CHAPTER TWO VULTURE CAPITALISM: THE FINANCIALISATION OF THE CORPORATION

We accept our responsibilities as a corporate citizen in community, national and world affairs; we serve our interests best when we serve the public interest... We acknowledge our obligation as a business institution to help improve the quality of the society we are part of. We want to be in the forefront of those companies which are working to make the world a better place. — Thomas Watson Jr, former chief executive of IBM, 1969.

When Thomas Watson Jr spoke these words, he was reflecting the mood of the times. This statement was typical of Watson, who believed that the best way to secure the long-term profitability of his business was to account for the interests of all of IBM’s stakeholders — workers, managers, shareholders, the state, and society at large.¹ He repeatedly maintained that the guarantor of IBM’s success was its commitment to putting its workers first. Under Watson, IBM was responsible for making significant advances in machine learning, developing newer, faster computer processors, and even helping NASA with its space programme. Endicott, New York, a town of around thirteen thousand people in which IBM was headquartered, hosted eleven thousand IBM employees at the firm’s peak.²

But by 2012, IBM’s business model was shaped around quite a different set of goals. The key promise of the 2015 road map was to “[leverage] our strong cash generation to return value to shareholders by reducing shares outstanding”. Its measure of success: increasing the share price to $20 per share by 2015. Rather than innovate, IBM has set out to achieve this mission through mergers and acquisitions.³ Between the end of Watson’s tenure and the present day, employment in Endicott fell from ten thousand to just seven hundred. In contrast, an investor who had bought a thousand IBM shares for $16,000 in 1980 would have seen those shares increase in value twenty-five times: their holding would now be worth almost half a million dollars.

Watson Jr would be unlikely to recognise the IBM that exists today. Gone are the concerns with stakeholders, or even workers. Instead, the corporate culture of one of the greatest technology companies in the world has been reshaped around a single imperative: maximising shareholder value. Describing the transformation of IBM in this way is not meant to imply that Thomas Watson Jr was a particularly saintly individual, or that today’s chief executives are particularly awful; nor that the old IBM model was perfect: clearly, the obsession with the “national interest” suggests a symbiotic relationship between multinational corporations and the US state that has not been a progressive development. But the change in business discourse — from an emphasis on stakeholder value, with workers at the core, to shareholder value, with workers coming last — reveals a deep change in the way corporations are run.

Today’s corporations have become thoroughly financialised, with some looking more like banks than productive enterprises. The financialisation of the non-financial corporation has involved a transfer of society’s resources from workers to shareholders. This transfer of power has resulted both from changes in the political and economic foundations of the global economy and from the rise of a new ideology, which holds that corporations’ sole aim should be to maximise profitability via increasing returns to shareholders. Both ideas and power relations have to change to create any lasting economic change — and the 1980s was a period of transition for both.

Firstly, rising capital mobility and the collapse of the post-war consensus increased the power of big institutional investors. Institutional investors control pools of money, such as hedge funds and pension funds, and are able to invest and divest huge sums at will.⁴ Much of this money was invested in corporations, allowing investors to use their power to control how these corporations were managed. Organisations were restructured to ensure that managers’ sole aim was to make as much money for their shareholders as possible. And the money that went to shareholders was money that wasn’t going to workers or being invested in future production.

Secondly, neoliberalism was sweeping the world by the 1980s, and with it the idea that the ruthless pursuit of profit was the only responsibility of any corporation.⁵ This translated into a simple imperative for corporate executives: maximise shareholder value.⁶ The valorisation of profit was cemented as managers’ pay packages were linked to share prices, ensuring that they would faithfully pursue the interests of their shareholders. As neoliberals gained control of many political parties, states actively began to encourage such behaviour. The ideology of shareholder value was institutionalised in a corporate code that reinforces the idea that the function of a business is to maximise its profits, consequences be damned.

The rise of the institutional investor and shareholder value ideology have had a lasting impact on corporate power in both the US and the UK.⁷ Most corporations are now structured around the interests of shareholders, with workers’ interests coming last, if they are even considered at all.⁸ As this process has developed, a battle has emerged between certain types of shareholders over others. Short-term shareholders, like hedge funds, have benefitted to a much greater extent than long-term shareholders, like pension funds.⁹ Some private executives, intent on maintaining their corporations’ size and power, have sought to protect themselves from hostile takeovers and activist investors. Those that have succeeded have emerged as the most powerful monopolies in human history. Meanwhile, any form of resistance to the emergence of this model has been brutally broken. Where unions may once have acted in the interests of workers against managers acting in the interests of shareholders, the former have been eviscerated by states intent on ensuring that businesses are able to make as much money as possible. The corporate culture that has emerged from these changes would be unrecognisable to the CEOs of the 1950s.

Some have argued that this focus on the maximisation of shareholder value represents a perversion of an otherwise benign capitalist system, and that the triumph of the “takers” over the “makers” is a development that we should be trying to somehow reverse.¹⁰ But whilst national politics were important in determining how this ideology developed, these changes didn’t just happen, they were driven by much deeper shifts in the way the global economy works. It is hard to imagine how shareholders wouldn’t have used the collapse of Bretton Woods and the rise of financial globalisation to increase their power, even if the political struggles that took place within different states determined how much their power grew relative to other actors. Capitalism wasn’t distorted by the changes of the 1980s, it adapted — and it did so in the interests of the most powerful.

The balance of social forces in the UK ensured that it developed the financialised corporate culture par excellence. By unleashing the power of the City of London, and crushing everything that stood in its way, Thatcher helped to build a highly exploitative, extractive and unequal economic model in the UK: one which endures to this day.

The Big Bang

Once upon a time in the City of London, there lived a noble and chivalrous group of knights in a great big castle called the Stock Exchange.11 At least, that was the story told by John Redwood, then head of the Number 10 Policy Unit. Redwood’s 1984 speech — Tilting at Castles — described the City as it existed back then as an elaborate system of knights, barons, kings, and peasants. The knights — the brokers who worked on the London Stock Exchange — were honest, hard-working, and “competed with each other in high spirits”. The barons — institutional investors like pension funds — weren’t nearly as jolly as the Stock Exchange knights and were forced to send all their money to the Stock Exchange castle, where the real money was made. At the bottom of the pile were the peasants, who subserviently sent their savings to the institutional barons for them to invest. The system worked well for the knights, but not so well for everyone else. Redwood’s speech told the story of how the wise ruler went to the castle to ask the knights to lower their drawbridge and let just a few more people in.

This incredible piece of Orwellian doublespeak describes the fierce battle that took place between the government and traders on the London Stock Exchange over the course of the early 1980s, ending with the deregulation of the City. Before 1986, regulation that dated back decades restricted the kinds of activities that different economic actors and institutions could undertake. Fixed minimum commissions were imposed on certain kinds of trades, making these more expensive; trading took place on the slow, crowded, non-automated Exchange floor; and different types of investors were separated from one another, creating a rigid City hierarchy. This arcane regulation and strict separation between actors gave rise to a system that worked something like an old boy’s club. In this pre-Big-Bang world Nick Shaxson reports that bankers could show their disapproval for one another by crossing the road and could determine a man’s creditworthiness by the strength of his handshake.¹²

In the wake of a legal battle between the government and traders, the Big Bang hit the doors of the London Stock Exchange like a battering ram. In a single day, many of the restrictions that maintained the City hierarchy were removed. Fixed commissions were abolished, the separation between those who traded stocks and those who advised investors was eliminated, rapid trading was moved away from the floor of the Exchange and foreign firms were invited into the City. These changes allowed more institutions to enter the stock market and facilitated a wave of mergers and acquisitions, many by foreign banks. By 1987, seventy-five of the three hundred member firms of the London Stock Exchange had been bought up by foreign rivals.¹³ Technological developments that allowed traders to buy and sell securities in the blink of an eye quickly followed the move of trading away from the Exchange room floor. In just one year, trade times were reduced from an average of ten minutes to ten seconds — a large reduction, but far off the trading times of today, which are measured in milliseconds.¹⁴ Trading volumes skyrocketed, reaching $7.4bn just one week after the Big Bang, compared to $4.5bn a week before.¹⁵ Many of the partners in the firms that had previously been at the centre of the City old boy’s network took their money and ran: some say that the Big Bang created 1,500 millionaires overnight.¹⁶

The Big Bang was helped along by the privatisation drives of the 1980s. In the same year, the UK government launched its famous “Tell Sid” advertising campaign, encouraging people to buy shares in the soon-to-be privatised British Gas. The adverts were centred on people encouraging one another — in the pub, at the shops, or on the street — to jump on the bandwagon before it was too late. The exchange always finished with the now-famous line: “If you see Sid, tell him!” As one commentator puts it, “You couldn’t pass a billboard, switch on the radio or glance at your junk mail and miss it”.¹⁷ After starting with British Aerospace in 1981, Associated British Ports in 1983 and Sealink in 1984, Thatcher’s privatisation of British Gas was by far the most ambitious privatisation attempted thus far — and was based on a questionable commercial case. The £32m advertising campaign worked and millions of ordinary Brits signed up to get their part of the nation’s family silver.¹⁸ At the time, it was the largest privatisation ever undertaken on the London Stock Exchange.¹⁹

Overall, Thatcher privatised more than forty stateowned enterprises. This represented a major challenge to the post-war status quo: in 1979, nationalised industries accounted for 10% of economic output and almost 16% of capital investment.²⁰ By the time she left office, £60bn worth of UK assets had been sold off — often on the cheap.²¹ Output accounted for by nationalised industries fell to 3% and investment to 5%.²² Employment in nationalised industries fell from almost 10% of total employment to just 2%.²³ According to one government minister, “[w]hen we came into office, there were about three million people who owned shares in Britain. By the end of the Thatcher years, there were twelve to fifteen million shareholders”.²⁴ Millions of people were effectively given free money when the state sold off national assets under their value — shockingly, many of them ended up voting Conservative.

Over the longer term, Thatcher’s dreams of boosting individual share ownership proved over-optimistic. She and Redwood claimed that financial liberalisation would allow the peasants — ordinary savers — to get a chunk of the pie by allowing them to earn money on the stock market. But instead, people ended up handing their savings over to the barons — the institutional investors previously prevented from directly engaging in trades themselves — who were able to extract large fees from their management of other peoples’ money.²⁵ One can think of institutional investors as financial institutions sitting on huge piles of cash that they invest to make the largest possible return. These cash piles can come from ordinary people’s savings, as with pension funds, the savings of the wealthy, as with hedge funds, or even from states, as with sovereign wealth funds. Institutional investors can buy all sorts of financial securities — from bonds, to equities, to derivatives — as well as real assets like property.

In 1963, individuals owned about 55% of publicly listed shares, whilst pension and insurance funds owned 6% and 10% respectively.²⁶ By 1997, individual shareholdings had fallen to 17% of the value of total equity, whilst pension and insurance funds had risen to 22% and 23% respectively. Many international institutional investors also bought up UK equities, meaning foreign ownership of UK corporations also increased. Meanwhile, individual investments were skewed towards the wealthy — some of whom set up hedge funds to manage their own, their close friends’, and their family’s money.

This was all part of the Conservative plan for “pension fund capitalism”.²⁷ In 1988, Thatcher launched private, personal pensions, allowing individuals to save without enrolling in a corporate scheme, which had themselves already amassed vast pools of capital thanks to previous reforms. Initially, this ended in disaster as pensions advisors took advantage of savers’ inexperience to sell them risky financial products. But eventually, private pensions pots and other savings instruments became a central part of the British financial landscape. The creation of private pensions pots would have two linked and propitious effects for the Conservative government. On the one hand, it helped to create a class of “mini-capitalists” with an incentive to support measures that would boost returns in financial markets. Thatcher’s acute grasp of political economy allowed her to build an electoral coalition with a strong material interest in supporting her policies. On the other hand, the move towards pension fund capitalism increased the pool of available savings for financial institutions to plough into whatever investments would deliver the highest returns.

The combination of private pensions pots and large, corporate funds gave private investors a great deal of capital to play with. It is a fairly respected law of investing that the more capital you have at your disposal, the higher your returns, not least because if a single investor puts enough money into a single security, his investment would boost the price of that security. When asset managers got their hands on workers’ pension funds, they invested this capital into global financial markets, making huge amounts of money in the process. As one commentator puts it, “social security capital’ is now as important as other sources of capital… it is a key element in fuelling the expansion of financial markets”.²⁸ By 1995, one estimate put the global assets of pension funds at almost $12trn, at least £600bn of which came from UK savers, making the UK’s the largest pensions pool in the EU.²⁹

It is not a coincidence that corporations began to be governed based on the logic of maximising shareholder value just as institutional investors from around the world emerged as some of the most powerful actors in the City. Historically, these pools of capital have been important: when they are large, those who control them are able to wield immense amounts of power by determining who gets what.³⁰ The mass-scale channelling of people’s savings into stock markets via pension funds and insurance funds after the end of Bretton Woods and the financial deregulation by the 1980s allowed institutional investors and wealthy individuals from around the world to channel money into the UK’s stock markets, unencumbered by capital controls or restrictions on foreign trading. Hyman Minsky has argued that we now live in an age of “money manager capitalism”, in which these pools of capital are some of the most important entities in determining economic activity.³¹

In this sense, money manager capitalism doesn’t just affect financial markets. By influencing the allocation of capital across the economy, it has affected the behaviour of almost every other economic actor — most clearly, it has transformed the nature of the non-financial corporation.³² Institutional investors’ primary goal is to maximise their returns as this is how they earn their fees and commissions. These pressures have been passed on to corporations via the stock market: with equities representing a significant chunk of the assets held by money managers, the pressure on corporations to meet shareholder needs for immediate returns increased.³³ In some cases, rather than being responsible to a board of directors and a few disorganised shareholders, corporations have been held to ransom by “activist investors” demanding that their capital is used in the most efficient way possible. This change in corporate governance has also been reinforced and embedded by the emergence of a new ideology: shareholder value.

Together, the increasing power of investors and the emergence of an ideology to support this power has led to the financialisation of the non-financial corporation: businesses are increasingly being used as piggy banks for rich shareholders. This, according to the CEO of General Electric, makes shareholder value “the dumbest idea in the world”³⁴. But like many dumb ideas that enrich the powerful, shareholder value took off in the 1980s — and nowhere more so than in the City of London.

Corporate Raiders, Hostile Takeovers, and Activist Investors

Lord Hanson — aka “Lord Moneybags” — is famous for many things.35 He was engaged to Audrey Hepburn, had a fling with Joan Collins, and also happens to be one of the UK’s most notorious corporate raiders. Although he made his money in the new economy, Hanson didn’t exactly come from humble beginnings. Born into a family that made its money during the industrial revolution, he built multiple successful business ventures on the back of his family’s wealth before teaming up with Lord Gordon White to start Hanson Trust in 1964. At its height, Hanson Trust was worth £11bn. Over the course of the 1980s, its share price outperformed the rest of the FTSE100 by a staggering 370%. He was named by Margaret Thatcher as one of the UK’s premier businessmen and, completely unrelatedly, he donated millions of pounds to the Conservatives over the course of his business career. The root of James Hanson’s success was his commitment to the religion of shareholder value. Thatcher admired Hanson not simply because of his political donations, but because she saw Hanson Trust as the future of the new economy, and the close relationship between the two can tell us a lot about what Thatcher was trying to do when she deregulated the City.

Hanson Trust was not built on the back of a great new idea by a brilliant entrepreneur, or some new innovation that promised to revolutionise its industry forever. Its sole aim was to find and buy up “underperforming assets” and make them profitable. Throughout the 1970s, the conglomerate loaded up on debt to buy up shares in several large companies — seen as “underperforming” — before selling off assets and cutting the payroll to disgorge these companies of cash, used to pay back bondholders and generate gains for shareholders. Hanson Trust quickly gained a reputation as an infamous “asset stripper” before the term was widely used.

But Hanson truly made his reputation in the same year as the Big Bang itself. In 1986, Hanson Trust purchased Imperial Tobacco for £2.5bn, accounting for 15% of the value of total mergers and acquisitions activity in that year alone. The Trust quickly sold off £2.3bn worth of Imperial’s assets and distributed the money to bondholders and shareholders. Hanson had aimed to extract assets from the company’s pension fund, but the trustees had managed to close the fund the day before the takeover went through. So instead, he sold off most of Imperial’s subsidiaries — from food producers, to brewers, to a variety of tobacco producers. He was left with a business that made a profit margin of 50%. And this takeover was only one of the more extreme examples of Hanson’s attitude towards acquisitions. Hanson Trust acquired dozens of undervalued companies throughout the Eighties and Nineties, claiming always to put shareholders first, customers second, and employees last. When James Hanson came for your employer, you knew what was coming next.

Initially, raiders like Hanson were derided as extractive parasites on productive economic activity. Hanson, widely reviled by the British media, was compared to a “dealer who bought a load of junk, tarted it up and sold it on as antiques”. In a more ambiguous assessment, the Economist termed him the king of the corporate raiders. When he attempted to take over a famous British brand — ICI chemicals — in 1991, he was faced with “the sort of moral indignation that the British usually reserve for a Tory cabinet minister caught in bed with his secretary”.³⁶ ICI was at the time one of the leading chemical firms in the world, based on strong previous investments, particularly in research and development. There was widespread concern that a Hanson takeover would lead to ICI being stripped to the bone, focused on increasing current cash flow and distributing it to shareholders rather than investing in the long-term future of the business. Faced with significant political opposition, the ICI bid failed. But Hanson’s approach eventually became common business practice.

By the 1990s it was no longer controversial to argue that, when corporations maximised their profits, the economy worked better for everyone.

These arguments ran contrary to the received wisdom in management theory, which held that businesses had responsibilities to a wide variety of stakeholders — workers, consumers, and governments for example. But with the rise of neoliberalism, the argument that — in the words of Milton Friedman — “the social responsibility of business is to increase its profits” gained traction.³⁷ This view assumes that resources are scarce, so when companies use their resources in unproductive ways there are fewer to go around for everyone else. In this sense, doing anything other than maximising profits is wasteful and inefficient.

From here, it is a short leap to arguing that the singular purpose of any corporation should be to maximise shareholder value — with the share price used as the proxy for profitability. Because neoclassical economic theory assumes that equity markets are efficient, it also assumes that current stock prices are an accurate reflection of the long-term profitability of a company. Investors will base their investment decisions on the amount of profit they expect the enterprise to make in the future, and how much of that profit they expect the firm to distribute to shareholders. The argument for shareholder value therefore proceeded from “businesses’ sole aim is to maximise profits”, through to “boosting the current share price is the best way to maximise profits”.

But this nice, neat story is based on some fundamental misconceptions about the way financial markets work — not to mention its questionable assumptions about human behaviour. First and foremost, a firm’s current share price doesn’t always reflect its real long-term value. Keynes was one of the first to point out that the prices of different shares on stock markets are mainly determined by a “beauty contest”: in other words, without perfect information about the inner workings of a firm and without certain knowledge of its future profitability, investors will put their money in the nicest-looking shares.³⁸ One can think of beautiful shares as expensive football players: when a football team buys a new player they cannot be certain that the player will be worth the expense — they will judge the price based on past performance and trends in the rest of the market.

In the same way, an investor can wade into a booming market, see a share that has been performing well — say, Carillion PLC — and purchase it expecting its value to carry on increasing, even if its business model isn’t particularly strong. This creates a self-reinforcing cycle in which the most “beautiful” shares receive more investment, pushing up their price and vindicating investors’ decisions to buy them in the first place. This dynamic can create bubbles: when everyone piles into certain stocks based on the fact that everyone else seems to be making lots of money from them, the price of those stocks comes to reflect peoples’ expectations about profits, rather than profits themselves.

But taking the neoliberal argument at face value is to miss the point. The reorganisation of the economy that took place in the 1980s had little to do with making the economy work better, and everything to do with changing who the economy worked for. Shareholder value became so dominant precisely because it benefitted those with the power. As a result, it quickly colonised management theory and practice, transforming corporate governance by changing managers’ incentives to ensure that they acted as reliable functionaries for the owners of capital.

Contrary to the arguments of mainstream economists, this political reorganisation of the firm has made firms less efficient when it comes to their use of society’s scarce resources. In the late 1970s, professors Meckling and Jensen published an article arguing that there existed a “principal-agent problem” between the individuals who owned a corporation and those who managed it.³⁹ Those who ran companies — managers, the agents in this context — had every incentive to maximise their own pay packages and engage in “empire building” to increase their power, even if this wasn’t in the long-term interest of the people who owned companies — shareholders, the principals. This created a conflict of interest for managers who were technically employed by shareholders to run successful, profitable companies, but who were, according to Meckling and Jensen, likely to use their positions to maximise their own wealth and power. According to this view of the world, corrupt, bureaucratic managers were wasting money, reducing business’ profits and therefore shrinking the size of the economic pie for everyone in the economy.

The way to solve this, Jensen later argued, was to align the interests of managers with those of shareholders. Their immensely popular article — “CEO Incentives: It’s Not How Much You Pay, But How” — argued that in paying CEOs a salary that didn’t reflect the impact they had on the company’s share price, directors were encouraging them to behave like bureaucrats. If instead CEOs were remunerated based on share prices, they would have a greater incentive to act in the best interests of shareholders, and therefore in the best interests of society as a whole. Managers had to be made to act like business owners — ruthlessly pursuing profit at every turn.

Adherence to the flawed ideology of shareholder value has created a set of deep-seated problems with British capitalism.⁴⁰ As you would expect, the ideology of “shareholder value” encouraged companies to distribute their profits to shareholders rather than distributing them internally or using them for investment, which curtails long-term profitability to facilitate a short-term boost in the share price. Failing to retain and properly remunerate workers erodes trust between workers and their employers, which can negatively impact productivity.

William Lazonick argued that the rise of shareholder value ideology has led to a transformation in the philosophy of corporate governance — the way in which corporations are run — from “retain and invest” to “downsize and distribute”. In other words, the rise of shareholder value has become a mechanism for redistributing the profits of business away from workers and towards corporate executives and current shareholders. This has, in the words of one commentator, led to “rampant short-termism, excessive share buybacks to the neglect of investment, skyrocketing C-suite compensation and misallocation of resources in the economy”.⁴¹ Elsewhere the Economist recently argued that shareholder value has become “a license for bad conduct, including skimping on investment, exorbitant pay, high leverage, silly takeovers, accounting shenanigans and a craze for share buy-backs”.⁴²

In the UK, these trends are clear. The proportion of corporate profits (measured as discretionary cash flow) returned to shareholders increased from just over 25% in 1987 to almost 50% in 2014.⁴³ As well as distributing profits to shareholders, corporations can also increase share prices by buying up their own shares. Data on share buybacks from the Bank of England between 2003 and 2015 showed that in almost every year, companies bought more of their own shares than they issued new ones.⁴⁴ Another way to give a quick boost to a company’s share price is to quickly expand the company by buying up another — this was the strategy preferred by corporate raiders like Lord Hanson. Between 1998 and 2005, UK mergers and acquisitions (M&A) activity was worth around 22% of GDP — double that of the US, and more than double that of Germany and France.⁴⁵ With shareholders placed firmly at the centre of corporate decision making, and managers remunerated based on share prices, long-term investment has fallen. UK companies’ investment in fixed assets fell from around 70% of their disposable incomes in 1987 to 40% in 2008.⁴⁶

Those firms that pursued the downsize and distribute model often ended up taking out debt to do so.⁴⁷ In what came to be known as the “debt-leveraged buyout”, activist investors would take out “junk bonds” — or expensive debt — to buy out existing shareholders, before selling off chunks of the corporation and using this to repay bondholders. This makes the hierarchy of finance capitalism obvious — at the top are creditors, followed by shareholders, with workers at the very bottom. Firms came to operate according to the logic of finance-led growth: distributing earnings to shareholders and taking out debt to finance investment and new takeovers. All in all, business’ stock of outstanding debt has grown from 25% of GDP in 1979 to 101% by 2008.⁴⁸ As a ratio of profits, this means that UK corporations owe 6.5 times more in debt than they earn in profits each year, making them some of the most indebted corporations in the global North.⁴⁹

As well as investing less and taking out more debt, companies have also been reducing workers’ pay and making their employment conditions more precarious. The ratio of CEO pay to the pay of the average worker increased from 20:1 in the 1980s to 149:1 by 2014.⁵⁰ This has driven up income inequality: the UK’s GINI coefficient — a measure of income inequality in which countries closer to zero are more equal and those closer to one more unequal — rose from 0.26 at the start of the 1980s to 0.34 by the start of the 1990s. In fact, there has been a secular decoupling of productivity (the value of what workers produce) and wages. The total income of an economy can be divided between that which accrues to workers in the form of wages and that which accrues to owners in the form of profits; modelling from the TUC suggests that the wage share of national income has fallen from a peak of 64% in the mid-1970s to around 54% in 2007.⁵¹

Within the profit share of national income, rising interest payments have led to an increase in what has been termed the “rentier share” of national income. Economic rents are income derived from the ownership of a scarce resource over and above what would be necessary to reproduce it. When a landlord increases a tenant’s rent without improving the property, he is simply extracting more income from the tenant without producing anything new — in this sense, economic rents are unproductive transfers from one group to another based on an asymmetry of power. The power to extract economic rents generally depends upon the monopoly ownership of a particular factor of production. Property rents, over and above what is necessary to maintain the property, paid to landlords are economic rents derived from the landlord’s monopoly ownership of a property in a particular location. Banks are often able to charge interest payments over and above the level necessary to compensate them for the risk they are taking in lending because they have monopolistic — or, more often, oligopolistic — control over money lending. Monopolies can extract monopoly rents from overcharging consumers, and firms can generate commodity rents from their control over a particular resource, like oil or diamonds. Perhaps the most common source of economic rents in financialised economies are property rents and financial rents. Those on the receiving end of economic rents are known as “rentiers”. Keynes famously called for the “euthanasia of the rentier”, defining a rentier as a “functionless investor”, who exploits the “scarcity-value” of capital to generate income.

In 2005, Gerald Epstein made the first attempt to measure the rentier share of national income in OECD economies. Epstein opted for a fairly narrow definition of financial rents, defined as “the income received by the owners of financial firms, plus the returns to holders of financial assets generally”. He was building on Kalecki’s definition of financial rents, which captures the returns financiers are able to generate from their control over lending and investment. Epstein showed that the rentier share in the UK had risen from 1970 to 1990, from 5% GDP to nearly 15%. Similar trends pertain in the US, where the rentier share increased from around 20% to over 40% GDP over the same time period, and in most other advanced economies. So, whilst the profit share as a whole was increasing, within the profit share, the amount accruing to rentiers was also rising. This was largely due to rising interest payments, after the dramatic increase in corporate and household debt during the 1980s. The reason Keynes called for the “euthanasia of the rentier” is that rental payments flowing up to the owners of capital act as a drain on demand. Interest paid by businesses represents capital that can’t be used for investment. Economic rents also accrue to the already-wealthy, who are less likely to consume their extra income. This was one of the major drivers of the rising inequality and financial instability evident in the inter-war years. Since the 1980s, the rising rentier share has once again begun to act as a drain on productive economic activity.

Even as these problems became obvious over the course of the 1980s, there were no attempt in the UK to constrain shareholder value ideology, perhaps because it was benefitting some of the wealthiest and most powerful people in society. Realising they had opened Pandora’s box, regulators in the US tried to close it again by outlawing corporate raiding strategies. Meanwhile, in the US, firms were developing innovative new ways to protect themselves from hostile takeovers. Firms could opt to take a “poison pill” in which existing shareholders could dilute their holdings to prevent a hostile bidder from gaining an overall majority; they could establish shares with different voting rights; or they could seek out a non-hostile bidder — a White Knight — to buy up the shares being targeted by the hostile party. But in the UK, the stock market crash did nothing to dampen the corporate raiding culture. In fact, the shareholder value ideology was positively encouraged by politicians like Thatcher. The infamous City Code created one of the most permissive takeover regimes in the world.⁵² It set out that all shareholders must be treated equally, preventing the use of many of the defences outlined above, and prevented management from standing in the way of a takeover agreed by shareholders. In other words, the City Code institutionalised the power of corporate raiders, activist investors, and other short-term shareholders who would come to act as the enforcers of shareholder value ideology.

From Thatcher’s perspective, and from that of her friends in the Mont Pelerin Society, corporate raiders like Hanson were heroes, charging into corporate fortresses and taking on the vested interests of the managers who were hoarding the company’s capital for themselves rather than investing it in the interests of shareholders. Thatcher’s Big Bang and the development of the City Code sought to make it as easy as possible for corporate raiders to “shake-up” big, incumbent firms like Imperial Tobacco. Once the shake-up was through, corporate raiders like Hanson were no longer needed. The Economist wrote in Hanson’s obituary that his company’s focus on the maximisation of shareholder value had become “standard business practice”.

From Downsize and Distribute to Merge and Monopolise

The pursuit of shareholder value made many companies profitable in the short-term, but over the long-term low rates of investment, high rates of debt, and the declining wage share should have reduced profits. If companies aren’t investing in new assets, like factories or technology, then they won’t be able to take advantage of rising demand for their goods down the line. Taking out debt today and failing to use this for productive investment comes at the expense of profits tomorrow. And paying workers relatively less across the board reduces overall demand for goods and services. As inequality rises, the demand deficit increases because those on lower incomes spend a higher proportion of their incomes on goods and services, whilst the wealthier tend to save more. Low demand is, in turn, likely to make businesses invest less, decreasing future profits, and therefore wages and employment. But instead of this low-investment, low-wage, low-demand doom-loop, we’ve seen corporate profits rising on average. What’s been going on?

As Jack Welch has pointed out, shareholder value — as interpreted by the corporate raiders of the 1980s — really is the dumbest idea in the world. Many of those companies that cut investment, loaded up on debt, and dished out money to shareholders didn’t last very long. Instead, they have been bought up by bigger corporations in the wave of M&A activity that has taken place since the 1980s. The most successful advocates of shareholder value haven’t been the downsizers or the distributers, but a small number of huge mergers and monopolisers. Corporations have learnt to adapt to the pressures of finance-led growth by building monopolies, immune from the pressures of competition, activist investors, and even tax and regulation. In fact, many of them have grown so large and make so much money that they are effectively able to act like banks — rather than loading up on debt, they’ve been lending to other companies.53 This is perhaps the most important hangover of the shareholder value ideology and the corporate raiding culture it entailed: a massive increase in the number of monopolies and oligopolies.⁵⁴

The macroeconomic link between investment and profits appears to have been severed because a few large corporations are dominating the global economy and maximising their profitability by acting as monopolies and failing to pay tax. Clearly, these corporations have not adopted the “downsize and distribute” model of growth — rather, these firms can be seen as having adopted a model of “merge and monopolise”. Monopolies are highly profitable because they are able to benefit from “monopoly rents” — i.e. they are able to charge consumers and other businesses more than they would in a competitive setting. This increases monopolies’ profits at the expense of consumers and other businesses. What’s more, these corporate behemoths tend not to recycle their earnings back into productive investment. Instead, they adopt two related strategies — neither of which is helpful for economic growth. Firstly, they buy other corporations to consolidate their monopoly positions and benefit from the past investment of these firms. Secondly, they invest the profits they generate from their monopolisation of key markets into financial markets — in other words, they act like financiers themselves.

The first trend can be measured by looking at corporate mergers and acquisitions (M&A) activity over the past several decades. Global M&A activity broke a record in the first half of 2018, when deal volumes increased 65% on the previous year and came in at the highest level since records began.⁵⁵ This comes off the back of forty years of increasing M&A activity — according to one industry body the value of M&A activity doubled between 1985 and 1989 and increased fivefold between 1989 and 1999. As more “merge and monopolise” activity takes place, the monopolies themselves become ever more powerful. Gaining a greater market share means increasing profitability, which facilitates even greater M&A activity, creating a self-reinforcing cycle that has led to the emergence of the biggest global monopolies in history.

Second, these firms are investing in financial markets. Monopolisation impacts investment in fixed capital because firms find it more profitable to restrict production and invest the proceeds in financial markets.⁵⁶ They distribute large sums to shareholders, but even that doesn’t exhaust their cash piles. Instead, they reinvest their profits into other assets — making these firms similar to the institutional investors that have been so important to the development of financialisation.⁵⁷ This trend can be measured by looking at the extent to which corporations’ holdings of financial assets have increased since the 1980s. Financial assets include assets such as loans, equities, and bonds — but they also include bank deposits and internal cash piles. Today, the financial assets of British non-financial corporations are 1.2 times the size of total GDP.⁵⁸ In the US, where most of the global monopolies are based, the trend is even starker.

This pattern is reflected across OECD countries, but the UK is unusual insofar as its corporations are more likely to hold debt securities and bank deposits than other European corporations.⁵⁹ In this sense, many UK-based corporations are acting a lot like hedge funds or investment banks — they are lending their capital to other corporations or banks in the hope of increasing their profits. UK corporations have actually become net savers since 2002 (think of saving as anything that isn’t spending — so financial investments and deposits both count as “saving”). Huge piles of corporate capital have now joined the cash piles of the big institutional investors to play a significant role in shaping the allocation of resources across society.

The result of both models — “downsize and distribute” and “merge and monopolise” — is the same: more money stuck at the top. By prioritising paying shareholders over remunerating workers or investing in long-term production, the structure and governance of today’s firms helps to increase wealth and income inequality. By hoarding cash and investing it in financial markets, failing to pay tax, overcharging consumers for services, and mistreating their workers, global monopolies are launching a concerted attack on society itself. As these companies grow, they become more powerful than the nation states which are supposed to regulate them.

But these changes did not take place simply because Thatcher deregulated the City, or because firms suddenly made a collective decision that it would be in their interests to maximise shareholder value. The changing corporate culture in the UK reflects broader changes in the global economy. In this sense, whilst it has created a number of severe problems with the functioning of the economy, it doesn’t really make sense to think of the rise of shareholder value as a corruption of a purer form of capitalist accumulation. The reason corporations are now run in the interests of shareholders rather than workers is that shareholder power increased dramatically in the 1980s relative to that of workers, and this power has been consolidated as it has been embedded in new sets of institutions and new ideologies.

But the rise of shareholder power on its own only explains half of the story; shareholders gained power at the expense of workers, who were previously far more central to corporate governance than they are now. Attempting to redistribute power from shareholders to workers would have met with fierce resistance in any company with a strong union. The necessary correlate of the promotion of the shareholder was the attack on the worker, and the best way to attack workers in the 1970s and 1980s was to attack their unions.