Current Text for debate
The
fall of a financial model
By Jean-Louis Beffa and Xavier Ragot
Published FT: February 21 2008 17:26
Recent changes in the world economy and financial markets mark the end of the present standard model of
financial capitalism, built up over the last decade or so. In this model, financial stability is mainly based on the self-regulation
of the financial sector, which alone assesses the risks produced by its financial innovations.
Moreover,
the link between finance and the real economy hinges on an adequate return on investment for shareholders, who punish poor
management by making share prices fall, leaving the company open to takeover. The only role assigned to governments is to
guarantee free circulation of capital between companies and between countries. As alternative economic models collapsed over
the past two decades, public opinion came to accept this model of financial capitalism. Today, governments and labour unions accept profit as the most relevant criterion for assessing a company’s
efficiency. This model is experiencing three crises, all of which refer to changes in the relationship between governments
and markets.
The first concerns the significant, yet silent, return of governments to the economic
playing field. Three of the five richest nations by total gross domestic product have become de facto neo-mercantilist, setting
their sights on trade surpluses. China is keeping its currency artificially low in order to increase its trade surplus and
lower its costs of production vis-a-vis competitor countries. Japan is pursuing government-oriented policies to bolster its
position in high-technology markets. Finally, and to a lesser degree, Germany has been carrying out reforms to restore industrial
competitiveness. In addition, countries that have access to natural resources, notably oil and gas, have revenues that serve
as both an instrument and aim of their international policy. Trade surpluses have resulted, demonstrating the capacity of
governments to acquire massive amounts of foreign assets through sovereign wealth funds. The problems that arise are not economic,
but political. Governments may use technology transfer or control of strategic national assets as a means to increase bargaining
power in international affairs.
The second change involves company ownership. Three transformations
should be noted. The first relates to the emergence of active shareholders, who build up significant stakes with the aim of
exerting strong influence on management. The second relates to activist shareholders and their demand for short-term returns,
resulting in decisions that are not in the company’s long-term interests. The third involves leveraged buy-outs, closely
linking the interests of managers and shareholders and taking advantage of easy credit.
These
shifts in the distribution of power raise questions: what is the relationship between shareholder meetings and boards? To
what extent should companies be allowed to protect themselves from hostile bids or creeping takeovers? In what form and how
frequently should accounting information be provided to shareholders?
Company ownership has
not yet found a new balance, as shown in Europe by the absence of agreement on the takeover directive and on one share/one
vote rather than multiple voting rights. Regulators’ desire to increase supervision of creeping takeovers is telling.
The trends are risky: a shareholder can pursue speculative or self-interested aims to the detriment of other shareholders
and against the company’s best interest by breaking up the business or by avoiding taking risk.
The
third crisis is the one rocking financial markets. Unlike the internet bubble, this is not a crisis based on irrational behaviour
but one of sophistication and disintermediation. The new risks produced by financial innovation were left to a sector that
alone was considered able to understand its instruments. The crisis demonstrates the costs to the real economy and lack of
an efficient self-regulating system.
All these risks call for a new relationship between the workings
of financial markets and regulatory actions of governments. Democratic governments will have to deal for a long time with
less democratic economies that use financial market mechanisms for political ends. Each sovereign investor must clarify its
intentions and define its code of conduct. Governments must also define with greater precision the sectors they consider strategic.
The changes in company ownership also call for greater transparency in order to prevent actions that offend
business ethics, such as creeping takeovers and speculative strategies that undermine companies’ long-term interests.
The board’s role of defining solutions that satisfy shareholders’ divergent interests will have to be strengthened.
It should allow for corporate governance that encourages long-term strategies while satisfying shareholder interests. Finally,
regulators should supervise the whole of financial markets to assess systemic risk, eliminate off-balance-sheet ambiguities
and bring within the scope of supervision actors that have eluded market authorities.
How
governments deal with these crises will depend on their national interests. These issues will be difficult to deal with in
Europe where country responses will diverge. One can expect to see the co-existence of various models, varying by level of
government intervention in financial markets. There is a great distance, however, between co-existence and compatibility.
Jean-Louis Beffa is chairman of Saint-Gobain and co-president of the Cournot Centre for Economic Studies.
Xavier Ragot is associate professor at the Paris School of Economics
Copyright The Financial
Times Limited 2008
The business section of Lilly's document
is noted here as i wanted to check if we had a common undertsanding about language:
B. BUSINESS
PHILOSOPHY is the SAME for
ALL BUSINESSES
4. Role
of Business is just to Make Profit vs Some Businesses Exist to Do Good
in Society while other Businesses are Driven by the Profit Motive
Mathematically, I would like to make sure that we agree that the definition of business'
role to make profit is nonsense unless a time period is clarified, and there's the rub. Over time lawyers hired by speculators
have changed the time period to every last quarter. As Unseen Wealth research reported by Brookings 2000, this is mathematically
not the role that benefits anyone other than speculators; it certainily does not benefit "investors"; its actually
in flagrant contradiction of the original laws that gave corporations limited liability assuming they were governed to compound
no harm.
People who studied economics before the spreadhseet - eg my father - would confirm that the worst thing
(in fact the only lose-lose-lose design) for investors (as well as societies or true economic models of grwoth) is
for an organsiation to be ruled by short-term analysts. When you ask him so what metric should be goverened with he says probably
one that contextually maximises the productive flows of those who are core to working at the organsiation. The whole
origin of economics around which The Economist was founded in 1843 or the filed of entrepreneurship coined around 1800 was
originally simple and clear on these points. Its very much part of Soros' age of fallibility that we have been taken over
by professions that have globalised their own business model in ways that have actually destroyed the real way of tracking
goodwill.
At the level of chapter 1, it is possible to go back and make the point that CSR is not designed around
ending poverty as its overarching goal- nor are any of the other 3 designs discussed.
However knowing that
the profit definition is itself part of the subterfuge of lose-lose-lose globalsiers also provides an interpretation of the
subtle game that Yunus is playing. In taking an opposite system map to the most abusrd one of 90 day profit maximisation,
he maximises the popular argument for siding with pursposeful instead of purposeless organisational systems.
I also dont see anything particularly eastern
or western about these issues. They are simply mathematical -and revolve around whole truth. Doing sometimng better for
the world takes a bit longer than 90 days to invest in - at least some of the time. None of the errant nonsense of today's
definition of business was around in Drucker's original Practice of Management in 1956. In those days the language of
business -and indeed the roles of marketing and innovation, today the opposite of drucker's definitions - had not
yet been corrupted.
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