From Orchestra Conductor to Principal's Agent: How Internal Financialization of Top Management Has Enabled External Financialization of the Firm

ABSTRACT

This paper analyzes the evolution of internal management work within large corporations from the end of the nineteenth century to the late 1960s. It argues that internal financialization is the prior condition for external financialization, as expressed notably in the shareholder value that is the focus of most theoretical and empirical analyses of financialization of corporate governance. Starting from the twofold nature of management work, our analysis examines how top managers of large corporations have become progressively disassociated from the production process. Through an exploration of the history of business accounting, we show how the evolution of management work has progressively financialized the functions of top managers. One of our main conclusions is that the alliance between shareholders and top managers around the nature and purpose of the firm is the result of an endogenous process. Therefore, the origin of shareholder-value-based corporate governance not only has to be situated before the rise of institutional investors and financial liberalization in the 1970s, but must also be seen as an internal process setting the conditions for the emergence of this management model.

KEYWORDS:

• Financialization
• top management
• corporate governance
• history of business accounting
• theory of the firm
• shareholder value

JEL:

• B14
• B52
• G32
• G34
• M41

Acknowledgements

The authors would like to thank Laurent Le Maux, Mary O'Sullivan and the two anonymous referees for their helpful comments and suggestions.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 We use the term in its broadest sense and not to refer to a specific manufacturing sector.

2 Most studies, especially the empirical ones, combine several of these explanatory factors. The genetic study of financialization incites on the explanation of the nature of financial incomes. This latter discussion is the main issue of the controversies between Marxists and Keynesians (Arrighi 1994; Krippner 2003; Chesnais 2016; Roberts 2019).

3 The process of financialisation of management takes original paths in each country. The financialisation of management has indeed followed a more ‘endogenous’ course in the United States than in Germany or Japan, where companies were strongly restructured after the Second World War (Franks and Mayer 1998; Miyajima 1994; Franks, Mayer, and Miyajima 2014) It is therefore the large American companies which record the most significant changes in accounting practices, in particular due to the extent of the concentration and diversification of production in this country.

4 Consequently, it is not a question of denying the current relationships between large companies and financial institutions, nor of underestimating the role of the latter in the decisions of the former.

5 By mixed economy era we designate the postwar economic system which mixed free markets and state interventionism with public and private ownership.

6 All the assets, shares, debts, etc. representing a claim to property rights or income, based, for instance, on future government tax revenues or commodities that remained, as yet, unsold (de Brunhoff 1990).

7 It was also in the 1920s that joint-stock companies enabled management to develop new means of controlling employees. One of these means was the ‘workers’ participation in capital’ in large industrial and public service companies (American Telephon and Telegraph Co., Eastman Kodak Co., United Steel, Bethlehem Steel or Standard oil). Faulkner underlines the extent to which this ‘opportunity given to employees to become shareholders of the company’ was a ‘subtle weapon used against workers’ unionism’, a method whose ‘main effect is to weaken unionism and, therefore, the power of the working class’ (Faulkner 1935, p. 635).

8 It should be noted that the increasing control of industrial unions over the conditions of labor—the strong claims of organized workers before the First World War, the reinforcement of capitalists’ power from the end of the war until the Great Depression, and the renewed power of unions in the New Deal era— followed by their weakening under the Taft-Hartley Act of 1947, does not seem to have coincided with changes in top management functions between 1890 and the 1960s. On the contrary, the progressive disconnection of top management from the rest of the large corporation seems to have given unions additional reasons to challenge the legitimacy of management prerogatives over the monitoring and control of production. It became increasingly difficult for managers of growing firms to exercise authority on the shop floor, or to bind the power of the foreman to the interest of the firm rather than to his personal interest. Top managers were nonetheless able to regain that control, but not so much through the personal authority of lower managers as through increasingly impersonal forms of control (Edwards 1979, pp. 53–55). On the one hand, industrial unions, especially during the New Deal, extended their claims to heretofore unchallenged management functions; on the other hand, workers were subjected to impersonal modes of control included in the structure and functioning of the means of production.

9 ‘The present value of an investment is the value in today's dollars of a series of future payments generated by the investment, evaluated at the appropriate discount rate. The net present value method is the most accurate process for determining which investment projects will maximize the value of the firm’ (Dulman 1989, p. 557).