FINANCIALIZATION



Financialization

Financialization

Introduction

In this paper, we argue that a process of Financialization is directing corporate strategy in an era of shareholder value. We employ the descriptor 'Financialization' as a way of 'making sense out of what is going on around us' (Martin, 2002). A narrow use of the term 'Financialization' can be used to describe the possibilities and limitations of a sector matrix, as opposed to industry and sector-specific strategic moves where, for example, financial services are bolted on to a firms activity mix in an attempt to boost return on capital employed and wealth accumulation for shareholders. A broader use of the term 'financialization' has been employed to reveal how managerial behaviour and culture, corporate governance, stakeholder interests, firm performance, national economic competitiveness and the distribution of income and wealth are modified by the demands of finance capital (Deeg & O'Sullivan, 2006; [Fligstein, 2004] and [Froud et al., 2006]; Rossman and Greenfield, 2006; Stockhammer, 2004).

Stakeholder contracts are continually being renegotiated and arbitrage across product, factor and capital markets required to increase cash extraction and also modify the pattern of cash distribution towards shareholders (Andersson et al., 2008). This change in perspective has consequences for the way in which we construct narratives about strategy, governance, financial performance and market value. Financialization is driving strategy because the process and elements are operating simultaneously in both a left-to-right (value creating) and right-to-left (value absorbing) direction. Corporate financials not only reflect current income and expenditure circuits but also embody the product of capital market wealth accumulation. The spheres of current cash earnings from product and factor market arbitrage combine with the holding cash gains (and losses) from capital market arbitrage in a financialized account of corporate strategy. Value absorption distorts conventional financial performance metrics, such as profit and cash ROCE, restricting the purchase of critical narratives and positivist arguments that are located within an orthodox left-to-right framework of analysis.

Strategy as value creation

The objective of corporate strategy, in an era of shareholder value, is to strengthen operating financials and increase the probability of wealth accumulation for shareholders in the capital market as market value. We start by reviewing the orthodox academic literature on shareholder value creation and situate this in an organising schematic: where the process and elements, within the value creating process, run in a left-to-right direction. In Fig. 1 strategy formulation, contractual renegotiation, stakeholder arbitrage and managerial incentives feed into corporate financial performance indicators and this coupled with narratives helps to inform capital market valuation(s). This organising schematic of strategy as a value creating process is set out in Fig. 1.

Fig. 1: Strategy for value creation: process, elements, direction.

Porter, Prahalad et al. and Kay construct models of strategy formulation and these emphasise the importance of industry, product market positioning and resource capability (Porter, 1980, Prahalad & Hamel, 1990, and Kay, 1993) Where there is a need to manage resources and capabilities dynamically for innovation and competitiveness. Changes in policy and strategic priority are articulated across a cobweb of formal and informal contractual relations with ...