shareholder value fights on

Today's news that boardroom pay rose by 55% in the last year is depressingly predictable. If there is any single reason why the shareholder value management creed will not disapear without a fight, it's that it serves executives' financial interests too well. Three things are worth keeping in mind here.

Firstly, shareholder value is an effect of the rise of agency theory in business studies during the 1970s, which itself was due to a concerted funding effort by Ford and Rockefeller foundations from the 1950s onwards, to create a more functionalist view of the firm. This story is told well by Rakesh Khurana. Since the 1970s, future managers have been trained to view all problems in terms of incentives of maximising, self-interested individuals. And it isn't implausible, by that account, that top management could require 200 times as much incentivisation as the functions performed by employees within the firm.

Secondly, the argument above is utter nonsense. As the article notes, the FTSE rose by less than 20% during the last year, yet pay is supposedly linked directly to share price (albeit with discretion available as to when options are exercised). This makes it tempting to view shareholder value as pure 'ideology', sold in all directions by a coterie of managerial elites in order to justify their theft of shareholder and employee property. But that might be a little, ahem, old-fashioned for some tastes.

Thirdly, maybe it's equally old-fashioned to view these CEOs as part of a firm at all. It is doubtful that they view firms as more than a web of contracts and assets anyway, despite the smokescreen of 'leadership' and 'teamwork' that is thrown up to conceal the financial engineering that actually dominates their strategy.

Speaking in Coimbra last week, Robert Boyer argued that in the era of shareholder value, the CEO has gone from being the 'most senior wage-earner' to being the salesman, tasked with marketing a vision of the company's future profits to institutional shareholders. Perhaps it's not so far from the job of advertising, involving similarly hallucinogenic, wild leaps of logic. Eve Chiapello has also written about the shift in the notion of company 'accounts', from being a historical statement of actions taken that is offered to society (as implied by the expression 'being accountable'), to being a necessary basis for future speculation that is offered to potential investors.

In each case, it's possible to get a sense of the surrealism of corporate activity in the era of shareholder value. Nothing that happens in the present or has happened in the past carries as much weight as that which might happen in the future. That £4.9m average FTSE 100 salary is not a reward, it's the payment of a gambling debt, that could well be dwarfed by the running up of even bigger gambling debts going on right now.

Comments

[Dick Pountain]

> maybe it's equally old-fashioned to view these
> CEOs as part of a firm at all

That same conclusion one could be drawn via a somewhat different argument as presented by James Galbraith in "The Predator State". The CEO/hedgie class have turned feral and are asset stripping the economy while there's still anything left to be picked...

[CharlieMcMenamin]

I've posted this elsewhere, but I think there are patterns in the behaviour of higher management in the private sector which defy most explanation. (Or at least they do for we non academic types - I hope you and yours in the dreaming spires might have some greater insight.)

Certainly, the whole theory of agency behaviour and alignment of incentives in stock options etc doesn't seem to have made CEOs act even in the interests of the shareholders, never mind the firm as an institution.

We perhaps need a new James Burnham to explain how (formal) ownership and control have first separated and now, it seems to me, utterly changed their meaning.

If de facto 'ownership' means you can exploit a resource without (many) restrictions then there is a case for seeing the managers as the real owners of any commercial institution and the de jure owners - the shareholders - as merely people who have lent them money. Finance and 'control' have trumped law and 'ownership'. I struggle to describe this accurately, I know, and I would welcome improvements in my hesitant formulations. I do think there are the germs of many a PHD thesis in this line of thinking. (Not to mention a lot of reworking of any kind of leftwing strategy.....)

[Dick Pountain]

Perhaps it's possible to establish a hierarchy of remuneration, something like:

level1: part of overhead (the workforce)
level2: share of profits (old-style manager)
level3: appropriating capital (new-style predatory manager)

It ought to be possible to establish the boundary ranges between these as percentage of turnover.

[Ian Christie]

A good post.
I agree that it is hard to explain the toleration of extremist executive pay trends among shareholders. One possible explanation is that the institutional shareholders are in the grip of the same cartelisation and contagion: they too are all setting each other's pay and justifying the imitation of top earners by the argument that 'you have to pay for top talent'. The attacks at company AGMs on extreme executive pay come from small shareholders, who are easily beaten down.
Another explanation is that the myth of the CEO as Fuhrer and Creative genius, a bit of post-80s corporate romanticism that is clearly a self-serving idea, has really been internalised as a Truth by the elites in question. They really believe they are worth it. It helps that the FTSE leadership class is by now thoroughly de-Christianised and lacks any sense of spiritual or social values that transcend personal fulfilment and 'shareholder value'. This would go some way to explain the total absence of shame among the FTSE CEOs, and the lack of any real debate about extreme executive pay among corporate social responsibility networks such as Business in the Community (believe me, I have tried to get them to speak up about it, and the party line is that the issue is marginal and we all need to 'move on' from it).
A final suggestion: maybe by now, it is the case that deep down, many CEOs agree with the critics of neoliberal globalisation that financialised post-70s capitalism is self-undermining, ecologically and socially. In which case, one had better plunder the system while one can, before the ultimate Crash. Apres nous, la deluge.

[Will Davies]

Ian - your last point is intriguing. It's worth remembering what is meant by the Gramscian notion of 'hegemony'. It's not about the capacity to dominate or hold power, but to do so in ways compatible with some notion of the general interest. A hegemon has only limited freedom of manoeuvre, because of the normative requirements of maintaining that hegemony. Hence it is argued that US global hegemony began to wither around the time of the Tet Offensive and the unravelling of Bretton Woods, because the US began exercising greater self-interested, strategic freedom than the terms of their hegemony would allow them.

It follows that the decline of neo-liberal hegemony (god, I'm sounding like a budget version of zizek) would initially allow greater freedom and opportunity to its dominant elites. If shareholder value ever attained anything like hegemony, it was via the privatisation of pensions - CEOs were serving the public interest by maximising profits, which ultimately benefited pension-holders.

This has unravelled in various ways. A hegemonic mode of regulation and corporate governance would need considerably greater sense of public purpose than the one we have now. Which then leaves current elites with all of the freedoms that they have won over the last 35 years, but with none of the responsibilities that they might once have promised to exercise them with. So, as you say, they get the best of both worlds: still the same power and wealth, but with none of the legitimacy anxieties, given their legitimacy has now entirely dried up.

[CharlieMcMenamin]

"...their legitimacy has now entirely dried up."

Response One: If only.

Response Two: Has anyone told Murdoch or the bloke who runs Barclays, let alone their political acolytes who hold the formal positions of power ?

[Will Davies]

Charlie - I think you're deliberately ignoring the distinction I'm making, between doing something because you can, and doing something because you can AND it is recognised as legitimate.

Shareholder value and other neo-liberal models weren't simply foisted on us against our wishes. They won certain cultural, political and social arguments over the course of the 1960s and 70s. 'Big business' and the job for life became viewed as stale and dull; government regulation became viewed as stifling innovation; etc. The 'greed is good' cliche doesn't capture the more subtle and political ways in which a model of capitalism reaches an accomodation with society and its critics (Boltanski and Chiapello's argument).

It is the accomodation that I'm arguing has dried up, and not the practices and possibilities themselves.

[CharlieMcMenamin]

Will,
If I'm misunderstanding your point it is certainly not deliberately so. What I was asking - admittedly perhaps a little archly - was whether the distinction you're making is actually true.

I accept your theoretical point that hegemons only have a limited room for manoeuvre within their hegemony and when they abandon action within this zone in pursuit of naked self interest then their 'zone of legitimacy' - the 'common sense normality' which they create and which sustains them - begins to contract. This seems to me to be an insight which is both subtle and profound.

But I'm not sure it applies in this specific. I don't think the legitimacy of corporate elites is drying up, or at least not outside the banking sector. To take a minor example at random: if what you suggest is true then perhaps the viewing figures of The Apprentice might be dropping, or TV sales going up as people replace sets they have broken by throwing things at the slimy Sugar? Or perhaps we might begin to see a swing away from the procurement norms of the 'commissioning state' at local government level, back towards some revised conception of public service obligations?

I suspect that you're in a far better position than me to judge whether the high academic economic theory which has sustained neo-liberal hegemony is 'drying up' (I imagine it is, but there is no sign of anything much replacing - at least not anything visible from the 'cheap seats' outside academia where I'm sitting). But that's not the same as the perceived legitimacy /normality of corporate power in popular/wider political culture.There's nothing on the horizon to challenge that I'd say. I regret this.

[Jacques-Olivier Charron]

Regarding the origins of agency theory, I haven't read Rakesh Khurana but I would just like to mention for example what is said about it in Justin Fox's "Myth of the rational market". More specifically, the idea is that the famous 1976 Jensen & Meckling's article was a sort of academic rewriting and rethinking of the also famous 1970 Friedman's article in the New York Times Magazine. In this article Friedman already called company's owners "principals" and its managers "agents" and stated "that problems always ensued when agents took on responsibilities beyond those of looking out of their principals" (Fox, p. 161). Then Jensen & Meckling related it to the EMH, and you got an unquestionable market making also unquestionable shareholders' votes.
The problem may not be agency theory in itself, but the fact that, in the uses of the theory, the principal is (nearly) always the same, namely the investor. Not the real end-investor but the theoretical investor, that is the agent that takes the decision to buy and sell financial assets.
Now, if you take in account the fact that the majority of shareholders are absolutely not investors in that sense, it changes the picture. Most individual shareholders, but also big institutional ones like pension funds are not investors in the sense that is posited by financial theory, because they delegate effective decisions to buy and sell to intermediaries that constitute the fund management industry. When addressing the classical question of the separation of ownership and control, agency theory (and other theories also) simply loses sight of another separation: separation of ownership and market decision, which implies shareholders are not the agents who make share prices move.
Most of the financial theory simply can't see this because it is built from a theoretical investor's point of view. Seeing things from the top of a mountain implies you don't see the mountain, that is, in real-world capital markets, fund management.
Separation of ownership and market decision has been highlighted and explored for example in Sabine Montagne's works on the legal concept of trust, that is at the heart of the way pension funds delegate decisions to fund managers. It's in French, but you can find a short article in english in economic sociology newsletter vol.8, n°3, July 2007, titled "In trusts we trust". Part of Paul Woolley's work, also, by considering real investors as principals and fund managers as agents, uses agency theory in a novel way.

[Ian Christie]

Thanks for the response and further debate - fascinating.

We might get a bit further if anyone was doing fieldwork among the hegemonic business elites to investigate worldviews, asserted values, any sense of a gap between such values and actual behaviour, etc. I hope economic sociologists are on the case with interview surveys as well as ambitious theorising, but don't know of any such studies.

I think the point about hegemony and self-interest is profound and helpful. My intuition is that many (but far from all) in the neoliberal elites see themselves as having legitimacy that is derived solely from rank and wealth and perceived effectiveness, and that there is no accountability to a transcendent foundation of value, whether that is God or a secular sense of the Common Good. Legitimacy in this sense is just the sum of what you can get away with while keeping inside the law and having sway over peers and policymakers. I would suspect that many in the neoliberal elites are uneasy about this but have no discourse or affiliations that can allow them to buck the system - note how little progress the ex-priest Stephen Green made at HSBC in explaining to his City peers why they should be ethically mindful and responsible to values beyond the bottom line. The shock of 2008 was a kind of near-death experience for neoliberalism but hardly anyone was able to use it to reframe their values. Instead, it seems to have reinforced the nihilism of the neoliberal elite - nothing really matters except accumulation and personal financial insulation from the void. It's not much consolation to the rest of us that those in the elite who feel that way probably aren't enjoying their money as much as they expected to.

[Ian Christie]

Further to all this - there was a discussion on Andrew Marr's START THE WEEK show on Radio 4 today about a new study of the great Quaker companies (eg Cadbury) and their demise. Several contributors argued that we need the ethos of such businesses now, as a counter to neoliberalism and 'maximisation of shareholder value' and its pathologies. But they also all put their finger on the key question - where do those values come from, and what sustains them, in the absence of religious faith, or of a religion that is more than individual and private? Christianity and Quakerism kept the business leaders in such companies honest, and made them mindful of hypocrisy and the need for reform. Possibly a secular-humanist version of the best of the Christian/Quake ethos can be devised. But the history of 'corporate responsibility' over the past 30 years suggests not, as does the feebleness of secular-humanist resistance to neoliberalism.

[Kate]

Playing devil's advocate almost literally here, Ian, you assert that, 'the FTSE leadership class is by now thoroughly de-Christianised,' and on the other, than we don't have much empirical work on their world views. Given b, how do we know, a?

And are we in slight danger of a somewhat a-historical take on this? Quaker chocolate manufacturers aside, you don't have to dig around that much to find religous elites up to harms that might make Fred Goodwin pause for thought. Do you?

[Ian Christie]

Thanks Kate. You're quite right, I have to rely on intuition and anecdote for A in the absence (or so I think) of B. But given the general decline in religious belief and observance in the population overall, it seems reasonable to assume the City and other business elites have been 'secularised' at least as much as any other section of society. I'd be fascinated to know of any empirical studies on the issue, but have not found any.
You're also right that religious elites have done, and continue to do, great harm. But the point here is not about religious organisations, but about the effect that religious belief can have and has had in influencing the worldviews and actions of capitalists. The case of the Quaker businesses suggests that a conscience shaped by a benign faith was a key factor in decisions about staff welfare and wider corporate responsibility. If in recent decades such a sensibility has been eroded or eliminated, as seems to be the case, it is a loss. If we can't recreate such faith - and I think it very unlikely now - then we have to ask what can be a comparably effective set of values and whence they might come.

[Kate]

Indeed, and I'm intrigued by Will's point that as almost all forms of legitimacy for neoliberalism have dried up, almost anything is possible. But not anything. A CEO accused of sexual harassment, overt racism or a sexual interest in underage girls or boys, would probably face stronger condemnation (and consequences) now than at other times, which suggest a selective sense of legitimacy, not a complete absence of it.

[Will Davies]

I'm not sure your CEO point quite follows from mine, Kate. Law-breaking and taboo-breaking are separate from the delicate issue of how to maintain legitimacy for power. One way that power wins legitimacy is to be gained and executed lawfully, but I was referring to less explicit/codified legitimacy, of whether power is gained and executed morally and in the public interest.

(Think of how George Bush was expected to govern consensually and moderately, because he hadn't 'really' won the 2000 election. An expectation he then trampled all over).

The question is whether CEOs still need to perform their function as the friendly, paternal faces of high capitalism (smiling on the front of Business Week), and I suspect that option isn't really available to them any longer.