategies, different from the earlier leaders of finance.
The Harvard Business Review put out a special issue of papers exploring how contemporary investors are ‘bad for business’. Indeed, across most OECD economies the stifling of long-term innovation has led to claims of ‘too much finance’. There is increasing evidence across developed economies that excessive and ongoing returns to investors is inhibiting ‘real’ economic growth and undermining the employee wage stability that sustains consumer markets, societies and individual lives.
So how do financial investors reach into firms? Well, the dominant measures that investors use to value companies actually steer corporate leaders away from internal firm investment and long- term, value creating activities. In particular, popular financial measures are ratios, comprising of a numerator and denominator which are an indication of investor returns and costs respectively. Some notable measures include price-earnings ratio, dividend ratio, price to book ratio, earnings per share and return on earnings.
Business leaders increasingly improve their organisation’s financial ratios by reducing the denominator through cost reduction, which is more predictable and offers returns in a short timeframe. Executive compensation packages incentivise and reward this short-term focus. Increasing the growth side of the ratio over the longer term is less certain and less welcomed by investors. Prominent innovation strategists lament this trend towards the ‘wrong’ kind of innovation, namely ‘efficiency innovation’ which eliminates jobs rather than ‘market-creating innovation’ that creates them.
These financialised interventions are designed to remove investor risk and ensure investor returns, and are often accompanied by other costly activities such as share buybacks and taking on debt. Money is taken out of the organisation and this feeds ongoing corporate restructuring which has surged in recent decades and these resource-depleting activities are spun into a story about a better future for investors.
As a result, risk is removed from investors and is transferred to employees. Ultimately, financial promises must be delivered, and employees often bear the brunt of the stories that business leaders tell investors. Employees shoulder the burden when the short-term promises made to investors meet a moment of truth inside organisations and within consumer markets. Financial ratios are improved, not through success with consumers, but via cost cutting delivered through employees via redundancies, outsourcing, centralisation and increasing pay insecurity and inequality.
Reducing fixed employee costs is a central feature of financialisation. Employees are not a financial asset, never mind the 'greatest asset'. Employee related expenditure is categorised in financial accounts as a cost, namely operational expenditure (OPEX). Reducing operational expenditure is a key activity for business leaders to signal commitment to investors. Financial markets react positively to these reduction announcements, particularly redundancies and outsourcing, which deliver returns in the short term, even if the organisation's ability to succeed in the consumer market over the longer term is undermined.
As seen by what happened at Boeing, the damage can be significant when an organisation tends primarily to investors and does not invest sufficiently in quality products and service. Within financialised organisations, success in the consumer market remains important, but it is secondary to how organisational resources can be continuously (re)structured to deliver constant returns to investors. The perpetual restructuring and continuous ‘re-organisations’ drive heightened employment insecurity as well as role insecurity, as an individual’s position and status within the organisation are in perpetual flux.
As more headlines relating to layoffs emerge, many will be framed in corporate euphemisms relating to efficiencies, rightsizing and changing consumer demands. However, it is likely that the changes will benefit one stakeholder above others, namely the short-term interest of financial investors. Financialisation is here and employees are already paying the price.
This article originally appeared on RTE Brainstorm.