Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

Figure 26.Business investment as percentage of US GDP 30

One way of testing whether ‘Downsize and Distribute’ is a necessary corporate strategy is to compare public and private companies. Figure 27 shows that on several basic criteria such as size, sales, growth and return on assets (ROA), private companies seem to invest more than public ones.

It could be said that public companies are less profitable and therefore have less money to invest. But that doesn’t seem to be true. Figure 28 illustrates that there is little difference between the profit margins of major US public companies (the S&P’s 500) and those of all US firms derived from the National Income and Product Account (NIPA) compiled by the Bureau of Economic Analysis, which is part of the US Department of Commerce. The graph clearly shows a steady rise in profitability over forty-five years, culminating in record highs in recent years: truly ‘profits without prosperity’. In other words, the agent–principal problem does not have to result in declining investment and short-termism.

Figure 27.Private-sector firm vs public firm investment rates (percentage of total assets) 31

Figure 28.Non-financial sector public company profitability (GMO) 32

So, if margins are high but investment is low, what have companies done with their profits? Following the money leads us directly to shareholders. As we can see from Figure 29, corporations have largely returned profits to shareholders in the form of dividends and share buy-backs. Having averaged 10–20 per cent in the 1970s, the percentage of cash flow returned to shareholders has remained above 30, and sometimes substantially more than that for most of the past thirty years, although it dipped during the tech boom in the early 2000s when companies were investing.

What emerges from the evidence presented so far is that, just like finance, the financialization of the productive sector extracts value – objectively, rent. But not only in the productive sector. In recent years a wide range of businesses in the UK, from social providers like care homes to utilities such as water, both of which had previously been regarded as steady and unexciting investments, have been subject to financial engineering by new owners, often PE firms. The result is a transformation of public goods into private goods.

Figure 29.Percentage of cash flows returned to shareholders (US non-financials five-year moving average) 33

Financialization has a long arm. It reaches into society as well as the economy, and despite claims that its encroachment into the productive economy is a solution to issues such as average earnings, skills and inequality, the evidence is not encouraging. As John Bogle has noted: ‘The highest-earning 0.01 per cent of U.S. families (150,000 in number), for example, now receives 10 per cent of all of the income earned by the remaining 150 million families, three times the 3 to 4 per cent share that prevailed from 1945 to 1980. It is no secret that about 35,000 of those families have made their fortunes on Wall Street.’ 34

FROM MAXIMIZING SHAREHOLDER VALUE TO STAKEHOLDER VALUE

Shareholder-value ideology is based on shareholders being the ‘residual claimants’. They are the lead risk takers, with no guaranteed rate of return. Friedman summarized the classic view of entrepreneurial firms as eternally struggling to stay afloat in a turbulent market (while hinting at the temptation to escape by subverting that market) by defining the purpose of a business as being to ‘use its resources and engage in activities designed to increase profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud’. 35

A truth more complex than the primacy of the shareholders, however, is that wealth creation is a collective process. After all, important as shareholders are, it is hard to imagine a company being successful without the involvement of many groups, including employees, suppliers, distributors, the broader community in which the company’s plants and headquarters are located, and even local and central government. Moreover, it is wrong to assume that these groups have a guaranteed return while shareholders are stuck at the back of queue. Indeed, as we shall see in the next chapter, governments which make risky investments in new technologies and basic research – both of which are later adopted by companies reluctant to assume this high level of early risk – have no guaranteed return at all.

Recognizing the collective nature of value creation takes us from a shareholder to a stakeholder view. Whereas MSV boils valuation down to a single measure – the share price – an opposing argument is that corporations should focus on maximizing stakeholder value : creating as much value as possible for all stakeholders and seeing any decision as a balance of interests and trade-offs to achieve that goal – hardly an easy task, given the complexity of many business decisions. The charge which proponents of stakeholder value level against MSV is that the ‘pursuit of gains for shareholders at the expense of other stakeholders [is] a pursuit which ultimately destroys both shareholder and stakeholder value’. 36Even Jack Welch, whose twenty years as General Electric CEO were often hailed as a triumph for the MSV approach, begged to differ when in 2009 he cited customers, employees and products as the key to that success, denouncing shareholder value as ‘the dumbest idea in the world’.

The stakeholder theory of business is more than a theory of how to run a company better; it also has far-reaching social and economic implications. It answers the question, ‘What makes a business successful?’ very differently to the proponents of MSV. In sharp contrast to Friedman and Michael Jensen, who advocated strongly that a company succeeds simply through profit maximization, a stakeholder view emphasizes the social relationships between management and employees, between the company and the community, the quality of the products produced, and so on. These relationships give the company social goals as well as financial ones. Together they can create more sustainable ‘competitive advantage’. And because value is created collectively, through investments of resources by a multitude of actors, it should also be distributed more collectively – not just to the shareholders.

In contrast to MSV and its goal of short-term profit maximization and its marginalization of human capital and R&D, stakeholder value sees people not just as inputs but as essential contributors who need to be nurtured. Trust – critical for any enterprise – is then built between workers and managers, in a process that acknowledges the vital role of workers in value creation. Investing in people is an admission that workers add value.

We have seen how short-termism distorts finance, making it more speculative. A stakeholder understanding of value denotes a very different type of finance: one that is more ‘patient’ and supports necessary long-term investments. In some countries this is achieved through public banks, such as the Kreditanstalt für Wiederaufbau (KfW) in Germany. KfW was intimately involved in Germany’s post-war recovery and economic growth, lending more than €1 trillion since its founding in 1948. 37Most of the countries that have public banks tend to follow a stakeholder model of corporate governance, for example by having workers on company boards.

Of course, no form of corporate governance is perfect – as the recent Volkswagen (VW) ‘dieselgate’ scandal proves. The car maker boasted several attributes which agency theorists consider helpful for far-sighted investment and honest practice, widening the shareholder base and extending its interests beyond short-term profit. German workers, who would have little to gain from tricking the US government, had a powerful say in the company’s affairs. A family holding company, a German state and a Middle Eastern sovereign fund control 90 per cent of the shareholder votes. All are very long-term investors. The company had a reputation among customers and industry specialists for engineering excellence. It did not seem like the sort of company that would get into serious trouble.