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Shareholder Value

by Isabelle Pivert Thursday, May. 07, 2009 at 12:33 AM

"From now on, you work only for the shareholder!" The disappearance of traditional paid labor relations accelerated by shareholder value strategies means the middle- and lower classes are permanently threatened in their social and economic existence.


Inverted and Ending

By Isabelle Pivert

[This article published in: Le Monde diplomatique 3/13/2009 is translated from the German on the World Wide Web,,3.]

Toward the end of the 1980s, the model of “profits for shareholders” was gradually carried out in large corporations that had the character of a dictate. This model was standardized in the language of international management as “shareholder value.”

In the meantime the concept has undermined the classical organization and functioning of business. Its consequences also threaten the social cohesion in nearly all industrial countries. It was developed in the divisions of Anglo Saxon institutions occupied with mergers and takeovers with the typical goal of maximum profit in the interest of shareholders. With time, this approach developed into the general orientation for financial business success to the detriment of all other important economic- and operational criteria of decision.

Swallowing other firms or being swallowed by takeover or merger of other firms was regarded as the raison detra of modern business. The merger and motor of business strategies was the operational principle of the largest economies of scale, a permanent “trimness competition” over the optimal size of companies. The crucial breach occurred here. According to the model of shareholder value, business success is only measured by the maximum profit of shareholders. This “shareholder benefit” according to the new rules is measured only by the rise of stock prices.

With the upswing of globalization promoted by the new information technologies and their standardization, the international management consultant firms brought the shareholder value strategy into all branches in the last 20 years beyond its birthplace – the classic commercial bank.

“From now on, you work only and exclusively for the shareholder!” a manager in the marketing division of a multinational pharmaceutical firm heard from his boss. “Then we in middle management will profit from the new strategies, we are told. When the shareholders become richer, our bonuses and salaries will also increase.”

In the expansion phase of the new economy, the shareholder value principle was popular and became the main instrument of modern rationalization processes with its expansion to all economic and business areas through its standardized logic. The goal seems clear and without alternative: A firm quoted on the stock exchange is obligated to bring its shareholders the greatest profit. Its efficiency is measured in the capital profit that should amount to at least 15 percent.


Within a decade, this goal was normalized and developed into the global maxim for all corporations quoted on the exchange. Didier C., former chairman of the board for a car dealership bought by a mammoth Japanese business, recalls this time. “Management had a new rhythm structured by constant profit forecasts or warnings and reports. A great tension always filled the air when the proclamation of quarterly results was imminent.

The obligation to blatant shareholder interest is manifest in the terms “corporate governance” and the model of “good business leadership.” Good business leadership means that management must always answer one simple question: Will this or that measure increase the wealth of shareholders or not? Didier C. sees the firm quoted on the stock exchange obligated to constantly prove its economic efficiency on the exchange. However the courage for innovative success in the medium- or long-term is weakened by this strategy. Thus business leaves the classical path of industrial success strategies. It only exists to churn out the right results in the interest of financial investors.

The causal agent of this turn is also clear to Didier C: the actors on the financial markets.

Under the new shareholder regime, business leadership has no other choice. The strategic script that promises the fastest and largest increase of the stock price because their own interest is tied with the profit motive of shareholders through the stock options. While the customary growth strategy “only” earned 6 to 8 percent annual capital profits – which earlier was considered very profitable – strategies promising up to 15 percent profit rates now became dominant.

An example from the pharmaceutical industry illustrates this. The research cycles in this industry are very long and fraught with risk. The new short-winded logic ensures that management is only oriented in the most profitable markets and customer groups. This dominates its reflections about the direction of applied research and a new model. The alternative of developing a medicine against malaria under which millions suffer in poor countries and a medicine against obesity in the “rich” countries is decided by the question what investment is more profitable on the stock exchange.

The pressure to short-term profit reinforces the globalization process and makes possible other measures to deregulate labor. Thus the supplier firms of the automobile industry are under increased pressure to raise their profitability by a radical reduction of their labor costs, Didier C. argued. “When one forces me to raise my economic efficiency 10 or 20 percent, I can only react with dismissals and shifting production to China or India.” Gerard S., who was formerly employed as an analyst, then in the management of a big bank and today manager of a pension fund, confirms this: “In nine of ten cases, a business that announces a 10 percent shift of its production from France to Asia posts a clear increase of its stock price the next day.”

The contradiction of a new type of “value creation” or profit that must be called almost superstitious arises out of this constellation because it contradicts the real purpose of the “enterprise” since the whole production process is subject to the dictates of short deadlines.

This contradiction intensifies through the bitterly defended faith that only permanent and unrestrained competition can win the battle for short-term profits. “One must constantly feel the danger, readjust and reinvest,” explains Jean-Marc P. who speculates with risk capital. Management consultant Charles C. admits very openly: “I constantly work on dehumanizing the business organization and management because all needs and feelings that constitute the person must be repressed.” The personnel manager Jean-Michel L. believes today’s managers interpret the famous saying of John Maynard Keynes in their way: “in the long run we are all dead – since only the today counts.”

The new profit strategy oriented in shareholder value benefits financial actors who have little in common with the old figure of the individual shareholder. The modern stock corporation literally owes an accounting to institutional investors. These are the big pension funds, banks, insurances and private investment funds that manage the investments of thousands of other persons.


Since the funds themselves must sell a commodity, they must tickle the expectations of their customers, Didier C. explains. This does not have much to do with the “old capitalist model” in which “an individual with a new idea can turn directly to potential shareholders for a new project.” The disappearance of traditional paid labor relations accelerated by shareholder value strategies means the middle- and lower classes are permanently threatened in their social and economic existence. Aline T. who works as a financial analyst sees the main cause of unemployment in this “worldwide organization of the capitalist system mediated through stock markets.”

This is also true for businesses not traded on the stock exchange in which private investment funds (private equity) have invested. “These funds buy up big businesses with the goal of selling them again after three or four years,” Gerard S. explains. Since they want to make a maximum profit, they simply get rid of the purchased businesses or parts of them. “In the worst case, the private equity funds already suspended the research, stopped long-term investments and dismissed as many employees as possible to realize short-term profit growth and then lucratively sold the enterprise.” Ultimately the new shareholders and top managers seized power. Their interests are coupled through the incentive of stock options. Against the pressure of these new rulers, the losers within the businesses have developed individual survival strategies by getting rid of labor material or commodities, withholding information or making semi-official agreements.

In the enflamed climate of intensified competition, everyone who has not adequately internalized the new rules is threatened with exclusion. At least in the past union organizations mediated between individual well-being and business policy, Didier C. laments. Whoever can hold out in the businesses is one of those whose individual ambitions ultimately coincide with the need of the employer side (though this is not the criterion according to which employers dismiss or keep these people). Agents are not necessary any more under these conditions.

Beyond this, the mental commitment to the new behavioral norms produces the inclination to overly hasty adjustment and a culture of imitation. So the analysts of the Fitch rating agency summarized: “Shifting production to low-wage countries is in no way inevitably an advantage over the competition. Rather such a step is obviously regarded as `modern’ and `good form.’” Remi Skoutelsky from the Syndex consulting firm registers a changed relation with mass dismissals. This is a very common process and ever-recurring measure. To support the stock price, constantly new restructuring measures must be carried out.”

For democratic societies, the described development represents a serious danger since two germinating forms of authoritarian rule are produced. Firstly, the communication processes organized from above have propagandistic features – inside and outside businesses. Secondly, the functions of security and control move into the foreground again within the enterprise and in society. The expansion of the respective instruments and professions that runs counter to the model of state guaranteed freedom rights testifies to a kind of reality denial that we also see in the political sphere. The reality blindness of most politicians originates from their totally confused faith in an essentially good (according to neoliberal perception) or somewhat good (according to the social-democratic perception) capitalism. Although modern finance capitalism is cut to the quick by the current crisis, the reaction of most impacted parties was limited to admonishing a “moral turn” in a mild and modest way.

Isabelle Pivert is a French essayist and author. This article is based on conversations between 2003 and 2008 with top managers from multinational corporations, financial investors and management consultants.

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