Wei, Zhe
This essay will first go through the definition of financialization and its implications. And then the article will illustrate the issues and problems that reside on these implications and how academics understand them from corporate governance perspective. With these corporate governance issues and problem associated depict or discussed possible solution, the author will present a critical analysis on such literatures and further ask a question whether exists a corporate governance pattern to escape from the negative impact of financialized business environment, followed by three concrete case studies in relevance to the author’s own economic environment. At last, although evidence of good corporate governance models can be observed from cases in real business world, the research sample is not strong enough to draw a causal conclusion. Therefore, given the limitation of variance and analytical approaches adopted, an initiative is proposed for further research on the theme.
Over the past two decades, the term ‘financialization’ has been widely used and discussed by journalist, academics, economics as well as people that related to the financial market. As early as the begin of the nineteenth century, Thorstein Veblen distinguished the phenomena between the product or goods market dominated money economy and capital market dominated credit economy that ‘The goods market, of course, in absolute terms is still as powerful an economic factor as ever but it is no longer the dominant factor in business and industrial traffic as it once was. The capital market has taken first place in this respect’ (Veblen, T, 1904). Post-Keynesian economists such as Epstein defines financialization as ‘the increasing role of financial motives, financial market, financial actors and financial institutions in the operation of the domestic and international economies’ (2005). Ertuk and et al. provided a new triangulated understanding based on a essential context of two axis: the contrast between agency theory and liberal collectivist critique of the rentier and the financier; and the difference between the political economy and cultural economy (Ertuk, Froud, Johal, Leaver, Williams, 2008) A more recent study by van der Zwan evaluated and discussed the financialization from three aspects: as a new regime of accumulation, the ascendency of the shareholder value orientation and the financialization of everyday life (van der Zwan, 2014). Given the about understanding and conceptualizing on financialization, researchers suggested potential implications: 1) both the objectives and the constrains of firms as a whole might be influenced. On the one hand, increasing shareholder value power will subordinate managements’ and workers’ preference for (long-run) accumulation of the firm to shareholders’ preference for (short-term) profitability. On the other hand, increasing dividend payments will restrict the availability of finance for firms’ investment projects. 2) New opportunities (and long-term risks) for households in terms of wealth-based and debt-financed consumption may arise. The reasons for this are financial asset price booms associated with shareholder value orientation of firms, on the one hand, and new credit instruments made available to households by profit-seeking banks, on the other hand. 3) Distribution of income may be affected because of changes in power relations between shareholders, managers and workers. Distribution effects will then feed back on investment and consumption (Hein, van Treeck, 2010). All of the implications can be ascribed to a core principal-agent model described in agency theory. The theory presented that the firm are formed as a ‘nexus of contracts’ between resource holders where controlling managers were primarily disciplined by security owners (Ertuk et al., 2008). As there exist an asymmetric information between the principal and agent, agents may tend to maximize their own interests at the expense of shareholders’ value. As a result, agents, who steered from ‘retain and reinvest’ to ‘downsize and distribute’, are ascribed to the crux of the problem. Shareholders tried every means to provide incentive payment on one side and to establish mature performance measurement to restrain the power of agents. Unfortunately, the investigation shows that there is no effective measurement system that could link the performance to the payment of top managements (Tosi, H.L. et al., 2000). Studies raised questions about the relation between the maximization of shareholder value and the sustainability of economic prosperity, but as the evidence presented in the paper, the experience of the United States suggests that the pursuit of shareholder value may be an appropriate strategy for running down a company. The pursuit of some other kind of value is needed to build up a company and an economy (Lazonick, O'sullivan, 2000). Moreover, academics from University of California also claim a end of shareholder value ideology (Fligstein, 2005). Given the about evidence, Jensen purposed another perspective – stakeholder theory to examine the role the corporate objective function in corporate productivity and efficiency. The enlightened value maximization utilizes the structure of stakeholder theory but accepts maximization of the long run value of the firm as the criterion for making the requisite tradeoffs among its stakeholders (Jensen, 2001). In short, first the stakeholder theory redefined the value maximization from the one party – shareholders to broader groups of people such as financial claimants, employees, customers, communities, governmental officials and etc. The theory achieved a balance state among stakeholders, managers and other stakeholders, but it may reduce social welfare as it seeks interests that wish to use resources of corporations for stakeholders’ own ends. As a result, it seems that no perfect state exists for corporate governance and no perfect mode could balance the interests among all parties. However, if we restrained the scope of corporate governance with the organizational level and exclude the external social environment, we do could find some cases that companies perform in a discipline way that could effective reduce the negative impact of financialization.
The discussion will mainly focus on three cases that business and economic environment that the author experienced and dwelled in.
The first case will perform an analysis on the shipping industry that the author had ever been served for more than 5 years, and it is still suffering after subprime crisis. The result shows there is no causal relationship between corporate performance and the pay of remunerated managers no matter if it is management-controlled company or owner-controlled company. Orient Oversea, one of the world’s largest integrated international container transportation, logistics and terminal companies, is well respected in the industry with a reputation for highly effective operation and customer service quality. During and after the 2007 subprime, global economy had been greatly impacted and shipping industry was storm-battered. However, by its conservative and robust financial strategy with high efficiency operations, the company maintained a margin of 1-2% profit comparing to the overall performance of the entire industry. Not only that, it still keeps its competency and profitability with decent dividend to its shareholder during the 10 years’ downturn since 2007 (Orient Overseas (International) Ltd, 2007-2016). In the contrast, according to the 2008 Annual Report of China COSCO Holdings Company Ltd, its dry-bulk cargo business had a total floating net loss of RMB 4.1 billion, its performance was not recovered until 2014 as it turned from loss to profit (China COSCO Holdings Company Ltd, 2009). Though COSCO is a government hold company, it is management-controlled compared with the owner-controlled firm OOCL. Before the financial crisis of 2007-2008, COSCO conducted a radical strategy for mergers and acquisitions business, as its business is heavily rely on the effective operation on vessels, it also booked relatively more ships than ever. However, after endured the financial crisis, as the global economy was greatly turndown and trade flow between US and China, EU and China sharply declined. As a result, the global shipping industry was suffered. How can the two company behave differently in performance according to their annual report and stock price? Family owned companies like Oriental Oversea was non-financialized. The CEO on one side is the top management act as an agent, on the other side, he also represents the interest of shareholders as principals. The company has a balance measurement on the long-run performance evaluation rather than short-term stock price variations. While COSCO, though with government capital behind the scene, it is essentially a management controlled firms. Executives are under the pressure of the interest of shareholders, no wonder they will go extreme for irrational expansion for better revenue and profit, which would have present a seemingly good looking balance sheet.
The second case will present the business that the author currently working for – domestic trucking transportation. It also makes comparison between a family-owned company, which ranks at the top of market share as well as performance in lorry trucking business. The result demonstrates that though business may be exposed under the process of financialization, effective corporate governance could still be achieved and the negative impact of financialization can also be alleviated as long as executives would seek common interest in the long run. Deppon, currently the largest less-than-truck load domestic transportation carrier in China, realized revenue of 11.2 billion CNY in 2015 with reasonable profit comparing to merely 1 million CNY 18 years ago. The domestic company conducted a continually intensive invest on fixed asset such as local stores and trucks. Even the domestic economy of China was greatly impacted under the 2007 financial crisis, it has surmounted such negative influence and still achieved a rapid growth during and after it. The capital of the company is mainly held by brothers from one family. Given the intensive fixed asset, to achieve a high turnover through efficient operation is their major strategy. Hoau is another less-than-truck load domestic transportation carrier, which was the top of the domain, but it is currently ranked as around 10 on the list. It was a family owned company as well a few years ago. After the acquisition by TNT, it still suffered a continual loss for years. Under the pressure of performance, TNT sold the business to a private equity fund owned by CITIC one of the largest conglomerates in China. Unfortunately, the downturn story was not over. Under the pressure of loss on the balance sheet, the executives made decisions to sold its fixed asset such as local stores and trucks to private individuals. To achieve an ostensible balance sheet, unlike other mergers and acquisitions that normally sell peripheral non-performing asset, what it sold is the asset of great importance to core business and core competencies. However, the company was still committed a loss in 2015 and the future is still not optimistic. However, the interesting thing is that the chief executive changed a new car which cost tens of thousands of dollars during this period of time. As the strategies of the two company are quite the opposite, it indicates that under the pressure of continually loss, managers tend to cash short-term profit at the expense of long run prosperity, but the payment of the executives are seemingly not affect by their performance, at least there is no obvious other income channel for them.
The third case will scrutinize a list of technology and internet companies in China such as Huawei, Baidu (BIDU), Alibaba (NYSE: BABA), Qihoo 360 (NYSE: QIHU) and etc. On one side, companies could be greatly affected by financialization to seek higher stock price and profit, on the other side, companies could also achieve profit to realize stakeholder’s interest including the shareholders through operational efficiency and R&D strategy rather than through capital manipulation. As Wall Street Journal reported that China’s securities regulator is investigating concerns over speculative buying link to buyouts of foreign-listed Chinese companies aimed at relisting them on domestic stock exchanges, often at much higher valuations (Gu, W, 2016). The cause of such privatization and relist process might be: 1) corporate level strategy or organizational change, 2) Chinese companies are not rationally valuated, 3) high operational fee on foreign market and so forth. The CEO of Qihoo 360 claims that the stock price of QIHU is under valuated. However, analyst also protests that such privatization process is mainly because of extra profit. If these companies are about to be relisted in China’s stock exchange market, they could achieve a high valuable, which is more favorable to capitalism. Huawei is a leading global information and communications technology company, which realized a revenue of 395 billion CNY with a net profit of 36.9 billion in 2015 through its high performing R&D competency and market strategy. The total revenue generated by Huawei is more than the sum of revenue of Baidu, Alibaba and Tencent. However, its CEO Ren claims that the company will never go for public offering. Another interesting point deserve to remind is the ownership structure of the company. Unlike Baidu, Alibaba, Qihoo 360 or the kind that the stock shares are largely held by fund or organizational capitalism, all employees in Huawei hold certain number of stocks from top management to the low level staff, which totally account for near 99% of the overall shares and the founder, also the CEO, hold only 1.4% as reported (Sevastopulo, D. 2014). And another telecom tycoon Cisco Systems Inc. was announced a laying off about 14,000 employees, representing nearly 20 percent of the network equipment maker's global workforce (Reuters, 2016). Therefore, companies with high discipline focus on value creation and core competencies could still satisfy the interests of shareholders as well as stakeholders under the fierce financalized business environment.
Although global economy and daily lives are affected by financialization, with the existence problems that managers tend to seek their own interests at the expense of shareholders’ value; internal control systems and external control avenues are overshadowed or even do not work for long-term value creation or capturing; payment could not be effectively measured; shareholders, top managements, employees, customers and the community are functionless to the corporate governance or even helplessness when confront the financialized capitalism, several models can still be observed as a streak of light in the darkness. The companies, which could still provide good performance and maintain competitive status in the fierce market, share some commons. Their ownership structure is quite different from the others and the relationship between shareholder and top management also has significant distinctiveness. Such dissimilarities may also lead to variance of organizational structure, benefit distribution or something need to further discover. Though these models might be so typical that can not be applied to other business or area, it still worth going further to perform a comprehensive analysis or study on these phenomena and setup possible relationship. Financialization had been evolved for more than two decades since 1980s, if it is impossible to control it, at least it is possible for academics or specialist to find approaches to reduce its negative effect or ‘greedily’ leverage it from righteous vantage point. This essay only provides a basic review on limited cases with small number of industries. However, a future research could be conducted either in terms of qualitative or quantitative meta-analytical approach on a good many of cases and the result might also be anticipated.
Ertuk, I., Froud, J., Johal, S., Leaver, A., Williams, K., (2008) Financialization at work. [Online] Available from.
Fligstein, N. (2005) The end of (shareholder value) ideology. Political Power and Social Theory, 17, 223-228.
Hein, E., van Treeck, T. (2010) ‘Financialisation’in Post-Keynesian models of distribution and growth–a systematic review. Handbook of Alternative Theories of Economic Growth, Cheltenham: Edward Elgar, 277-292.
Jensen, M.C. (2001) Value maximization, stakeholder theory, and the corporate objective function. Journal of applied corporate finance, 14(3), 8-21.
Lazonick, W., O'sullivan, M. (2000) Maximizing shareholder value: a new ideology for corporate governance. Economy and society, 29(1), 13-35.
van der Zwan, N. (2014) Making sense of financialization. Socio-Economic Review, 12(1), 99-129.
Epstein, G. A. (ed.) (2005) Financialization and the World Economy, Cheltenham: Edward Elgar.
Gu, W. (2016). Scrutiny greets overseas-listed Chinese companies returning home to relist. Available at: http://www.wsj.com/articles/china-scrutinizes-deals-for-foreign-listed-companies-to-relist-at-home-1462537821 (Accessed: 11 August 2016)
Tosi, H.L., Werner, S., Katz, J. P., Gomez-Mejia, L.R., (2000). Testing the pay-performance relation. In Erturk et al (eds). (2008). Financialization at Work: Key Texts and Commentary. Routledge: Oxon.
Orient Overseas (International) Ltd (2007-2016) 2006-2015 Annual report [Online]. Available at: http://www.oocl.com/eng/pressandmedia/ooilannualandinterimreports/Pages/default.aspx (Accessed: 11 August 2016)
China COSCO Holdings Company Ltd (2007-2016) 2006-2015 Annual report [Online]. Available at: http://en.chinacosco.com/col/col1096/index.html (Accessed: 11 August 2016)
Huawei (2016) 2015 Annual report [Online]. Available at: http://www.huawei.com/en/about-huawei/annual-report/2015 (Accessed: 11 August 2016)
Reuters (2016). Cisco to lay off about 14,000 employees: tech news site CRN. Available at: http://www.reuters.com/article/us-cisco-systems-layoffs-idUSKCN10S05D (Accessed: 19 August 2016)
Sevastopulo, D. (2014). Huawei pulls back the curtain on ownership details. Available at: http://www.ft.com/cms/s/0/469bde20-9eaf-11e3-8663-00144feab7de.html?siteedition=intl#axzz4HkEdfRpl (Accessed: 11 August 2016)
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| Criteria | Comment |
|---|---|
| Comprehensiveness and accuracy of the review of the literature, and the organisation and structure in presenting the key arguments in the literature | Nice introduction & a proper conclusion well done!. Good set of sources used mostly well there are some assertions left uncorroborated. Perhaps the comprehensive of the coverage is the relatively weak point in this paper – the use of three cases has crowded this out. More balance is required but all the requisite bits are year. |
| Critical analysis of the literature with own ideas and experience | You have used you cases as your critical counter point although perhaps more of a focus on the critical literature would have underpinned your argument much more. |
| Discussing the relevance of the subject to the student’s own business and economic environment with references to the practice | This section is excellent – I think one of the cases developed in more depth would have been better as it would have left more space for you to discuss the themes from an academic perspective, but this is good and interesting to boot! |
| Presentational qualities of the paper- citation, bibliography, paragraphing, spacing, spelling, quotations etc. | Just be careful that too much of the original source text doesn’t appear in your work. I.e. bottom of page two. You write very well and a little focus on getting the tense right and you will write with more flow and elegance. |