Financialization, managerialism, and abject utter failure

Neoliberal economic systems are dominated by two interrelated trends: financialization and managerialism. In the business press, one frequently reads that the management team of a company is the most important indicator of its likely success, but on the other hand, the measure of that success is the delivery of “shareholder value,” which most often happens through actions that juke the short-term share price or through changes in the capital structure of the company (mergers and acquisitions, share buybacks, etc.). This is supposed to deliver good results, as “shareholder-oriented managements” submit themselves directly to the imperatives of financial markets, which in turn are supposed to be brilliant allocators of capital to its most productive uses — everyone wins!

In reality, the result of this feedback loop has been catastrophically bad management of nearly everything. A case in point, and one that I take somewhat personally: the Borders bankruptcy. One often hears that the bankruptcy was inevitable due to the rise of e-readers, which are taking the world by storm with their market share of less than 10%. (A sidenote: a lot of urgent things that are taking the world by storm tend to come in under the 10% mark — most notably, China holds less than 10% of the U.S. debt. You’d think they hold 95% from the hysteria surrounding it.) Yet if one looks at the actual events, every major contributing factor to the bankruptcy was a matter of either poor management or corporate structure. For instance, Borders routinely picked second-rate locations in order to save money and then locked themselves into overly long leases. Great strategy! They were bought out by Kmart, apparently for no reason, and then spun off, at which point they bought Waldenbooks, again apparently for no reason, and then implemented changes that wound up destroying that chain. They burned through the cash reserves necessary to deal with consignment arrangements peculiar to the book industry — so that they could do share buybacks. And one of my favorites: a new line of stores where you have to go to the store to purchase digital downloads.

Meanwhile, the underlying business model was still potentially profitable, as shown by the continuing success of Barnes and Noble. I had long suspected that the Borders locations on Michigan Avenue and State Street in downtown Chicago were highly profitable, and I was probably right! The problem was that those profitable stores were tied to a total clusterfuck of “shareholder-oriented management” that ultimately wound up destroying all “shareholder value” along with a genuinely valuable chain of retail stores.

One could multiply examples — one that’s close to the heart of Chicago residents and Wire fans alike is the massive ongoing failure that is the Tribune Company. Despite online blah blah blah, papers like the Chicago Tribune and Baltimore Sun were profitable as well as being valuable institutions for other reasons. Yet the obsession with “shareholder value” has resulted in the gutting of the reporting staff and a subsequent drop in quality, exacerbated by idiotic corporate structures such as the deal that allowed Zell to acquire the Tribune using debt that he then put on the Tribune’s balance sheet. With that albatross around their necks, they surprisingly turned out not to be profitable anymore! Better cut! And then when people lose interest because the newspaper has turned into an utterly worthless piece of shit? Well, it turns out people just aren’t inerested in newspapers anymore — totally beyond our control!

It may be that “shareholder value” is something that you can only reliably deliver if you’re not directly seeking it on a quarterly basis. Maybe an excessive orientation to shareholders — themselves an incredibly passive group with basically no ability to control company policy — actually winds up destroying the only things that allow for the long-term production of value in the first place. Indeed, maybe — just maybe — the best thing that could happen to revive our struggling economy would be if all that precious “management talent” really did Go Galt and leave us the fuck alone.

[Another sidenote: I ultimately hope for something to replace the capitalist mode of production -- yet it remains frustrating that our brilliant capitalist elites apparently can't even do capitalism properly.]

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2 Responses to “Financialization, managerialism, and abject utter failure”

  1. burritoboy Says:

    The largest source of this problem is that the Chicago School of economics grotesquely misunderstood what firms do – more generally, the Chicago School could not properly understand hierarchies (organizations, firms, governments, groups, etc) versus markets.

    Put more bluntly, Oliver Williamson (hierarchies are a structure to reduce transaction costs) was simply baldly wrong. See Ghoshal and Moran’s 1996 paper on transaction cost theory: firms’ overhead expenses are many times larger than any possible transaction costs, so that is not why firms exist as opposed to markets. The Chicago School currently simply has no plausible explanation for why firms even exist instead of the supposedly more efficient markets. This is an inherent ideological flaw – the Chicago School needed to portray capitalism as a realm of liberty, when modern capitalism is heavily dominated by hierarchies (i.e., modern capitalism has comparatively much less to do with markets than previous economies and is instead dominated by the exercise of power within organizations, not by freedom to contract within markets).

    All of the financialization of the firm from 1980 to today that you note was based upon Michael Jensen’s work, who in turn based his understanding of the firm entirely upon Williamson’s model. Which is simply wrong. Not surprising that companies managed under a nonsensical theory fail.

  2. Kevin Says:

    Not to mention Borders’ “international expansion” rolled out amidst myriad other woes (only some of which were outlined above; bailing on amazon before it was Amazon and then creating their own online presence once they realized what a terrible move they made comes to mind), which tanked almost immediately.


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