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Shareholder value and


corporate governance:
some tricky questions
Michel Aglietta
Published online: 02 Dec 2010.

To cite this article: Michel Aglietta (2000) Shareholder value and


corporate governance: some tricky questions, Economy and Society, 29:1,
146-159
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Economy and Society Volume 29 Number 1 February 2000: 146159

Shareholder value and


corporate governance: some
tricky questions

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Michel Aglietta

Abstract
Shareholder value is not a new idea. But it entails a shift in control over businesses
with far-reaching macroeconomic consequences. They are mostly apparent in the
USA. The required nancial return spurs a momentous equity price appreciation
which discourages private saving. Meanwhile, the achievement of a nancial pro tability consistently above the economic rate of return on real capital induces a rising
leverage cum share buybacks. The nancial dynamic is highly procyclical and generates a nancial fragility which questions the hypothetical advantage of private pension
funds over pay-as-you-go retirement systems.
Keywords: Shareholder value; corporate governance; growth regime; leverage;
wealth accumulation.

Introduction
I was asked to comment and draw conclusions on papers which address fundamental questions. The paper written by Robert Boyer (2000), which appears in
this issue, explores the macro-economic consistency of an equity-based growth
regime.1 The two other papers drafted collectively by Julie Froud, Colin Haslam,
Sukhdev Johal and Karel Williams (1999, 2000) take a critical view of the doctrine of shareholder value.2 In the rst paper, they investigate the impact of
restructuring, a favourite management tool, on the labour market. In the second
paper, which appears in this issue, they question the relevance of the nancial
performance criteria derived from the doctrines of efficient management.
Both approaches have a common background. They deny that nance is
Michel Aglietta, CEPII, 9 rue Georges Pitard, 75015 Paris.
E-mail: AGLIETTA@CEPII.FR
Copyright 2000 Taylor & Francis Ltd 0308-5147

Michel Aglietta: A comment and some tricky questions

147

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neutral and that shareholders claims on a rms value-generating process are


the direct outcome of a natural order of property rights. On the contrary, they
contend that capital markets strongly shape corporate behaviour with de nite
real effects. Therefore, in reading the papers, my approach was to ask how they
supported one another in understanding the stylized facts of present-day
capitalism. I did so by posing the following questions:
What is new about the doctrine of shareholder value and what is old stuff in
new attire?
What are the patterns of corporate behaviour induced by the governance of
present-day institutional investors?
What are the macro-economic trends, and what are the linkages in the business cycle, which convey the in uence of shareholder value?
What is the meaning of, and what are the prospects for, a stage of capitalism
whereby pooled savings of labour, whose investment is delegated to professional managers, become the paramount shareholder?
These four points will be considered in turn in the following sections.

Shareholder value: old ideas and new social conditions


As far as formal theory is concerned, the new conception of value creation
measured by market value added (MVA) is nothing but the net present value of
the rm (Stewart 1991). It is also the familiar goodwill of accountants, that is to
say, the excess of the market value of equity over net asset measured at book
value. This substantial identity is forcefully stressed in the paper by Froud et al.
in this issue.
To make this crucial point clear, let us consider a very simple sketch of a rms
balance sheet. On the asset side the rm has a productive capital K which can
be treated as homogeneous. On the liability side it has a quantity of debt D and
net assets F = K-D. Let us suppose an in nite horizon, a cost of capital r and an
P
economic return r = , with P the gross pro t before debt service. Assuming
K
P is constant through time, net pro ts are:
P rD = r K rD
The market value of equity is:
P rD r K rD
C = =
r
r

r
r
C = K (K F) = 1 12 K + F
r
r

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The net present value of the rm is:

r
C F = 1 12 K
r
Let us consider now the new economic value added (EVA )3 and market
value added (MVA) problematics. Economic value added (EVA ) is net pro t
less the income generated by equity capital, were the yield equal to the cost of
capital:

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EVA = (P rD) rF = (r r)K


MVA is just the discounted value of future expected EVA . In the simple
model of constant returns on capital, one gets:
EVA
r
MVA = = 1 12 K = Net Present Value = C F = Goodwill
r
r
For sure, management textbooks use more complex balance-sheet structures.
They give rise to free cash- ow models, discounted value of dividend models,
return on equity (ROE) and the like. That does not in any respect change the
one concept of net present value which uni es the whole range of formulae. For
instance, ROE is the ratio of net pro ts to the book value of equity capital.
P rD
r K rD
r (D + F) rD
D
ROE = = = = r + (r r)
F
F
F
F
It is an increasing function of leverage (D/F) as soon as the economic return
of capital is higher than its cost.
Then C/F is Tobin q. Subsequently one gets:
C
r
K
r
r
D
ROE
q = = 1 12 + 1 = + 1 12 =
F
r
F
r
r
F
r
MVA
Or q 1 =
F
Therefore there is nothing new under the sun as far as nancial theory is concerned. On this basis, one might be puzzled about all the growing fuss of the last
ten years. It is less surprising if the expanding literature on shareholder value is
considered from the point of view of legitimation. Shareholder value helps to
legitimize the predominance of shareholders over other stakeholders, and the
predominance of a capital market view of the rm over an industrial one. It has

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149

much to do with income distribution, that is, with the claims over the global
product of factors generated by the rm.
A long time ago, Berle and Means (1932) celebrated the decline of family
ownership and the rise of salaried managers. The autonomy of managers was
closely associated with the advent of the large multi-divisional corporation run
according to the staff-and-line principle (Chandler 1962). In the US model the
power of managers coexisted with dispersed patterns of shareholding which
made it easier to separate ownership and control. In Germany and most Continental Europe, managers obtained a freedom of manoeuvre which was secured
by cross-shareholding between rms, the silent support of bankers and, in some
countries, the assent of the Treasury and (or) the Ministry of Industry.
It was not until the late 1970s that the control of the rm by its managers was
contested by principal-agent theory which was designed to rehabilitate shareholders interests (Jensen and Meckling 1976). However, the institutional
investors who professionally manage assets from large pools of contractual
savings do not draw their power from majority holdings or even from strong
minority interests. Most often they have no acquaintance with the rms whose
shares they put into their diversi ed portfolios. In erce competition with one
another, the funds usually have no individual power over corporate management.
Their in uence in shaping corporate behaviour stems from the collective
power of opinion wielded by capital markets in the new era of information technology. The nancial markets have the power to value rms publicly. This
process of evaluation takes place under the permanent scrutiny of the community of investors, because rules and standards have made it possible to abstract
from the speci cities of the rms organization. Charters of corporate governance embody the principal-agent relationship in a set of formal procedures,
require transparent information reporting, certi ed accounts and quanti ed
prospects of future pro t, so that the performance of the rms can (without
difficulty) be measured against objectives or benchmarks.
The elaborated capital-market structures and the related capacity to move
funds in liquid markets are sources of power for the institutional investors who
manage their portfolios and are themselves subjected to stringent relative performance criteria. The principle which faces corporate management is a formal
abstract code: the logic of a system of public valuation. Shareholder value is just
the norm of the transformation of capitalism which has promoted this system of
public valuation. Corporate governance is the set of behaviours which induce the
rm to maximize shareholder value.
Firms behaviour under corporate governance
Maximizing shareholder value entails business and nancial strategies. Froud
et al. (1999) extensively document business strategies which attempt to increase
the economic return on capital employed (P/K). An intense wave of

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restructuring, which started in the US as early as 1982, subsequently spread all


over Europe and is still in full swing. Such restructuring has increased the gross
rate of return on capital employed by the combination of two methods: on the
one hand, labour-cost reduction which raises the share of pro ts; and, on the
other hand, saving productive capital which reduces the capital/output ratio.
Outsourcing, subcontracting, spin-offs and the like are management decisions
that are remodelling the division of labour. Successful companies capture quasirents downstream in fast-expanding markets for nal goods and services where
the goodwill resides and at the same time pass the costs of making commodities on to others.
A birds eye view of the results of the changes induced by such management
activism shows striking differences between the US and Europe (Table 1). The
gross return on capital employed increased by roughly the same magnitude.
However, until recently in France and Germany, the achievement was accompanied by a rise in the share of pro ts against wages. In the US a similar result
came chie y from an improvement in the productivity of capital employed. At a
rst glance these gures and the differences in mechanics are puzzling. By way
of explanation, it is enlightening to turn to the data of the US Department of
Commerce on the composition of productive investment in the US non-farm
corporate sector: between 1982 and 1997 the share of structures in productive
investment nearly halved, from 44.8 to 23.5 per cent; over the same fteen-year
time span, the share of non-IT equipment remained roughly stable around 43
per cent, while the share of IT equipment trebled from 11.8 per cent to 33.9 per
cent. Because the price of computer products declined tremendously, both
volume and price effects of the spur in IT technology concurred to decrease the
capital/output ratio in value terms. As US corporations are far more advanced
in IT than their European counterparts, the same phenomenon did not show up
in Europe to the same extent in the period under review. A large potential for
catch up is available to European rms in the years ahead.
Furthermore, information technology helps reduce the capital/output ratio
in the industries which make use of it, because IT raises production capacity
utilization, increases inventory turnover and speeds up the replacement of
Table 1 Share of pro ts, return and productivity of capital in the non-farm, non nancial corporate sector
Return on capital
employed (%)

Apparent productivity
Share of pro ts
of capital
(Index 100 in 1982)
(Index 100 in 1982)

1982 1987 1993 1997 1982 1987 1993 1997 1982 1987 1993 1997
US
Germany
France

12.6 16.0 17.8 18.3 100.0 120.7 132.1 140.0 100.0 105.4 105.6 103.7
9.9 11.6 12.0 14.8 100.0 102.8 105.0 112.7 100.0 113.8 117.4 129.3
10.2 13.1 14.1 15.0 100.0 102.8 104.9 106.8 100.0 123.7 133.0 137.5

Source: National Accounts, OCDE, Paris

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151

product lines. The impact on labour productivity is quite another matter. From
fragmentary evidence, it could be that IT equipment is complementary to, not
a substitute for, skilled labour. With a complementary production function, the
massive investment in IT created a strong demand for labour. This conjecture
goes some way towards explaining why labour productivity gains remained
rampant, while the US capital/output ratio declined substantially.
As stressed in the papers on corporate governance, restructuring spurred by
tougher price competition displays the above-mentioned effects and others that
are macro-economically signi cant. Along with the use of information technology to develop product innovation comes a shorter product cycle. The quasirents required to boost the return on capital employed are regenerated by faster
and more versatile changes in the structure of consumer demand.
New technology can exhibit a higher elasticity of supply in response to change
in demand whenever the supply of consumer products has been delivered by
using a production function which is less capital intensive and more able to shift
exibly from one variety to another. That is, a technology capable of producing
diversity at the low cost of mass production which is not possible in more rigid
and more capital-intensive production processes. In this case, it becomes possible to delay or prevent altogether the bottlenecks in supply which made prices
shoot up when demand was riding high in earlier business cycles.
Financial strategies complement restructuring and the use of information
technology in maximizing shareholder value. On top of the saving of capital
employed comes the saving of equity capital. From the previous section one can
observe that the ROE or the MVA is an increasing function of leverage as soon
as the gross return on capital employed exceeds the cost of capital. Leverage is
usually increased in aggressive nancial strategies like management buy outs
(MBOs), leveraged buy outs (LBOs) and share buy backs. There can be a reinforcing process involving leverage when increasing ROE and pro t per share
attract investors who buy shares, exerting a demand pressure on a reduced
supply, thus increasing the market price of shares. The impact on share prices
occurs because the rise in pro t per share is not fully re ected in the price of the
buy back itself. A possible explanation is the distortion of the tax system: buy
backs have a different impact on taxes than extra dividends which transfer the
rms cash ow to shareholder. Another explanation is that the actual execution
of a buy back (rather than the mere intention to buy back) is interpreted by the
investing community as a sign of managements compliance with the criteria of
corporate governance (Batsch 1999).
Questions have to be raised about the limits of the process of higher leverage,
share price appreciation and increasing nancial returns. Is it possible that the
book value of net assets could fall towards zero and correlatively that the ROE
would rise ad in nitum? Or, well before this can occur, will the cost of capital have
risen and the economic yields have decreased, thus cancelling the positive in uence of leverage on nancial return? This question directs attention towards
analysis of the behaviour of institutional investors. Leverage is conducive to
higher risk which stems from the volatility of pro ts and the probability of

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failure (Artus 1999). In a nutshell, the result is: the higher the leverage, the wider
the volatility of the ROE and the larger the risk of failure.
In standard portfolio theory, investor demand for shares increases with the
excess expected return on shares and decreases with the volatility of this return
variable, ignoring the risk of failure.
The excess expected return on shares is:

r aK rD
= r
F

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11+
F 2

D
r
F

being the expected return on capital employed.


The variability of the excess return on shares is proportional to:

11+

V(r )

V(r ) being the volatility of the return on capital employed.


The demand for shares by individual investors is an increasing function of the
following variable:
D
D
r a1 1 + 2 r
F
F

D 2
11+
2 V(r )
F
Therefore increasing leverage should diminish the demand of the investing
community for shares! And the greater risk of failure with leverage should
further discourage the buying of shares, thus reversing or at least mitigating the
rise in stock prices.
How is it that we observe in the US a rising leverage in the corporate sector
and an accelerating pace of stock-price increases?
The rst reason is a straightforward consequence of corporate governance. As
institutional investors have pressured rms to disgorge their free cash ow, buy
backs have become a standard management device (see Lazonick and OSullivan
in this issue). Hence the supply of shares has decreased, making a rise in prices
possible even if the demand for shares decreases with risk.
The second reason is the replacement of individuals with institutional
investors in the investing community. Individuals have actually been net sellers
in the US. But institutional investors have been net buyers as they diversify huge
portfolios of pooled contractual saving. Furthermore, institutional investors are
less risk averse than individuals for a variety of reasons: the size and liquidity of
their funds, their professional expertise and, above all, the competitive structure
of delegated portfolio management industry. Structural changes conducive to a
higher appetite for risk in a broader more optimistic nancial environment have
come with the rise in mutual funds and hedge funds relying on expectations

Michel Aglietta: A comment and some tricky questions

153

arbitrage as well as the shift to de ned contribution pension funds more eager
to take risk.

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A nancial wealth-induced growth regime


Boyers paper sketches a model of a growth regime whereby overall demand and
supply are driven by asset price expectations, which create the possibility of a
self-ful lling virtuous circle. In the global economy, high expectations of pro ts
trigger an increase in asset prices which foster a boost in consumer demand,
which in turn validates the pro t expectations. The dynamics of this growth
regime are far removed from those of the Fordist growth regime in respect of
the macro-economic relationships between demand, supply and income distribution.
One important question raised by the path of the US economy in the 1990s
is its robustness to external shocks and, more importantly, the in-built instability of the nancial market-led system. Such in-built instability is suspected by
some observers and denied by others.
The accumulation of nancial wealth by households is rooted in a powerful
socio-demographic trend towards ageing. If households are not constrained by
credit control, they save or dissave according to their optimal consumption ows
over their life-cycle subject to their inter-temporal budget constraint. For a
typical individual household, the life-cycle hypothesis predicts that the households net nancial saving is bell shaped according to age of household. The
young working adult household is a net debtor which thereby nances investment in housing and the cost of child-raising. As individuals become mature
working adults with higher income, the household builds up net nancial wealth
in expectation of future retirement. At retirement age, the household starts dissaving which continues to the end of life. If we aggregate this life-cycle behaviour over the whole population, household nancial saving depends on the
(changing) age structure of the population. From the late 1980s onwards, the
post-war bulge of the baby boom generation has started moving into the matureworker stratum, swelling the demand for nancial assets.
As Table 2 shows, the ratio of household net nancial wealth to disposable
income was trendless in the post-war growth regime but has recently risen systematically in every developed country. The trend is expected to persist for about
a decade. As Table 3 shows, this process of wealth accumulation has been increasingly intermediated by institutional investors whose assets have risen much
faster even than household wealth.
The institutional investors have bene ted from large pools of contractual
saving and have been subjected to a erce competition for high yield in fund
management. For reasons explained in the previous section, these institutional
investors have been attracted by the stock market and have increased the share
of equities in their portfolios; an appreciating trend in equity prices has ensued.
In the US case, Helmut Reisens empirical study of the Standard and Poors

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Table 2 Ratio of household net nancial wealth/disposable income (period average)


Countries

19815

19869

19902

19937

USA
Japan
Germany
France
UK

2.52
1.46
1.58
0.85
1.60

2.80
2.15
1.80
1.29
2.08

2.89
2.18
1.76
1.38
2.12

3.11
2.24
1.85
1.77
2.75

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Source: Economic Outlook, OECD, Paris

Table 3 Financial assets managed by institutional investors (expressed as a percentage


of total nancial wealth of households)
Countries

1980

1985

1990

1995

1997

USA
Japan
Germany
France
UK

20.7
15.6
22.3
11.4
23.0

30.0
20.2
27.5
24.7
27.0

35.2
26.7
33.3
36.7
42.4

42.7
29.6
40.5
44.3
52.1

45.0
29.2
43.3
44.4
52.6

Source: National data

500 index (SP500) identi ed the in uence of age structure on the priceearnings
ratio. After controlling for the long-run interest rate and for in ation, Reisen
found that the ratio of population age 40 to 60 to population over 60 was strongly
signi cant in a regression explaining the trend of the P/E ratio over the 197797
period.
The demographic trend towards ageing supports a long bull market where
stock prices deviate from the historically trendless real stock-price index. Under
demographic in uences this long bull market will be followed by a long bear
market from 20078 onwards when the institutional investors will become net
sellers. The bull market is not a speculative bubble but it results in trend overvaluation in the stock market with prices above the standard net discounted value
of future pro ts per share. This is consistent with a risk premium on the SP500
lower than its long-run average in recent years (Brender and Pisani 1999). It is
also consistent with a Tobin q, i.e. a ratio of ROE over the cost of capital, higher
than two.
However to be sustainable, pro t expectations embodied in nancial returns
must be held to be pervasive rather than transitory. Fund managers have been
accused of myopia, taking as steady pro ts the high transitory pro ts linked to
restructuring, increased leverage and devices like buybacks. This may be so. But
there is another hypothesis in the explanation that points to the macro-economic
consistency of a growth regime whereby the appreciation of equity prices is selfful lling. In this growth regime, corporate governance becomes the central institution regulating the relation between overall supply and demand.

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In the post-war growth regime, labelled Fordism, in ation on the goods and
labour markets played a double role as both a compendium of economic tensions
and a mechanism regulating those tensions. In ation was anti-cyclical in character and ensured some matching between productivity gains and real wage
increases over the business cycle. This matching between productivity and wage
increases was essentially performed by collective bargaining, as the central institution of that age of capitalism. Whenever con icting claims on production
capacity degenerated into excess demand, unexpected in ation ensued. By
eroding real wages resulting from pluri-year nominal wage contracts or by inducing monetary authorities to tighten liquidity conditions, in ation could provoke
a slowdown which eliminated excess demand. Eventually expected in ation
ratcheted upward because a remnant of past in ation cycles was embodied into
future price expectations. But the mechanism of excess demand generation and
cancellation worked on a slowly rising trend of in ation until the oil price shock.
The present growth regime has embodied in-built forces which subdue in ation in the goods and labour markets. The much tighter competition that has
occurred with globalization is responsible for a drastic change in price determination. The price-setting formula compatible with collective bargaining in the
Fordist era was a desired mark-up over unit labour cost, this ratio being an
increasing function of the output gap as a proxy for demand pressure. In presentday capitalism, corporations have lost their grip on prices. Standard commodities are priced internationally in markets which are plagued with world-wide
over-capacity. Quasi-rents on innovative products are shorter-lived. Caught in
the vice between erce competition in product markets and high pro t requirements in nancial markets, corporate management has responded with
cost-cutting, restructuring through shedding and acquiring product lines, outsourcing and the like. Managers have been induced to indulge in high leverage
both to nance real capital and to boost their return on equity.
The compendium of tensions shows up in asset markets with respect to the
dynamics of leverage and asset price appreciation. This new dynamic is procyclical instead of being anti-cyclical. Therefore the upward stage of the business cycle can have a stronger momentum and last longer. Imbalances are
concealed in the nancial structure, depicting ambiguous indicators of fragility.
The self-ful lling macro-economic dynamic works as follows. Shareholder
value sets a requirement in nancial return which is re ected in rising equity
price appreciation. In turn, the latter is an incentive for institutional investors to
increase the share of their portfolio invested in stocks. The counterpart is an
increase in the nancial wealth of households. This increase stimulates consumption, not only out of disposable income but also out of capital gains. Realized capital gains are spent by individuals who have sold the shares bought back
by rms which transfer their free cash ow. Unrealized capital gains spur credit
demand against collateral. As a result, in the US case, the saving ratio of American households has collapsed. Firms are also contributing to the momentum of
aggregate demand. High Tobin q ratios stimulate productive investment nanced
by leverage. The macro-economic outcome is a sustained high level of aggregate

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Economy and Society

demand that validates the pro ts required to keep up with the requirements of
corporate governance.
This outcome is possible only because, in addition, aggregate supply responds
exibly to the impulse of demand. In the previous section we found reasons for
the elasticity of supply in the new technological paradigm of information technology and its induced restructuring of production. One might add that the high
q ratio encourages the investment demand required to embody information technology in higher productivity through management and organizational change.
This improvement does not show up easily in national accounts but is nonetheless a factor of price restraint.
One puzzle remains however, as we see in the American case. How can pay
increases remain so subdued with a tight labour market as is apparent in the US?
One reason might be the change in the structure of the labour-force and the
pro t sharing which accompanies corporate governance. Flexible production no
longer permits stable jobs sustained on an insider job market, sheltered from
competition by a set of rules that reconciled the vested interests of management
and organized labour. Unskilled labour in the service industries is precariously
employed in a myriad of micro-enterprises always in ux, starting and failing.
Unskilled service labour is in no position to claim higher wages. But there may
be bottlenecks in the supply of professionals whose skills are very valuable for
the rms which employ them (Beffa et al. 1999). For these categories of professional labour, pro t-sharing techniques mitigate potential con icts. Companies can make the most of stock-price appreciation by luring professional
employees into shareholding. What they lose by accepting lower reservation
wages, they recover in wealth accumulation.
One is left with the impression that the wealth-induced growth regime rests
upon the expectation of an endless asset-price appreciation. The dynamic is selfful lling as much as it is re exive because market sentiment induces rms and
individuals to act in such a way that expectations are ful lled. This market
sentiment is a co-ordination of expectations around a convention shared by the
nancial community: the economy has reached a new age of capitalism! Can this
convention be robust or fragile? It depends upon a heavily leveraged nancial
structure and is therefore vulnerable to market liquidity conditions, as shown in
the aftermath of the Russian crisis in SeptemberOctober 1998. Ultimately, the
central bank is the linchpin of the whole nancial structure. Only the central
bank can thwart a melting down of in ated asset prices if an unexpected shock
causes the convention to crumble and launches a contagious ight to quality.
Pensions, savings and shareholder value
A growing share of the aggregate saving of households is wage earners saving
for future retirement income. This type of saving does more than create a private
claim on the value-generating process of productive capital, bearing the risks
associated with private investment. Wage earners contractual or mandatory

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157

saving accumulated in pension funds creates a social right to retirement income,


meaning that society as a whole has a liability towards the holder of such a claim.
Two philosophies, Bismarckian and Beveridgian, legitimate the social character of this nancial relationship in different ways. In the Bismarckian conception it is a deferred wage, a counterpart to the contributions of the wage earner
throughout his (or her) working life; because it is essentially a wage, the bene ciary must have absolute priority in the hierarchy of nancial claims. In the
Beveridgian conception, the income of retirees is the means of citizenship; it is
an unconditional and universal right which proceeds from every individuals
common membership of a democratic society.
Under both doctrines, society is responsible for the security of those rights
and the social debt bears an intergenerational dimension of solidarity and risk.
With the principle of pay-as-you-go, this dimension has the advantage of being
transparent and guaranteed by the state. The risk is political and arises because
the working population may eventually refuse to pay the cost of ensuring equality of income for retired people. Funded systems entail a nancial risk which
arises because nancial markets may be unable to deliver the real income
promised in the nancial contract.
Suppose that, as an alternative to raising taxes and social contributions,
funded systems are encouraged to complement pay-as-you-go in order to
smooth out the future demographic transition. Pension funds could then
improve the inter-temporal allocation of resources, if it could be assumed that
people were too myopic to save enough in their own right, because they do not
fully estimate the effect of the rapid rise of the dependency ratio more than a
decade ahead. There is a caveat, however. If contractual saving is to be more
efficiently invested, a promised nominal nancial return is not enough. Capital
must be allocated in such a way as to enhance productive capacity, so that real
income is increased via labour productivity gains when the demographic transition has got into full swing.
The dilemma about choice between retirement systems does not, however,
disappear even under this favourable assumption. The higher saving induced by
the future demographic shock will drive down the marginal productivity of
capital, assuming a standard global production function. Meanwhile the labourforce will shrink and the labour market will tighten. The real return on capital
will decline and the real wage will rise. It follows that pay-as-you-go will become
preferable because it operates under a principle of justice between wages and
retirement bene ts. But this can be achieved only if, before the shock, funded
retirement plans have attracted enough saving to raise capital intensity, which in
turn raises labour productivity.
The lesson is that the popular rivalry between retirement systems is largely
fallacious. They are more complementary than substitutionary. Furthermore,
pension funds can deliver the social claims embedded in contractual savings only
if they look beyond shareholder value. Long-run economic return should supersede nancial return. The types of pension funds that should be promoted are
the ones whose criteria explicitly take account of the productivity of human

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158

Economy and Society

resources in knowledge-acquiring industries and the potential of innovation to


foster market growth in the long run. The services of the right type of sectoral
analysts would allow us to quantify those parameters and provide ratings which
modulate nancial performance criteria and vary the composition of portfolios.
A move to overcome the limits of shareholder value could possibly be engineered by several social developments. One development is ethical diversi cation on the initiative of the trustees of private or public funds. Another is the
development of German-style, jointly managed corporate retirement plans. Yet
another possibility is the funding of social security through a public reserve
fund managed by an independent public nancial institution, along the lines of
the newly instituted Canadian reform. This reform starts from the idea of
severe information asymmetry between asset managers and the individual
savers who are the ultimate owners of the funds (Davis 1995). This information
asymmetry makes asset management an inefficient industry, because the ultimate wealth owners have not enough information about the risks which are
being taken on their behalf. The agency problem would be limited, if the funds
were mandated in such a way that the collective interest of wealth owners could
be incorporated into the criteria of performance required from the managers.
An intermediary between the principal and the agent would have to be set up
to issue guidelines and supervise their enforcement. These guidelines should
be prudential in character but should not specify a priori limitations in the portfolio structure.
Further improvement could be secured by applying new kinds of prudential
regulation to the fund management industry. If an attempt were made to regulate the excesses of competition and reduce the asymmetric information which
plagues this industry, two easily implemented changes stand out. The rst
reform would be to reward fund managers according to absolute instead of relative criteria; the second would be to base EVA payouts on multi-year (two or
three years) results rather than on quarterly results. The SEC or similar marketregulating agencies in European countries could introduce these kinds of rules.
Their rationale is to make fund managers conscious and responsible for the risk
they take. Active trading of stocks, benchmarking and short-run assessment of
performance are practices which make fund managers insensitive to the fundamentals of company share pricing. The fundamentals are expected future pro ts
and the risk assessment for each possible pro le of future pro ts. Suppose, for
instance, that institutional shareholders pressure rms into high leverage so as
to achieve a high pro t pro le. In this case, the imposition through regulation
of a longer time horizon would force institutional investors to take into account
the increased risk induced by the rms leverage. They would have to use a
higher discount ratio, thus reducing the expected price appreciation in the
shares. If the net present value of the rm was reduced, compared to the norm
which is emerging from present aggressive trading, institutional shareholders
would not induce managers into high leverage in the rst instance. With lower
leverage, share prices would actually not rise so fast and stay more in line with
fundamentals. Prudential rules, aimed at disciplining the fund management

Michel Aglietta: A comment and some tricky questions

159

industry, will have a bearing on asset price dynamics and subsequently on the
whole wealth-based growth regime.
Notes
1 Boyer, The conditions of a viable nancialized or equity-based growth regime: a

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revised version of this paper is presented in this issue (Boyer 2000).


2 My comments are based on a reading of two of the papers by Froud et al., Shareholder value and nancialization: consultancy promises, management moves (2000), and
Restructuring for shareholder value and the implications for labour (1999). The rst of
these papers is included in this special issue.
3 EVA is a Stern Stewart trademark.

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