FINANCIALISATION AND THE WORKPLACE WHY LABOUR AND THE LABOUR PROCESS STILL MATTERS

Paul Thompson, University of Strathclyde Jean Cushen, Dublin City University

For ‘Financialization: What Does it Mean for Work and Employment?’

Workshop, University of Leicester 16 October

Financialization: scope and coverage • Financialization refers to the increasingly significant role of financial markets,

financial actors, and financial motives in daily life (Epstein, 2005). In review of scholarship on financialization Van der Zwan (2014) identifies three strands of growing literature namely: – financialization as a regime of accumulation – financialization of the modern corporation – financialization of everyday life

• Financialization research that focuses on labour, work and employment is still relatively limited. There are a number of reasons for this, including the persistence of misleading references to a division between finance and the ‘real economy: – ‘Finance is a site of power struggles between the producers of goods (capital and labour) and producers of

money (central and private banks and financial institutions; this challenges the notion that exploitation takes primarily at the point of production’ (Walby 2013: 504)

– In contrast, Milburg (2009, 423) notes that ‘Traditionally non-financial firms became more like financial holding companies, with a spectrum of financial services and financial investments swamping production in their contribution to company revenues’.

• Those interested in researching workplace outcomes of financialization need to focus on how distinctive financialized activities are connected to or manifested in corporate non-financial organisations that affect working life. – ‘There is a significant lack of studies explaining how financialization is linked to

organization, power structures and distribution of wealth within firms and along supply chains for specific industries.’ (Baud and Durand 2012: 258)

Financialization, labour & labour process • A variety of frames and starting points.

– Bryan, Martin and Rafferty (2008, 2009): financialization constitutes labour as a form of capital , advancing into the household and private sphere as a ‘frontier of accumulation’, and ‘binds labour to participate in expanded reproduction’

• The disconnected capitalism thesis (Thompson 2003, 2013) – Broke new ground in developing LPA that focused on financialization as a driver of

corporate and workplace change leading to undermining of the stable conditions necessary for workplace-based productivity bargains and investment in human capital. Use of concept of circuits of capital. It conceptualises financialization a regime of accumulation that represents a shift in the interconnections and pattern of dominance in the (industrial, financial and commercial) circuits of capital. A triple disconnect: between employer objectives in the work and employment spheres; between managerial levels and layers within firm governance; and between corporate dynamics and state regulation in national business systems

• Further challenges – To identify mechanisms through which shareholder value pressures are ‘translated’ into

workplace outcomes and worker experiences.

– To distinguish between dimensions – for example financialization of objectives (value norms/strategy, investment, and operations (Baud and Durand, 21012: 243-4)

Different challenges? • In their collection looking at the impact of new investment funds on labour, Gospel

and Pendleton (2014) refer to the ‘transmission mechanisms’ as (shortened) time horizons (new) corporate strategies and (shifts in the balance) of governance between stakeholders). See pp. 27-28)

• Indirect impacts – ‘downstream’ activities are not easily traceable (Gospel and Pendleton 2014: 28)

• Appelbaum, Batt and Clark (2013) share some of the concerns and propositions with the DCT though sometimes in different language; focusing on specific financial actors (private equity) and a wider range of stakeholder disconnects or ‘breaches of trust’ of ‘implicit contracts’. But also throw down a challenge to LPT. Their paper aims to:

– ‘contribute to a more fine-grained theory of value-extraction by moving beyond the labour process and an exclusive focus on labour-management relations to reveal the variety of sources of value extraction under new forms of capitalist governance… the organization of work and labour relations is a limited frame’ (p. 500)

– ‘Our institutional analysis of PE mechanisms of value redistribution also provides an example of how employment relations scholars can move beyond labour process analysis to examine a wider range of value extraction and a broader range of stakeholders..’ (p. 513)

• Whilst financialization is clearly broader than NIFs, this does constitute a substantive challenge.

Core theory: a defence & some propositions • A corrective: LPA does not operate within ‘the frame of

conventional labour-management relations’ and DCT does ‘conceptualize how new regimes of accumulation and value extraction operate under financial capitalism’ (p. 499) – We need to accept that given new value creation mechanisms in the

contemporary economy, the labour process is a central, but not the sole source of value

– The logic of accumulation is now partly financialized, both in terms of the more active management and disposal of corporate assets and capital market pressures squeezing labour costs and revenues.

• Under financialization, there is a shift of control mechanisms away from the normative and towards cascading financial targets, performance management and market discipline.

• With respect to the ‘structured antagonism’ between capital and labour, market discipline, externalization in the labour market and work insecurity limit possibilities for collective labour action, but are accompanied by a falling levels of employee engagement and a crisis of attachment.

Financialization of the logic of accumulation • Changing constitution of stock markets:

– Institutional investors grew from owning about 10% of equity in US publicly traded firms in the 1950s to over 73% by 2009 (The Conference Board 2010), and account for over 80% of UK equities (Roberts et al, 2006:278).

• The principal activity of institutional investors appears not to consist of holding shares to affect organisational performance, but in buying and selling shares based on perceptions of intrinsic value to outperform the index they are benchmarked against (Hendry et al, 2006:1103).

• Institutional investors’ desire to identify an equity’s ‘intrinsic value’, usually via professional financial analysts, underpins the perpetual short-term information and speculation activity that characterises financial markets (see valuation factors in selecting stock, Appendix 1 & 2). Corporate management must continuously stimulate a market for their shares by making them desirable both to existing and potential investors (Hendry et al, 2006; Roberts et al, 2006; Zorn et al, 2005). – (firms) ‘need to maintain or boost their share price as a measure of corporate and managerial performance

and discourage hostile takeovers’ (Gospel and Pendleton, 19-20).

• Corporate management seek to enhance company performance under the valuation methodologies primarily by:

– growing the share price

– increasing investor returns via dividends, buybacks, taking on debt, and reducing internal investment and costs;

– creating confidence in future return through both the financial and product market strategy

Financialization and strategy • Creating investor confidence in an equity’s intrinsic value requires corporate management to

craft, communicate and deliver a corporate strategy which enhances the organisation’s performance under the numerous financialized valuation methodologies.

• Accounting techniques provide a quasi-legal firm level co-ordination mechanism which positions financial targets as central and dominant in decision making (Froud et al 2006; O’Neill, 2001). Cushen (2013) shows how the budgeting process can provide a firm wide co-ordination mechanism through which targets relating to revenue growth and cost cutting were communicated, disseminated and achieved. Furthermore, accounting regulations require that internal company investment and projects to be assessed and justified on the basis of measures such as Net Present Value, Internal Rate of Return (IRR), payback period, discounted payback period, average accounting rate of return, profitability index.

• All these processes shape enhanced financialization of investment. This takes two main forms. First, an investor-oriented redistributive agenda. – ‘…what sets the financialized corporation apart from its industrial-age predecessor is that the financial gains from these

operations are not reinvested in the firm’s productive facilities, but rather are distributed to shareholders through dividend payouts and share buybacks’ Van der Zwan (2014:108).

Second, the growth of investment in financial assets and activities (rather than ‘operational’). Baud and Durand (2012) show that the financial assets ratio of leading retail firms in the 2000s increased for most; and that this helps to account for an upwards trend in return on equity despite constraints on domestic sales growth and international expansion. Milburg also notes, ‘This can be seen, for example, in ‘changes in the gap between the rate of return on manufacturing investment and the rate of return on financial assets’ (2009: 423)

• However arriving at this endgame is neither straightforward nor automatic; much has to happen at the firm level to deliver the desired agenda.

Financialization & the Labour Process • Firm interventions that come with defined financial value expansion targets must be

delivered, in part, by employees – meaning it is within the labour process that interventions prompted by the speculative elements of financialization confront a ‘moment of truth’.

• Such interventions reflect a trend noted in research of a historic long-term decline in the ability of lead firms in many sectors to generate revenue through raising prices. Maintaining a shareholder value orientation requires ‘dramatic efforts to control costs’ (Milburg 2009, 428). Much of this inevitably falls on labour. Labour can expand value by delivering goods and services whilst also absorbing interventions such as headcount reduction, outsourcing, centralisation, supply chain harmonisation, reward insecurity etc – ‘market pressure to maintain asset prices is, at the same time, a pressure on labour as variable capital..’ (Bryan et al 2009, 467).

• Gospel and Pendleton explore the labour outcomes associated with new investment funds. They identify employment, wages and benefits, work organisation and industrial relations arrangements as the key territories. All outcomes are mediated by (mostly national-level) labour regulation. Most of the case study and survey evidence does support a variety of negative outcomes, but ‘the impact of NIFs on labour is essentially indirect, mediated through the business strategies..’ (2014, 28 and see 31)

• Broadly we can distinguish between direct effects of value extraction and indirect effects of other financialization activities.

LP interventions, impacts& implications • Taking labour costs out: Employee related costs are categorised in financial accounts

as operational expenditure (OPEX); a key cost measure used in valuation techniques. The consequences for labour relate primarily to: – Headcount reduction remains a key measure for signalling commitment to and delivery of targets to

shareholders. Financial markets react positively to firm announcements relating to OPEX reduction, particularly redundancies and outsourcing (Farber & Hallock, 1999). Layoff announcements are associated with higher CEO compensation (Shin, 2010). Concurrent rise in emphasis on cost reduction and cost accounting techniques such as activity based costing (ABC) and benchmarking (Kennedy, T., & Affleck-Graves, 2012).

– Though rapidly growing wage inequality within firms is a longer term, macro-economic phenomena, increased emphasis on profit targets sharpens that divide. CEO pay is rising and increasingly linked to share options and prices. Meanwhile, cost reduction targets exert downward pressure on wages and constraints on the ability to share performance improvements with the workforce (Cushen, 2013).

• Stronger and more significant hierarchical and financial controls: The need to deliver key numbers to investors has strengthened the trend to centrally driven, short term financial measures of performance. The consequences for labour relate primarily to: – Increased use of numerics in performance management, reflecting the ratcheting down of corporate

profit targets (Ezzamel, Wilmott, & Worthington,2008) – Increased use of internal financial measures to assess and measure progress of internal investment

prompting employees across a range of skill levels and disciplines to consider and quantify their contribution to the ‘bottom line’ .(Alvehus and Spicer, 2012; Cushen, 2013; Gleadle and Cornelius, 2008; Gleadle and Haslam, 2010)

– Marginalisation and/or undermining of normative control s (Kunda and Ailon-Souday 2005; Cushen and Thompson, 2012; Thompson 2012; Cushen, 2013).

LP Interventions continued • Perpetual restructuring and insecurity: Organisational restructuring has

surged in recent decades in order to create a vision of a better future for investors. Arises from the desire to deliver value through the disposal and acquiring of corporate assets based on their status within accounting techniques. Also driven by the difficulty in quantifying product market returns, e.g . big Pharma (Andersson at al, 2010; Gleadle et al, 2012). The main consequences for labour are: – Job insecurity related to externalization, centralisation and outsourcing of employment – Role insecurity caused by internal re-organisations (Cushen, 2013) – Shifting risk to labour and other stakeholders and breach in bargains (Thompson, 2003) and

trust (Appelbaum et al, 2013).

• Financialised investment and doing more with less: interventions designed to return more value to investors – such as moving to high dividend ratios, share buybacks and taking on debt – all deplete internal investment (Lazonick and O’ Sullivan, 2000). The consequences for labour relate primarily to: – Work intensification is a consequence of heightened competition, depleting internal

investment and associated initiatives such as reduced headcount, use of peripheral employment,

– falling R&D and less investment in human capital is claimed to be damaging entire labour markets. (Lazonick, 2012)

– Efficiency gains from reorganisation of work and restructuring of employment in firms and across supply chains are appropriated by shareholders. (Baud and Durand 2012: 256)

Avatar: an illustration • The case (Cushen and Thompson 2012, Cushen 2013) examines the

relationship between leading global IT firm Avatar and its Irish subsidiary. • In the mid-2000s investors called on the new CEO to make higher returns e.g.

through taking on more debt, share buy-backs and on more debt. They did. The Group executive committed to an ongoing dividend pay-out ratio of 60% of earnings.

• A conflict was then embedded between initiatives to develop new product revenue streams and the constrained resources available to do so. This tension was expressed in narratives and practices associated with capital (CAPEX) and operational (OPEX) expenditures.

• Group imposed strict targets on the Irish subsidiary in order to align AVATAR Ireland to the corporate revenue generation strategy, cutting both CAPEX and OPEX budgets.

• With limited revenue available through new products, the burden of the new strategy fell disproportionally on the workforce. This was manifested in work intensification, an 8.5% cut in the bonus pool, headcount reduction, outsourcing and role insecurity.

• The result – angry and disengaged knowledge workers.

Final remarks • Financialization is only part of the explanation for many of

these processes: ‘interacting with accelerating and exacerbating longer term trends such as labour market insecurity, externalization and internationalisation’.

• Baud and Durand (2012, 259) explore the ‘potential interactions between the globalization and financialization processes in the context of retail firms (see also Milburg 2009). But some of their own evidence (and recent trends in UK supermarkets) indicates that product market competition amongst lead firms continues to a determinant of strategy and driver of changes in work and employment practices (to the detriment of labour in those firms and in suppliers).

• Labour process change therefore continues to reflect product and labour market competition and sources of value. The extent to which financialization is a primary or secondary driver of change varies by sector.

Appendix 1: Searching for Intrinsic Value in Equity

Relative Valuation Models: • Price to earnings ratio • Earnings per share • Price to earnings growth (PEG) ratio

• Growth rate • Sum of perpetuities • Nerbrand Z • Return on Invested Capital • Return on Assets • Price to Sales • Market Cap • Enterprise Value (EV) • EV to Sales • EBITDA • EV to EDBITDA

Is this security fairly priced, overpriced, or underpriced relative to its current estimated value and relative to the prices of comparable securities?

Absolute Valuation Models: • Present Value • Discounted Cash Flow • Dividend Discount Models • Free Cash Flow to Equity • Free Cash Flow to the Firm • Residual Income • Sensitivity Analysis

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