On the relationship between financialization and shareholder value

by Andrew Gunnoe

In the wake of the 2008-09 financial crisis, there has been a steady outpouring of social scientific research examining various aspects of what is now commonly referred to as the “financialization of the US economy.” Although debate continues on the exact definition of this concept, most analysts generally agree that it refers to the increasing importance of the financial sector in broader economy.

The concept of financialization originated during the early 1990s in the works of several political economists – most notably Giovanni Arrighi and Paul Sweezy – in order to describe and theorize the growth of financial forms of accumulation that were then taking place in the capitalist system. Despite some important differences, these theorists shared a common methodological approach that situated financialization within the context of historical capitalism.

Economic sociologists, writing during the same period, began focusing on changes taking place in corporate governance. Neil Fligstein, in particular, developed a dynamic theory of corporate control that described contemporary changes in corporate governance in terms of what he called a “shareholder value conception of control.” This shareholder value conception of control holds that the primary metric of success lie in the ability of managers to increase shareholder returns.

In an article recently published in Social Forces, I argue that there is much to be gained from integrating the insights from political economy and economic sociology, two fields that remain isolated and rarely engage with each other. More specifically, I suggest that there is a direct relationship between the dynamics of capital accumulation and shifting managerial ideologies

Using the US forest products industry as my case study, I demonstrate the extent to which the shareholder value conception of control was adopted by corporate managers in the industry. Beginning during the hostile takeover movement of the 1980s, and increasing over the next two decades, managers in the industry engaged in a series of tactics, including an increase in stock buybacks and dividend payments, rising debt, a series of mergers and acquisitions, and a large-scale restructuring that included the divestment of over 50 million acres of timberland. As I demonstrate, each of these decision was carried out with explicit reference to the prevailing norm of maximizing shareholder returns.

However, in contrast to some economic sociologists, I do not prioritize the role of culture in shaping the shareholder value movement, but ground this process within the concrete realities of financialization. That is to say, corporate managers did not just change their mind about how to manage a firm, but were part of a broader structural shift taking place in the capitalist system.

Using data gathered from corporate proxy statements, I show how the relations that exist between shareholders and managers underwent a dramatic change during this period. The first key indicator lies in the rapid rise in the concentration of stockholdings among institutional investors. By 2010 institutional investors had come to control over 80 percent of all outstanding stock in 8 of the top 10 firms in the forest products industry.

The second key indicator of this shifting relationship between shareholders and managers was the increase in incentive-based compensation plans. Data shows that the percentage of compensation for top executives in the forest products industry increased from 31 percent in 1980, to 59 percent in 2005.

Together, the concentration of stockholdings among institutional investors and the growth of incentive-based compensation plans, suggest that there was a shift in the socio-economic relations that exist between shareholders and managers; a shift that gave corporate managers a material interest in adopting a shareholder oriented (read financial) conception of corporate control. Critically, I argue that this did not constitute a loss of control on the part of managers, but is more accurately characterized as a shifting metric of success that corresponds to the demands of a financialized economy.

My research makes two primary contributions. First, it provides a methodology for integrating perspectives from political economy and economic/organizational sociology, which despite calls for integration, remain isolated and rarely engage with each other.

Second, it provides an empirical example of how the financialization of non-financial corporations is actually accomplished. This transformation is not limited to an increase in financial profits, but involves a series of material and ideological transformations that reshape the firm in the interests of the financial community.

The forest products industry has been a critical component of the US industrial economy for well over a century. The evidence suggests that the pursuit of shareholder value has, in many ways, been a disaster for the US forest products industry as a whole.

Yet, as Fligstein and Shin (2007) note, a full consideration of the effects of shareholder value should include a measure of the success of the movement on its own terms. In this sense, shareholder value was successful in legitimating and rationalizing a dramatic transformation of one of the United States’ most important manufacturing sectors. And although these transformations did not produce a resurgence in overall profitability, they did serve to enrich the financial interests that own and control the US forest products industry. From the vantage point of their interests, it was a resounding success.

Andrew Gunnoe is Assistant Professor of Sociology at Maryville College in Maryville, Tennessee. This article is based on a paper published in Social Forces.