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Shareholder value and crisis

The doctrine of "shareholder value" is a major structural transformations that make up what is called the vague term "financialization" of the economy. It became the foundation of corporate governance. And one of the causes of imbalances of contemporary economies. During the crisis, it has even led, as we shall see, misuse of public money.

As a management technique, shareholder value is now devoted exclusively to serving its shareholders, seeking to maximize its return on equity (ROE). This has multiple consequences. One of them is that companies retain a portion of lower and lower profits that are left after payment of taxes and interest on loans. These retained profits allow them, in particular, to self-finance their investment. Since the late 1970s, the profits are, on the contrary, more and more returned to shareholders as dividends. As the chart shows, the proportion of profits donated form of dividends during 2000 reached a level very high, so high that it threatens the flow of investment.



The 2008/2009 financial crisis has offered an extreme example of this imbalance that raises shareholder value.

While U.S. corporate profits were down sharply (-30% between 2006 and late 2008), they have strived to maintain a constant level of dividends distributed to shareholders. For this, she fell from profits not distributed, by giving their shareholders as dividends, proportion of increasingly strong profits. It took until the second half of 2009 for the share dividend decreases. And probably not just because American companies then started to charge their shareholders a portion of the cost of the crisis but also because the rebound in equity markets to compensate for the lower dividends from capital gains.



We see that in the last quarters of 2008, that the heart of the financial crisis, companies have distributed as dividends slightly over 100% of their profits. How is this possible? Very simply, companies have chosen to go into debt to pay dividends. It is, essentially, the financial firms that have resorted to borrowing to pay dividends to their shareholders, while their profits plummeted because of the crisis (a decrease 3-fold between early 2006 and late 2008). In autumn 2008, dividends accounted for 170% and profits of U.S. financial firms.

However, a significant proportion of loans that financed the dividend consisted of funds provided by the U.S. government to rescue the financial sector. As this study emphasizes the U.S. banks have therefore simply diverted the money from American taxpayers to pay their shareholders.

Moreover, as noted in this study always, shareholder value has led to an increasing risk taking, leading banks to increase their leverage before the crisis, to ensure to increase their profitability. This raises questions about the theoretical justifications for shareholder value. According to them, shareholders should obtain a higher yield than a risk-free, precisely because they take a risk, that of bankruptcy. But during the crisis financial, financial institutions have ignored the principle that one must always secure the payment of creditors before those of shareholders in bankruptcy. And they did it just to be able to ensure a constant return to their shareholders, even though the risk had materialized.

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Privatization of Education in a graph

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The "common sense" and pensions

Amid a forum about negotiations on pensions written by Michel Godet, the man of common sense in economics, I find this sentence:

Indeed, assets, fewer market Labour will be in a strong position to negotiate their net pay and unwilling to pay more for the generations that have given them a debt which already stands at 150,000 euros per worker, if one takes into account commitments of State .

Concentrated "common sense" that is, in fact, factual Errour and misconceptions about retirement and debt of the French state. A sentence, four statements: four errors and approximations.

You found? No?

In order:

1. " assets, fewer market work ... . Prediction is certainly always difficult, especially when it comes to the future, but on demographic predictions to 20 years (Time Projection Mr. Bucket) are relatively reliable. However, to believe, the number of assets will remain stable by 2030 and even 2050.

2. "... be in a strong position to negotiate their wages net ... . Suppose that the number of assets decreases, which is probably wrong, as we have just seen. Nevertheless admit. So? Well that phrase is always at fault. It is based on a fallacy of thinking that the jobs are stable in number and are divided by assets who want to occupy. If they decline, the assets will therefore be in a strong position with employers and may raise their wages. This reasoning is based on "common sense", that is to say about what common sense knows: the micro level he experiences alone. At this level, the number of people who will request a morning job at the local job center obviously has no effect on the number of jobs that the agency will provide. But when it is at the level of the entire economy, it no longer the same. For an economy as a whole, the number of jobs, beyond the changes produced by cyclical economic activity, reflect fairly closely the number of assets. When the number of assets increases, the number of jobs is also increasing. That's what happened in France, with the exception of the decade and a half following the end of the war boom.


For example, in the years 1955-1965, the workforce is stagnant and same goes for the number of jobs, although growth is so exceptionally strong. Presumably they will do the same in 2030: stagnation of the working population and stagnation in the number of jobs 1.

3. " ... and reluctant to pay more for generations who have given them a debt which already stands at 150,000 euros per worker, taking into account the commitments of the State . "There are two inaccuracies that come together in the same statement.

First, the famous metaphor loveth as "common sense" debt that one generation passes to the next, as that would pose a burden on the son of the weight of the shortsightedness and selfishness of their fathers.
This metaphor is, in this case, currently at 33% false ... The degree of truth depends, in fact, the number of French people who buy the debt of the French state. Again, the "common sense" that is based on experiments at the level of the economy. But the "common sense" is hard to understand that we can reason about an entire economy as one reason the small investor, only he knows. The small investor passes, indeed, its heritage (or its debts, if they want) and his heirs, and they are enriched or impoverished. But it is not the same at all investors combined. Let us consider the simplest case: when the French government debt is fully underwritten by the French. The next generation is she crushed the weight of the recklessness of his fathers? Not at all, because it is the same generation as the French state reimburses its debt. Overall, this generation is neither richer nor poorer. The debt is for the sole purpose of producing a redistribution of wealth even within this generation, without affecting the level of that wealth: the son of the previous generation of savers are, in net cash of from those whose parents did not spare. But taken together, they are neither rich nor poor. For the next generation is depleted, it is necessary that their parents have borrowed from foreigners. Currently, the French government debt is held for 2 / 3 by foreigners. We therefore impoverish for two thirds of the debt the next generation. (This proposal deserves various comments. But let us).

4. " ... if we take into account the commitments of the State . Understanding implicit commitments state, particularly pay the pensions of civil servants, which are not included in the measure of debt under the Maastricht Treaty. I do not mind if we take into account implicit liabilities, but then where is the famous "common sense" ? The purpose of negotiation on pensions is to determine what will be ... pension commitments and thus linked to them. We can not pretend that their level was already determined. It is characteristic of implicit liabilities: they are not debt, because their level is not irretrievably, because contractually fixed. The state does what he wants, or can, depending on their negotiations.

Moreover, common sense generally considers that what really needs an individual is constituted by the difference between what he has and what he is to rough. If you own a house worth 100,000 euros and that we should 200 000 euros in the bank, the real debt is 100 000 euros. For once, common sense is right, though strangely makes Michel Godet do not appeal. However, the French state has not only debts: it also has financial assets (equities, miscellaneous, etc.).. If we take this into account, public debt is over 84% of GDP but 53% (OECD data). Debt is no longer only about 30 000 euros per worker. That is, at once, much less spectacular. And yet, I do not entirely follow the right direction: the French state has other assets in addition to its financial assets such as houses of character , for example, that you can still deduct from its gross debt. But he better not follow the common sense so far: we doubtful that the state must sell.

can therefore ultimately be pleased that "this is not common sense prevails in this country," at least one call Miche bucket. This "common sense" is to rely on the experience of common sense of the economy, whereas knowledge about the economy, like any knowledge, was built in part to strong resistance against this meaning that we give away.

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1 . The same reasoning helps explain why there is no reason to wait beyond the short-term adjustments, lower unemployment due to the stagnation of the workforce. If unemployment falls, it will not be for that.

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