How Financialisation Phenomenon Has Influenced Corporate Ownership and Control - Essay Example

?Financial Strategy How Financialisation phenomenon has influenced corporate ownership and control Epstein (2001 defines financialisation as the process where financial institutions, financial markets and financial elites gain higher control over economic outcomes and economic policies or become increasingly important. It changes the functioning of economic systems both at the micro and macro levels. Financialisation operates under three conduits namely changes in the operation and structure of financial markets, changes in economic policy and in the behaviour of non-financial corporations (Palley 2007). Financialisation has influenced corporate ownership and control. Corporate control is basically the mode of its governance and this behaviour is what financial markets has worked to influence and change to align to their own interests. Financialisation has led to a change in corporate control in such a way that managers are disciplined by the prospect of ouster and takeover if they are unable to maximise profits. Because of this, managers are compelled to go for market efficiency improvements such as privately financed equity investments and leveraged buyouts as a way of satisfying stakeholder interests. Basically, managers of corporations are now forced to merge their interests with those of the financial markets. This has eliminated the countervailing force that previously interfered with the ability or willingness of managers to side with excessive financial interests. It has also broke the union-power that used to exist between corporations. This clearly depicts that financialisation has led to a drift in the corporate financial behaviour. Financialisation and its new approach to corporate control have fostered the growth of options like the stock pay option. The main reason behind this is that there is an increased need to align the interests of the management with those of the stakeholders and such options help to accomplish this task successfully. The top management of corporations have benefitted from these stock options and new pay practices and this has generated in managers the interest to maximise the short-lived stock prices. Financialisation has also led to excessive adoption of debt finance by corporations. The main motivation for this is tax code is more favourable to interest payments than on profits. In addition, managers of corporations have also adopted this strategy as a way of draining free cash from the firm leaving little for claimants on the income stream of the firm and putting pressure on workers (Bronars and Deere 1991). The overall effect of financialisation on corporate control is that corporate governance is becoming increasingly beholden to and dominated by financial markets. This implies that corporate managers have been pressurized to import behaviors from the current financial markets and these in turn have affected business decision-making and corporate investment. These investments and decisions include resource allocation whereby corporate managers of non-financial corporations have capitalized on stock repurchases as one of the main mode of corporate resource allocation. This has mainly been encouraged by the extent to which executives of corporations can enrich themselves by manipulating the stock prices of the corporation (Lazonick 2011, 11). These corporate control modes may be profitable and attractive and more profitable to firms. It also gives corporations a range of options for investing under various economic climates and profitability levels. For example, when profits achievable in financial markets are higher than those that can be achieved in the normal product market, then it becomes a motivation to corporation management to invest less in real assets and more on financial assets. However, such strategies may not be long-lasting. Palley (1995) and Palley (1997b), state that it is not good for the financial market behaviors of an economy or corporations are governed by short-terminism and herd behavior. Financialisation has also had an impact on the human resource management practices in corporations (Barreau and Arnal 2011. Just like the managers, the evolution of human resource management is geared towards aligning the human resource management processes to the interests of the financial markets. According to Palpacuer et al (2010), financialisation has largely been adopted as a strategic management method for large corporations and this has led to the transformation of HRM policies in large corporations in France as a result of and these targets the skilled employees. These changes are mainly a result of competitive strategies adopted by various corporations and also as a result of the corporate governance patterns. According to levy (2004a), dividend and interest payments to financial markets have been increasing and this is attributed to the corporate control methods that are more common in financialisation. In support of this, Aglietta and Breton (2001) state that an active market control among corporations push them to boost their share price and they achieve this through stock buy-backs and dividend payouts. This market control strategy among corporations that have even financialised is effective in increasing the share prices of a firm in the face of take-over threats. However, it drains away the share of earnings that set apart for financial growth. In addition, financialistion increases the influence of stockholders and to please these stakeholders and protect themselves, corporations have to maintain their equity return at the minimum. This again calls for a buy-back of their own stocks which in turn drains money for real investment, or distribute dividends. Conclusion Financialisation is a change in market structure where financial institutions, financial markets and financial elites gain higher control over economic outcomes and economic policies. Financialisation has several impacts on corporate ownership and control. The effect on corporate control is mainly seen by how corporate governance is taking a new shape and top managers are becoming increasingly more interested in merging their interests with those of the financial markets. At the same time, financialisation has increased the influence of stakeholders and managers of corporation are also faced with the task of merging their interest with stakeholders interests. Other things that have been affected by financialisation include HRM and their resource allocating decisions. Generally, it has affected corporate behaviour including corporate financial governance. Despite their many advantages, financialisation and its effects on the ownership and control of corporation also present a few negative impacts on businesses. References Aglietta, M. and R. Breton. 2001. “Financial systems, corporate control and capital accumulation,” Economy and Society 30(4) 56--65. Barreau, J. and Arnal, J. 2011, Effects of Financialization on Restructuring and Sustainable Development Policy: The Accor Group Case, in William Sun, Celine Louche, Roland Perez (ed.) Finance and Sustainability: Towards a New Paradigm? A Post-Crisis Agenda (Critical Studies on Corporate Responsibility, Governance and Sustainability (Vol 3). Emerald Group Publishing Limited. Bronars and Deere 1991. “The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth,” Quarterly Journal of Economics, CVII. (February), 231-254. Dumenil, G. and D. Levy. 2004. Capital Resurgent. Harvard University Press. Cambridge, MA. Economic Behavior and Organization, (28), 443-50. Epstein, G. 2001. “Financialization, Rentier Interests, and Central Bank Policy,”How Shareholder Value Ideology is Destroying the US Economy. Viewed 21st March, 2012. http://www.newdeal20.org/wp-content/uploads/2011/07/innovation-and-financialization.pdf Lazonic, W. 2011. From Innovation to Financialization: MA, December.manuscript, Department of Economics. University of Massachusetts. Amherst. Palley, T. 1995. "Safety in Numbers: A Theory of Managerial Herd Behavior," Journal of Palley, T. 2007a. Financialization: What It Is and Why It Matters. Viewed 21st March, 2012. http://www.levyinstitute.org/pubs/wp_525.pdf Palley, T. 2007b. “Reviving Full Employment Policy: Challenging the Wall Street Paradigm,” EPI Briefing Paper #191, Economic Policy Institute, Washington, D.C., June. Palpacuer, F. Seignour, A. and Vercher, C. 2010. Financialization, Globalization and the Management of Skilled Employees: Towards a Market-Based HRM Model in Large Corporations in France. British Journal of Industrial Relations. 49(3) pp 560-582. Read More