Challenges of financialised firm behaviour for Capital Markets Union

Abstract

Capital Markets Union is a late but right project towards a truly single currency economic zone in the EU. However the CMU Green Paper chooses the wrong benchmark of US capital markets and is not based on evidence. The hegemonic corporate governance ideology of shareholder value maximisation that determines the financialised firm behaviour in the US has produced, since the 1980s, malign macroeconomic outcomes resulting in lower private investments, lower wages, regular stock market crises and socially and economically costly misalignment of the interests of owners and controllers of capital. The financialisation literature has amply examined these processes and recently international institutions like the OECD and the Bank for International Settlement have confirmed the findings of the financialisation literature with their own empirical evidence. Therefore the CMU project needs to be based on a better foundation of corporate governance that encourages long-term investments and true alignment of all stakeholders' and managers' interests.

Notes

1 European Commission, Green Paper: Building a Capital Markets Union, COM(2015) 63 final.

2 Ibid, 5.

3 Ibid, 5.

4 Ibid, 14 and 17.

5 A Haldane, “Who Owns a Company?”, speech delivered at the University of Edinburgh Corporate Finance Conference, Edinburgh, 22 May 2015, http://www.bankofengland.co.uk/publications/Pages/speeches/2015/833.aspx accessed on 20 July 2015.

6 I Ertürk, “Financialization, Bank Business Models and the Limits of Post-Crisis Bank Regulation” (2015) Journal of Bank Regulation, forthcoming.

7 A Sarangi, Northern Rock: This Train Has Left the Station, ING Equity Markets Report (London, ING, 19 September 2006), 2.

8 J Treanor, “ABN Amro Shares Soar as Contest Hots Up”, The Guardian, 17 April 2007, http://www.guardian.co.uk/business/2007/apr/17/3 accessed on 17 February 2010.

9 I Ertürk, “Reconceptualising Central Bank Unconventional Policies: Long Positions on No-Growth Capitalism”, in C Goodhart, D Gabor, J Vestergaard and I Ertürk (eds), Central Banking at a Crossroads: Europe and Beyond (London, Anthem Press, 2014).

10 OECD, Business and Economic Outlook 2015 (Paris, OECD, 2015), chapter 2.

11 L Fink, “BlackRock CEO Larry Fink Tells the World's Biggest Business Leaders to Stop Worrying about Short-Term Results”, Business Insider, 14 April 2015, http://www.businessinsider.com/larry-fink-letter-to-ceos-2015-4?IR=T accessed on 10 July 2015

12 See Bloomberg Politics, “Hilary Clinton Takes Aim at ‘Quarterly Capitalism’ in NYU Speech”, 24 July 2015, http://www.bloomberg.com/politics/videos/2015-07-24/clinton-takes-aim-at-quarterly-capitalism-at-nyu accessed on 1 August 2015 and L Edward, “Hillary's War on Quarterly Capitalism”, Financial Times, 26 July 2015, http://www.ft.com/cms/s/0/0cb6c12a-321a-11e5-8873-775ba7c2ea3d.html#axzz3lpdOS7DQ accessed on 26 July 2015.

13 See for example V Bavoso, “Focus on Securitisation”; N Dorn, “Policy Prioritisation Criteria”; D Pesendorfer, “Tensions, Conflicts, Flaws”, all presentations at the EU Capital Markets Union: Contents and Discontents Conference organised by the Institute of Advanced Legal Studies, London, 3 July 2015.

14 See C Crouch and W Streeck, Political Economy of Modern Capitalism: Mapping Convergence and Diversity (London, Sage, 1997); VA Schmidt, “French Capitalism Transformed, Yet Still a Third Variety of Capitalism” (2003) 32(4) Economy and Society 526; S Vitols, “German Corporate Governance in Transition: Implications of Bank Exit from Monitoring and Control” (2005) 2(4) International Journal of Disclosure and Governance 357; G Wood and C Lane, Capitalist Diversity and Diversity within Capitalism (New York, Routledge, 2011); J Grittersová, “Non-Market Cooperation and the Variety of Finance Capitalism in Advanced Democracies” (2014) 21(2) Review of International Political Economy 339.

15 PA Hall and D Soskice, “An Introduction to Varieties of Capitalism”, in PA Hall and D Soskice (eds), Varieties of Capitalism (Oxford University Press, 2001), 1–68, 16.

16 U Steger and W Amann, Corporate Governance: How to Add Value (Chichester, John Wiley, 2008).

17 N van der Zwan, “State of the Art: Making Sense of Financialization” (2014) 12 Socio-Economic Review 99, 120.

18 Haldane, supra n 5.

19 W Lazonick and M O'Sullivan, “Maximizing Shareholder Value: A New Ideology for Corporate Governance” (2010) 29(1) Economy and Society 13.

20 J Froud, S Johal, A Leaver and K Williams, Financialization and Strategy: Narrative and Numbers (London, Routledge, 2006).

21 LA Stout, “The Shareholder Value Myth”, European Financial Review (April–May 2013), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2277141 accessed on 15 June 2015.

22 European Commission, supra n 1, 7.

23 ICGN (International Corporate Governance Network), “Statement on the Global Financial Crisis” (10 November 2008), http://www.iasplus.com/en/binary/resource/0811icgn.pdf/view accessed on 10 July 2015.

24 ICGN (International Corporate Governance Network) Consultation on Green Paper Capital Markets Union (13 May 2015), https://ec.europa.eu/eusurvey/publication/capital-markets-union-2015?language=en accessed on 5 July 2015.

25 Haldane, supra n 5, 12.

26 Ertürk, supra n 9, 223.

27 OECD, supra n 10, 31.

28 J Plender, “Politicians Have the Treatment for Pfizer Syndrome”, Financial Times, 12 May 2014, http://www.ft.com/cms/s/0/37793a70-d9b8-11e3-920f-00144feabdc0.html#axzz3lpdOS7DQ accessed on 12 May 2014.

29 C Sanati, “Pfizer's Massive Tax Play for AstraZeneca” Fortune, 29 April 2014, http://fortune.com/2014/04/29/pfizers-massive-tax-play-for-astrazeneca/ accessed on 29 April 2014.

30 McKinsey, M&A 2014: Return of the Big Deal (April 2015), http://www.mckinsey.com/insights/corporate_finance/m_and_a_2014_return_of_the_big_deal accessed on 3 May 2015.

31 J Fontanella-Khan and R Wigglesworth, “US Dealmaking Hits $243bn Monthly Record”, Financial Times, 1 June 2015, http://www.ft.com/cms/s/0/a0e34690-0874-11e5-b38c-00144feabdc0.html#axzz3lpdOS7DQ accessed on 1 June 2015.

32 ShareAction, “Mainstream Responsible Investment Across the Capital Markets Union” (2015), https://ec.europa.eu/eusurvey/publication/capital-markets-union-2015?language=en# accessed on 5 July 2015.

33 PensionsEurope, “PensionsEurope Position on the Capital Markets Union” (May 2015), https://ec.europa.eu/eusurvey/publication/capital-markets-union-2015?language=en# accessed on 5 July 2015, 7.

34 HM Treasury, “UK Response to the Commission Green Paper on Capital Markets Union – Building a Strong Capital Markets Union” (2015), https://ec.europa.eu/eusurvey/publication/capital-markets-union-2015?language=en accessed on 5 July 2015.

35 Managed Funds Association, “Managed Funds Association Comments on Capital Markets Union Green Paper” (May 2015), https://ec.europa.eu/eusurvey/publication/capital-markets-union-2015?lang=en accessed on 5 July 2015.

36 P Richards, “Capital Markets Union: A Discussion Paper”, ICMA Quarterly Report, issue 36, First Quarter 2015, http://www.icmagroup.org/assets/documents/Regulatory/Quarterly_Reports/ICMA-Quarterly-Report-First-Quarter-2015.pdf accessed on 5 July 2015.

37 See Deutsche Börse, “Deutsche Börse Group's Response to European Commission's Public Consultation” (May 2015); European Stability Mechanism, “European Stability Mechanism's Response – Green Paper – Building a Capital Markets Union” (May 2015); Pensioen Federatie, Position Paper, “Capital Markets Union (CMU) Green Paper” (May 2015): https://ec.europa.eu/eusurvey/publication/capital-markets-union-2015?language=en accessed on 5 July 2015.

Additional information

Ismail Ertürk, Manchester Business School, The University of Manchester.