Finance - Tyranny, Mystery or Horror?

The recent April CoCKEAS workshop that Karel Williams and his team organised in London gave us an opportunity to discuss "The Tyranny of Finance". The contributions that have been presented enabled us to highlight the extremely relative nature of financial tyranny and of shareholder power. Most of the world's major automobile companies are still controlled by a family (Ford, PSA, Toyota, Fiat, BMW) or by the State (Renault, VW), and despite increased pressure from institutional investors, executives remained largely autonomous in terms of their managerial decision-making. Principles of "good shareholder management" have been observed in most automobile companies, but the situation continues to diverge greatly between those firms whose explicit goal is the creation of shareholder value (GM, Ford or even Fiat); those where this drive is still contained (Renault, PSA); those that are seeking to balance shareholder and employee interests (VW with its "workholders"); and those that remain outside of this trend (Toyota, Honda). The stock market is not a place where resources are being collected to fund investment, which is financed nowadays by retained earnings or by debt. The oft-mentioned dictatorship of the markets would appear to be somewhat exaggerated.

The opposition between "financialised" firms (GM, Ford) that have been divesting from the manufacturing function (outsourcing, spin off) so as to position themselves in downstream activities (consumer credit, services) and "productive" firms (Toyota) that have been reinforcing their presence in system design and production (i.e., electronic systems) is a useful factor of behaviours' differentiation. But it does not fully describe the variety of configurations that would need to be apprehended more precisely if we want to identify the forms by which shareholder value has diffused throughout the automobile industry, as well as its real impact on investment or divestment decisions. Towards this end, the workshop provided us with an opportunity to have a look at a number of studies that are beginning to reveal the secrets of Finance (see Karel Williams paper in this issue of the Lettre du GERPISA).

It remains that a strategy of extreme financialisation, wherein a preponderant role is attributed to the creation of shareholder value as a criteria for decision-making (to the detriment of the firm's other stakeholders - employees, but also suppliers, retailers, etc.), is not without risks. First of all, there are financial risks, insofar as the automobile industry will, for structural reasons, continue to under-perform in terms of financial profitability (as compared to the other businesses in which financiers could be investing). This means that by targeting high returns, there is a double risk: that the financial community may in the end become disillusioned with the industry; and that it can fall prey to short-termism. There are also technological risks, inasmuch as short-termism can lead to under-investment in innovation (the syndrome of excessive "leanness"), and then to products that are not competitive in technological or commercial terms. Lastly there are economic risks, as clients can quickly tire of products that are not attractive enough.

The example of Chrysler is full of lessons on this score. Close to bankruptcy in the late 1970s, the firm was lead to recovery by a chief executive who would only accept stock options as remuneration. In 1990s it would become something of an icon, with its combination of an innovation strategy (launch of the minivan segment in the United States, new technocenter), its "leaner" and more partner-like management of supplying relationships (a high degree of outsourcing and partnership enabling productive flexibility), and its financial performances (record profit margins and returns on capital employed). All of these strengths were very attractive to Daimler's senior management, leading to the acquisition of the United States third-largest carmaker. Above and beyond the difficulties faced or errors committed in managing the merger between these two firms, it would also appear that "la mariée était trop belle", with certain weaknesses having been underestimated.

Is it possible to conclude from this that Chrysler was pressurised into sacrificing long-term strategies (innovation, new model design) on the altar of American institutional shareholders - many of whom subsequently sold their stake in DaimlerChrysler? Did the pressure done by Kirk Kerkorian at mid-90s to raise Chrysler's shareholder value divert the US firm's managerial resources from its core business (design and produce vehicles)? These conclusions may be somewhat hasty, but the issue should be addressed before a turnaround in the economic and social environment reveals the full extent of the problems that can be associated with excessive financialisation. The next GERPISA colloquium will certainly allow continuing this debate about merger and acquisition, and exit issues.