The Philosophy of Short-Sightedness: Shareholder Value

The Philosophy of Short-Sightedness

“Shareholder Value” as a New Term of Management

by Robert Kurz

[This article is translated from the German on the World Wide Web, http://www.krisis.org.]

Philosophy, a term from Greek antiquity, means “love for wisdom”. Originally the teaching about living rightly and well was meant. Since the enlightenment, philosophy has been regarded as a kind of secularized theology explaining the whole world and human reason. Today the term philosophy has become inflated. Tricks of self-assertion, sexual fads, personal delusions, methods of gymnastics, shampoo and even eating habits are described as “philosophy”. When someone drinks Schnaps in the morning or tea, takes a vacation at the ocean, bathes with or without shorts, he pompously calls that his philosophy. Tennis players, football stars, politicians and pop singers can speak for hours about their philosophy and the media are full of their orations.

In the meantime the managers must also have a philosophy. Management philosophy has also become the trend-setter in the galloping inflation of philosophizing. No producer of cosmetics, cars, pasta or porno-books manages any more without a special philosophy. Since every person has become his own management and must market himself, every individual also needs his/her own self-management philosophy. The “love for wisdom” is now traded as “love for selling”. The lowest level of human thinking is reached but for capitalism it is “the highest wisdom”. Thus philosophy now means the theory of selling oneself and the rubbish that one must pass on to humanity.

Philosophies of this kind come mostly from the US but correspond to the global spirit of the times. They are normally changed more frequently than underwear. The gurus of management philosophy also quickly pass through their business cycles. There is a summer- and a fall fashion of this phi8losophy and management has much to do to keep everything timely. Hardly any time is left for the managers themselves. Thus one intellectual flop replaces another and the world of the economy is already weak in the head. If the management philosophy is not as deep as the ocean, it is at least as deep as a puddle and even produces its own ethic. Like Immanuel Kant, the management philosophy of the world now also presents a “categorical imperative”. This maxim is called “shareholder value”. In the German economic press, the term shareholder value was the “buzz word of the 1996 financial season”. As one on the European continent in the age of neoliberalism respectfully smells and probes everything that comes from the Anglo Saxon world, the interpretation of shareholder value has become the subject of economic philosophy. What is shareholder value? The first commandment of this new philosophical ethic of management is: You shall have no other God than your shareholders. Thus shareholder value represents a ruthless orientation of the corporate policy of management companies in the interests of shareholders. As investment bankers tell us, this is a movement “back to the roots”, namely to the original task of management to gain maximum profits for the shareholders. For too long, this original ethical command was displaced by the “interests of social groups” (unions, politics and so forth).

Thus true orgies of mass dismissals and reductions in costs are celebrated in the name of shareholder value to squeeze out a maximum of output from a minimum of employees and no longer to worry about the social consequences. Profit maximization was always the goal. Now what is crucial is an increasing radicalization of this will against all other interests within the capitalist society. The concept of shareholder value corresponds to the radicalization of the narrow-minded management viewpoint in the sign of the globalization of capital. All human life, all social compromises, the remnants of culture and even the self-interests of the state bureaucracy should be subordinate to “gaining attractive profits for shareholders” and if necessary be sacrificed on this altar. Humanity together with its natural atmosphere is taken captive as a hostage of large private and institutional shareholders.

For an old-fashioned political left, this development could again be an occasion for moaning about the malicious power and glory of the capitalist spirit that gives an ethical halo to the despicable profit interests. However the philosophy of shareholder value does not reflect common sense but a fundamental strategic weakness of capital. The problem lies in the relation of the stockholder to the practical entrepreneur or to management. As everybody knows, a shareholder is a financial investor who buys shares and participates in a business with a goal of gaining a share of the profits of this enterprise.

The shareholder is not a businessman. The decision to buy shares of a business has reasons that can be both emotional and rational and are based on information (for example about the commercial success of this business). However because the shareholder is not himself a managers and therefore is not actively involved with the production and sales of the enterprise, he cannot prescribe any strategy or specific commercial conduct. He cannot decide over investments, reorganization, personnel policy, marketing and so forth. In other words, according to capitalist rationality, the shareholder as a mere financial investor must put his trust in the strategy, goals and possibilities of a producing capital and in its management. This trust is its risk.

Although the capitalist mode of production was deformed from the beginning by the abstract functionalism of money, this involved in the past the remnant of a qualitative goal, namely the production and sale of a certain (proven or innovative) concrete practical value. Thus the trust and risk of the investing shareholder refer to the quality and market accessibility of the entrepreneurial product and its usefulness, not merely to methods of management. Only in this way could inventor-capitalists like Edison, Siemens, Benz and so forth realize their ideas in the 19th century (however these may be judged qualitatively today). They needed investors who believed in their ideas and their possible commercial success.

The greatest capitalist project of the past century, opening up the world by building railroads, was only possible through the risk of investors who as shareholders of the railroad companies gave management a free hand. Thus the Italian film director Sergio Leone in his famous western “Play Me the Song of Death” (1968) described the nearly tragic figure of a railroad manager who was more concerned with the great dream of joining the east- and west coasts of the US from ocean to ocean by the rails of track than fast profits – against the stubborn money egoism of his enemies and co-workers.

This function of the practical entrepreneur or manager is also reflected in economic theory. The great economic author Adam Smith justified the share of profit for the practical businessman in that he brought together the “production factors” labor, land and material capital. The innovative entrepreneur and “creative destroyer” of antiquated production structures postulated theoretically by Joseph Schumpeter as a guarantor of capitalist development, and loudly invoked again today presupposes a strategic freedom and independent business policy of productive real capital over against investors.

The concept of shareholder value turns this classical relation of shareholders and practical capitalists upside down. The more difficult the exploitation of real capital through the high standard of global productivity and the more dependent real production is on cash injections of transnational financial markets, the more the strategic power of industrial “men of action” declines. Schumpeter’s innovative entrepreneurs required in the theory are condemned to die out in capitalist praxis since the beginning of the 90s. Steve Jobs was probably one of the last of his kind. There is no place any more for people like him in the philosophy of shareholder value. The ideas and strategies of real industrial capital are devoured by the naked financial interests of shareholders.

This concerns above all the time horizon. Orienting oneself strategically means thinking relatively long-term and having long-term goals. Developing and marketing a real product needs its time even with the technological potentials of microelectronics. Shareholders and other investors must have a certain patience so that new industrial ideas can be realized. They may not demand “attractive profits” here and now without regard to necessary investments and other medium- to long-term presuppositions of future gains if they do not want overexploitation of the substance of the business.

While the time horizon of industrial innovations, production and transportation cannot be shriveled at will, the speed of financial markets and their profits dictate economic reality. David Vice of Telecom speaks of the “nano-second culture of the 90s”. The former Japanese financial minister Toyoo Gyohten says in an anecdote: “Recently I spoke with one of the most successful Japanese stock traders. I asked him what factors he considered in buying and selling. He replied: “Many factors, some very short-term, some medium-term and others long-term.” I found it very interesting that he also thought in the long-term and asked what he meant by long-term. He hesitated and said completely seriously `perhaps ten minutes’. The market moves at that speed nowadays.” In this climate, the last remnants of a qualitative goal oriented in practical value evaporate along with business strategies extending beyond one or several business cycles. Basic research is also reached by the imperatives of short-term maximum profits.

The philosophy of shareholder value is a concept of extreme short-sightedness which doesn’t need visionaries of capital any more. Multipliers and revitalizers replace the great strategic agents. Business “shrivels for health reasons” everywhere to core areas. The wheel turns more and more quickly. Profits from the real business are no longer of top priority. As the name implies, shareholder value emphasizes the value which shareholders can immediately control in the short-term, the market value of the shares, not the dividends. A business policy that follows the maxims of shareholder value is oriented less in real long-term profits than in short-term maximization of the market value of its shares by whatever means.

The philosophy of shareholder value is a product of simulated casino capitalism. While stock packages in the past often remained in the same possession for decades and were passed on to the next generation, most private and institutional investors do not hold any long-term portfolios any more but play through the stock market according to current prices.

Nothing is left to the directors and managers of real capital than to steer their businesses in a kamikaze or suicide style. More and more frequently they see themselves forced to sell off cheaply the substance. Even the secret reserves are brought into the balance in the interest of fast hairstyles of pseudo-success. Many businesses are hopelessly indebted to stay on course by repurchasing their own shares. Conservative business- and investment advisors have already become dizzy with this mad bustle and warn of a bad end. Thus the US rating expert Edward Emmer declared in the German trade magazine “Wirtschaftswoche” (Economic week): “Under the mantle of shareholder value, the most dreadful excesses have already occurred. Much of what is done is irresponsible… In dozens of cases, businesses are driven to bankruptcy in the name of shareholder value.”

The inner barrier is real capital exploitation itself that reduces the ideas of managers to the short-term memory of financial markets, not subjective lapses. Therefore the warnings of conservative moral watchdogs of honest capitalism dissolve in empty air. Through automation, rationalization and globalization, capital on its own deprives human workers of food. The system raving with a hunger for exploitation begins to devour its own flesh. The strategic capitulation of industrial management continues across the capitalist elites. In the financial empires, the tycoons are replaced by pimply youths at computer terminals who play with the world economy like children in sand boxes. Even the time horizon of politics falls to the level of video clips. With the philosophy of shareholder value, neoliberal market radicalism trumps itself and labors single-mindedly on its historical ruin.