1. business and industrial

FINANCIALISATION AND VALUE EXTRACTION:
WHY THE LABOUR PROCESS & LABOUR PROCESS
ANALYSIS STILL MATTERS
Paul Thompson, University of Strathclyde
Jean Cushen, Dublin City University
Australian Working Group on Financialization
University of Sydney 1st May 2014
Financialization
• Financialization refers to the increasingly significant role of financial
markets, financial actors, and financial motives in daily life (Epstein, 2005).
• In review of scholarship on financialization Van der Zwan (2014) identifies
three strands of growing literature namely:
– financialization as a regime of accumulation
– financialization of the modern corporation
– financialization of everyday life
• Scholarship on the modern corporation examines the elevation of the
‘shareholder value’ orientation as the guiding principle of corporate strategy.
The pursuit of shareholder value is conceptualized as a redistribution
process:
– ‘…what sets the financialized corporation apart from its industrial-age
predecessor is that the financial gains from these operations are not reinvested
in the firm’s productive facilities, but rather are distributed to shareholders
through dividend payouts and share buybacks’ Van der Zwan (2014:108).
• Analytical questions remain for those interested in researching workplace
outcomes of financialization regarding how uniquely financialized activities
are manifested in non financial organisations to affect working life.
Financialization and labour
• A variety of frames and starting points.
– Bryan, Martin and Rafferty (2008, 2009): financialization constitutes labour as
a form of capital , advancing into the household and private sphere as a
‘frontier of accumulation’, and ‘binds labour to participate in expanded
reproduction’
• The disconnected capitalism thesis
– Broke new ground in developing LPA that focused on financialization as a driver
of corporate and workplace change leading to undermining of the stable
conditions necessary for workplace-based productivity bargains and
investment in human capital
– This was part of a wider process of become less workplace-centric, and reconnecting CPE and LPA (as a form of macro-meso-micro linkages)
– Use of concept of circuits of capital. Financialization a regime of accumulation
that represents a shift in the interconnections and pattern of dominance in the
(industrial, financial and commercial) circuits of capital
• Further challenges
– To identify mechanisms through which shareholder value pressures are ‘translated’ into
workplace outcomes and worker experiences. Gospel and Pendleton (2014) refer to the
‘transmission mechanisms’ as (shortened) time horizons (new) corporate strategies and
(shifts in the balance) of governance between stakeholders)
A different challenge: as easy as ABC?
•
•
Appelbaum, Batt and Clark (2013) re-affirm DCT propositions, though sometimes in
different language; focus on specific financial actors (private equity) and a wider range
of stakeholder disconnects or ‘breaches of trust’ of ‘implicit contracts’
But also throw down a challenge to LPT. Their paper aims to:
– ‘contribute to a more fine-grained theory of value-extraction by moving beyond the labour
process and an exclusive focus on labour-management relations to reveal the variety of
sources of value extraction under new forms of capitalist governance… the organization of
work and labour relations is a limited frame’ (p. 500)
– ‘Our institutional analysis of PE mechanisms of value redistribution also provides an example
of how employment relations scholars can move beyond labour process analysis to examine
a wider range of value extraction and a broader range of stakeholders..’ (p. 513)
•
•
A corrective: LPA does not operate within ‘the frame of conventional labourmanagement relations’ and DCT does ‘conceptualize how new regimes of
accumulation and value extraction operate under financial capitalism’ (p. 499)
A ‘pincer movement’? Autonomist Marxism and the value question
– ‘if labour is not the sole source of value in capitalism, then there is no reason to assume an
exploitative economic relationship and structural antagonism in the labour process and to
privilege the labour process as a site of research’ (Bohm and Land, 2012: 222)
Core theory: a defence & some propositions
• ‘Because the labour process generates the surplus and is a central part of the
human experience in acting on the work and reproducing the economy the role
of labour and the capital labour relationship are privileged in LPT’.
– We need to accept that given new value creation mechanisms in the contemporary economy,
the labour process is a central, but not the sole source of value (In LPT, the understanding of
exploitation and structural antagonism never rested on the labour theory of value).
• ‘There is a logic of accumulation that compels capital to constantly
revolutionize the production of goods and services. This arises from
competition between capitalists and between capital and labour’.
•
The logic of accumulation is now partly financialized, both in terms of the more active
management and disposal of corporate assets and capital market pressures squeezing labour
costs and revenues.
• ‘Because market mechanisms alone cannot regulate the labour process, there is
a control imperative’.
•
•
Under financialization, there is a shift of control mechanisms away from the normative and
towards cascading financial targets, performance management and market discipline.
‘Given the dynamics of exploitation and control, the social relations between
capital and labour in the workplace are of “structured antagonism” (Edwards
1990).
•
Market discipline, externalization in the labour market and work insecurity limit possibilities
for collective labour action, but are accompanied by a falling levels of employee engagement
and a crisis of attachment.
Financialization of the logic of accumulation
•
Changing constitution of stock markets:
–
–
•
The principal activity of institutional investors appears not to consist of holding shares to
affect organisational performance, but in buying and selling shares based on perceptions of
intrinsic value to outperform the index they are benchmarked against (Hendry et al,
2006:1103). It is not uncommon for an institutional investor to sell everything in its portfolio
in one year.
–
•
•
•
Institutional investors grew from owning about 10% of equity in US publicly traded firms in the 1950s to over 73%
by 2009 (The Conference Board 2010), and account for over 80% of UK equities (Roberts et al, 2006:278).
11% of total assets under management worldwide are held by new investment funds (private equity, hedge funds
and sovereign wealth funds (Gospel and Pendleton 2014, 3). NIFs are, however not the primary driver of
financialization and have distinctive characteristics and effects (e.g. Extensive debt burdens).
‘Investors are not in a development marathon but a relay race anxious to pass on ownership and extract higher
returns on invested capital through realised market value’ (Andersson et al, 2010).
Institutional investors’ desire to identify an equity’s ‘intrinsic value’, usually via professional
financial analysts, underpins the perpetual short-term information and speculation activity
that characterises financial markets. Institutional investors report using an approximate
average of nine valuation factors in selecting stock (Merrill Lynch Institutional Factor Survey,
2006, see Appendix 1).
Corporate management must continuously stimulate a market for their shares by making
them desirable both to existing and potential investors. Effective management of investor
relations is in itself a route to organizational success (Hendry et al, 2006; Roberts et al, 2006;
Zorn et al, 2005) and both the chief executive and finance director now commit more time to
investor relationships (Pye, 2001).
Creating investor confidence in an equity’s intrinsic value requires corporate management to
craft, communicate and deliver a corporate strategy which enhances the organisation’s
performance under the numerous financialized valuation methodologies.
Financialization and strategy
•
Corporate management seek to enhance company performance under the valuation
methodologies primarily by:
–
–
–
•
•
•
•
growing the share price
increasing investor returns via dividends, buybacks, taking on debt, and reducing internal investment and
costs;
creating confidence in future return through both the financial and product market strategy
Underperformance in one area heightens the need to perform well or compensate in another
(Jacobs and Singhal; 2013). For example failure to grow share price or lack of confidence in
product market strategy may result in higher dividend payout ratio, increased buybacks, cost
cutting and debt issuance.
Accounting techniques provide a quasi-legal firm level co-ordination mechanism which positions
financial targets as central and dominant in decision making (Froud et al 2006; O’Neill, 2001).
Cushen (2013) shows how the budgeting process can provide a firm wide co-ordination
mechanism through which targets relating to revenue growth and cost cutting were
communicated, disseminated and achieved.
Furthermore, accounting regulations require that internal company investment and projects to
be assessed and justified on the basis of measures such as Net Present Value, Internal Rate of
Return (IRR), payback period, discounted payback period, average accounting rate of return,
profitability index.
Intrinsic value speculation means that the ‘endgame’ of financialization within organisations is an
investor oriented redistributive agenda. However arriving at this endgame is neither
straightforward nor automatic; much has to happen at the firm level to deliver the desired
redistributive agenda. The labour process is a key territory in this respect.
Financialization & the Labour Process
•
•
•
•
Trend emerging in the literature whereby financialized value expansion is depicted as
existing wholly above organizations and ‘the sources of wealth appear to belong to
completely disparate spheres with not the slightest connection to living labour’
(Burnham, 2010:34).
In reality, the financial and strategic commitments corporate management make to
investors are translated into firm level value seeking interventions to be enacted by
employees Labour can expand value by delivering goods and services whilst also
absorbing interventions such as headcount reduction, outsourcing, centralisation, supply
chain harmonisation, reward insecurity etc – ‘market pressure to maintain asset prices is,
at the same time, a pressure on labour as variable capital..’ (Bryan et al 2009, 467).
Firm interventions that come with defined financial value expansion targets must be
delivered, in part, by employees – meaning it is within the labour process that
interventions prompted by the speculative elements of financialization confront a
‘moment of truth’.
Gospel and Pendleton explore the labour outcomes associated with new investment
funds. They identify employment, wages and benefits, work organisation and industrial
relations arrangements as the key territories. All outcomes are mediated by (mostly
national-level) labour regulation. Most of the case study and survey evidence does
support a variety of negative outcomes, but ‘the impact of NIFs on labour is essentially
indirect, mediated through the business strategies..’ (2014, 28)
LP interventions and implications
•
Taking labour costs out: Employee related costs are categorised in financial accounts
as operational expenditure (OPEX); a key cost measure used in valuation techniques.
The consequences for labour relate primarily to:
–
–
•
Headcount reduction remains a key measure for signalling commitment to and delivery of targets to
shareholders. Financial markets react positively to firm announcements relating to OPEX reduction,
particularly redundancies and outsourcing (Farber & Hallock, 1999). Layoff announcements are
associated with higher CEO compensation (Shin, 2010). Concurrent rise in emphasis on cost reduction
and cost accounting techniques such as activity based costing (ABC) and benchmarking (Kennedy, T., &
Affleck-Graves, 2012).
Though rapidly growing wage inequality within firms is a longer term, macro-economic phenomena,
increased emphasis on profit targets sharpens that divide. CEO pay is rising and increasingly linked to
share options and prices. Meanwhile, cost reduction targets exert downward pressure on wages and
constraints on the ability to share performance improvements with the workforce (Cushen, 2013).
Conversely disputes relating to pay have significant consequences on stock price; the announcement of
strikes at US automobile producers lowered the value of automobile shares by $229 million to $328
million on average (Abowd, 1989). Strikes are interpreted as costly surprises (Kramer et al, 2002).
Stronger and more significant hierarchical and financial controls: The need to deliver
key numbers to investors has given rise to centrally driven, short term financial
measures of performance. The consequences for labour relate primarily to:
–
–
–
Increased use of numerics in performance management, reflecting the ratcheting down of corporate
profit targets (Ezzamel, Wilmott, & Worthington,2008)
Increased use of internal financial measures to assess and measure progress of internal investment
prompting employees across a range of skill levels and disciplines to consider and quantify their
contribution at the point of valorisation (Alvehus and Spicer, 2012; Cushen, 2013; Gleadle and Cornelius,
2008; Gleadle and Haslam, 2010) .
Marginalisation and/or undermining of normative control interventions (Cushen and Thompson, 2012;
Cushen, 2013; Thompson, 2013).
LP Interventions continued
• Perpetual restructuring and insecurity: Organisational restructuring has
surged in recent decades in order to create a vision of a better future for
investors. Arises from the desire to deliver value through the disposal and
acquiring of corporate assets based on their status within accounting
techniques. Also driven by the difficulty in quantifying product market
returns, e.g . Big Pharma (Andersson at al, 2010; Gleadle et al, 2012). The
main consequences for labour are:
– Job insecurity related to externalization, centralisation and outsourcing of employment
– Role insecurity caused by internal re-organisations (Cushen, 2013)
– Shifting risk to labour and other stakeholders and breach in bargains (Thompson, 2003) and
trust (Appelbaum et al, 2013).
• Financial engineering and doing more with less: interventions designed to
return more value to investors , such as moving to high dividend ratios, share
buybacks and taking on debt all deplete internal investment (Lazonick and O’
Sullivan, 2000). The consequences for labour relate primarily to:
– Work intensification is a consequence of heightened competition, depleting internal
investment and associated initiatives such as reduced headcount, use of peripheral
employment, falling R&D and less investment in human capital (e.g. internal development
and training, other than leader development): ‘financialization and especially securitization
is intensifying competition between capitals, with direct implications for the intensification
of labour within production’ (Bryan et apl 2009: 461).
– Depleting internal investment in skills and R&D is claimed to be damaging entire labour
markets (Lazonick, 2012).
Conclusions
• Financialization is only part of the explanation for many
of these processes: ‘interacting with accelerating and
exacerbating longer term trends such as labour market
insecurity, externalization and internationalisation’.
Labour process change continues to reflect product and
labour market competition and sources of value. The
extent to which financialization is a primary or secondary
driver of change varies by sector.
• Back to ABC. It is true that value extraction arises from a
variety of sources inside and outside firms, and that
lower returns on ‘relationship-specific investments’ can
adversely effect other stakeholders. Nevertheless, their
own evidence indicates a focus headcount reduction and
performance management in some of the cases.
Appendix 1: Searching for Intrinsic Value in Equity
Is this security fairly priced, overpriced, or underpriced relative to its current
estimated value and relative to the prices of comparable securities?
Relative Valuation Models:
• Price to earnings ratio
• Earnings per share
• Price to earnings growth (PEG) ratio
•
•
•
•
•
•
•
•
•
•
•
Growth rate
Sum of perpetuities
Nerbrand Z
Return on Invested Capital
Return on Assets
Price to Sales
Market Cap
Enterprise Value (EV)
EV to Sales
EBITDA
EV to EDBITDA
Absolute Valuation Models:
• Present Value
• Discounted Cash Flow
• Dividend Discount Models
• Free Cash Flow to Equity
• Free Cash Flow to the Firm
• Residual Income
• Sensitivity Analysis
Effect
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Additional references
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•
•
•
•
•
•
Thompson, P. (2013) ‘Financialization and the Worlplace: Extending and Applying the
Disonnected Capitalism Thesis’, Work, Emloyment and Society, 27/3: 472-88.
Gospel, H., Pendleton, A. and Vitol, S. (2014) Financialization, New Investment Funds and
Labour, Oxford: Oxford University Press.
Applebaum, E., Batt., R. and Clark, I. (2013) ‘Implications of Financial Capitalism for
Employment Relations Research: Evidence From Breach of Trust and Implicit Contracts in
Private Equit Buyouts’, British Journal of Industrial Relations, 51/3: 498-518.
Martin, R., Rafferty, M. and Bryan, D. (2008) ‘Financialization, Risk and :Labour’, Competition
& Change, 12/2: 120-132.
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Van der Zwan, N. (2014) ‘Making Sense of Financialization’, Socio-Economic Review 12: 99129).
Bohn, S. and Land, C. (2012) ‘The new “hidden abode”: reflections on value and labour in the
new economy’, The Sociological Review 60/2: 217-40.