Paul Thompson, University of Strathclyde Jean Cushen , Dublin City University

1. FINANCIALISATION AND VALUE EXTRACTION: WHY THE LABOUR PROCESS & LABOUR PROCESS ANALYSIS STILL MATTERS Paul Thompson, University of Strathclyde Jean Cushen, Dublin City University Australian Working Group on Financialization University of Sydney 1st May 2014

2. Financialization • Financialization refers to the increasingly significant role of financial markets, financial actors, and financial motives in daily life (Epstein, 2005). • In review of scholarship on financialization Van der Zwan (2014) identifies three strands of growing literature namely: • financialization as a regime of accumulation • financialization of the modern corporation • financialization of everyday life • Scholarship on the modern corporation examines the elevation of the ‘shareholder value’ orientation as the guiding principle of corporate strategy. The pursuit of shareholder value is conceptualized as a redistribution process: • ‘…what sets the financialized corporation apart from its industrial-age predecessor is that the financial gains from these operations are not reinvested in the firm’s productive facilities, but rather are distributed to shareholders through dividend payouts and share buybacks’ Van der Zwan (2014:108). • Analytical questions remain for those interested in researching workplace outcomes of financialization regarding how uniquely financialized activities are manifested in non financial organisations to affect working life.

3. Financialization and labour • A variety of frames and starting points. • Bryan, Martin and Rafferty (2008, 2009): financialization constitutes labour as a form of capital , advancing into the household and private sphere as a ‘frontier of accumulation’, and ‘binds labour to participate in expanded reproduction’ • The disconnected capitalism thesis • Broke new ground in developing LPA that focused on financialization as a driver of corporate and workplace change leading to undermining of the stable conditions necessary for workplace-based productivity bargains and investment in human capital • This was part of a wider process of become less workplace-centric, and re-connecting CPE and LPA (as a form of macro-meso-micro linkages) • Use of concept of circuits of capital. Financialization a regime of accumulation that represents a shift in the interconnections and pattern of dominance in the (industrial, financial and commercial) circuits of capital • Further challenges • To identify mechanisms through which shareholder value pressures are ‘translated’ into workplace outcomes and worker experiences. Gospel and Pendleton (2014) refer to the ‘transmission mechanisms’ as (shortened) time horizons (new) corporate strategies and (shifts in the balance) of governance between stakeholders)

4. A different challenge: as easy as ABC? • Appelbaum, Batt and Clark (2013) re-affirm DCT propositions, though sometimes in different language; focus on specific financial actors (private equity) and a wider range of stakeholder disconnects or ‘breaches of trust’ of ‘implicit contracts’ • But also throw down a challenge to LPT. Their paper aims to: • ‘contribute to a more fine-grained theory of value-extraction by moving beyond the labour process and an exclusive focus on labour-management relations to reveal the variety of sources of value extraction under new forms of capitalist governance… the organization of work and labour relations is a limited frame’ (p. 500) • ‘Our institutional analysis of PE mechanisms of value redistribution also provides an example of how employment relations scholars can move beyond labour process analysis to examine a wider range of value extraction and a broader range of stakeholders..’ (p. 513) • A corrective: LPA does not operate within ‘the frame of conventional labour-management relations’ and DCT does ‘conceptualize how new regimes of accumulation and value extraction operate under financial capitalism’ (p. 499) • A ‘pincer movement’? Autonomist Marxism and the value question • ‘if labour is not the sole source of value in capitalism, then there is no reason to assume an exploitative economic relationship and structural antagonism in the labour process and to privilege the labour process as a site of research’ (Bohm and Land, 2012: 222)

5. Core theory: a defence & some propositions • ‘Because the labour process generates the surplus and is a central part of the human experience in acting on the work and reproducing the economy the role of labour and the capital labour relationship are privileged in LPT’. • We need to accept that given new value creation mechanisms in the contemporary economy, the labour process is a central, but not the sole source of value (In LPT, the understanding of exploitation and structural antagonism never rested on the labour theory of value). • ‘There is a logic of accumulation that compels capital to constantly revolutionize the production of goods and services. This arises from competition between capitalists and between capital and labour’. • The logic of accumulation is now partly financialized, both in terms of the more active management and disposal of corporate assets and capital market pressures squeezing labour costs and revenues. • ‘Because market mechanisms alone cannot regulate the labour process, there is a control imperative’. • Under financialization, there is a shift of control mechanisms away from the normative and towards cascading financial targets, performance management and market discipline. • ‘Given the dynamics of exploitation and control, the social relations between capital and labour in the workplace are of “structured antagonism” (Edwards 1990). • Market discipline, externalization in the labour market and work insecurity limit possibilities for collective labour action, but are accompanied by a falling levels of employee engagement and a crisis of attachment.

6. Financialization of the logic of accumulation • Changing constitution of stock markets: • Institutional investors grew from owning about 10% of equity in US publicly traded firms in the 1950s to over 73% by 2009 (The Conference Board 2010), and account for over 80% of UK equities (Roberts et al, 2006:278). • 11% of total assets under management worldwide are held by new investment funds (private equity, hedge funds and sovereign wealth funds (Gospel and Pendleton 2014, 3). NIFs are, however not the primary driver of financialization and have distinctive characteristics and effects (e.g. Extensive debt burdens). • The principal activity of institutional investors appears not to consist of holding shares to affect organisational performance, but in buying and selling shares based on perceptions of intrinsic value to outperform the index they are benchmarked against (Hendry et al, 2006:1103). It is not uncommon for an institutional investor to sell everything in its portfolio in one year. • ‘Investors are not in a development marathon but a relay race anxious to pass on ownership and extract higher returns on invested capital through realised market value’ (Andersson et al, 2010). • Institutional investors’ desire to identify an equity’s ‘intrinsic value’, usually via professional financial analysts, underpins the perpetual short-term information and speculation activity that characterises financial markets. Institutional investors report using an approximate average of nine valuation factors in selecting stock (Merrill Lynch Institutional Factor Survey, 2006, see Appendix 1). • Corporate management must continuously stimulate a market for their shares by making them desirable both to existing and potential investors. Effective management of investor relations is in itself a route to organizational success (Hendry et al, 2006; Roberts et al, 2006; Zorn et al, 2005) and both the chief executive and finance director now commit more time to investor relationships (Pye, 2001). • Creating investor confidence in an equity’s intrinsic value requires corporate management to craft, communicate and deliver a corporate strategy which enhances the organisation’s performance under the numerous financialized valuation methodologies.

7. Financialization and strategy • Corporate management seek to enhance company performance under the valuation methodologies primarily by: • growing the share price • increasing investor returns via dividends, buybacks, taking on debt, and reducing internal investment and costs; • creating confidence in future return through both the financial and product market strategy • Underperformance in one area heightens the need to perform well or compensate in another (Jacobs and Singhal; 2013). For example failure to grow share price or lack of confidence in product market strategy may result in higher dividend payout ratio, increased buybacks, cost cutting and debt issuance. • Accounting techniques provide a quasi-legal firm level co-ordination mechanism which positions financial targets as central and dominant in decision making (Froud et al 2006; O’Neill, 2001). Cushen (2013) shows how the budgeting process can provide a firm wide co-ordination mechanism through which targets relating to revenue growth and cost cutting were communicated, disseminated and achieved. • Furthermore, accounting regulations require that internal company investment and projects to be assessed and justified on the basis of measures such as Net Present Value, Internal Rate of Return (IRR), payback period, discounted payback period, average accounting rate of return, profitability index. • Intrinsic value speculation means that the ‘endgame’ of financialization within organisations is an investor oriented redistributive agenda. However arriving at this endgame is neither straightforward nor automatic; much has to happen at the firm level to deliver the desired redistributive agenda. The labour process is a key territory in this respect.

8. Financialization &the Labour Process • Trend emerging in the literature whereby financialized value expansion is depicted as existing wholly above organizations and ‘the sources of wealth appear to belong to completely disparate spheres with not the slightest connection to living labour’ (Burnham, 2010:34). • In reality, the financial and strategic commitments corporate management make to investors are translated into firm level value seeking interventions to be enacted by employees Labour can expand value by delivering goods and services whilst also absorbing interventions such as headcount reduction, outsourcing, centralisation, supply chain harmonisation, reward insecurity etc – ‘market pressure to maintain asset prices is, at the same time, a pressure on labour as variable capital..’ (Bryan et al 2009, 467). • Firm interventions that come with defined financial value expansion targets must be delivered, in part, by employees – meaning it is within the labour process that interventions prompted by the speculative elements of financialization confront a ‘moment of truth’. • Gospel and Pendleton explore the labour outcomes associated with new investment funds. They identify employment, wages and benefits, work organisation and industrial relations arrangements as the key territories. All outcomes are mediated by (mostly national-level) labour regulation. Most of the case study and survey evidence does support a variety of negative outcomes, but ‘the impact of NIFs on labour is essentially indirect, mediated through the business strategies..’ (2014, 28)

9. LP interventions and implications • Taking labour costs out:Employee related costs are categorised in financial accounts as operational expenditure (OPEX); a key cost measure used in valuation techniques. The consequences for labour relate primarily to: • Headcount reduction remains a key measure for signalling commitment to and delivery of targets to shareholders. Financial markets react positively to firm announcements relating to OPEX reduction, particularly redundancies and outsourcing (Farber & Hallock, 1999). Layoff announcements are associated with higher CEO compensation (Shin, 2010). Concurrent rise in emphasis on cost reduction and cost accounting techniques such as activity based costing (ABC) and benchmarking (Kennedy, T., & Affleck-Graves, 2012). • Though rapidly growing wage inequality within firms is a longer term, macro-economic phenomena, increased emphasis on profit targets sharpens that divide. CEO pay is rising and increasingly linked to share options and prices. Meanwhile, cost reduction targets exert downward pressure on wages and constraints on the ability to share performance improvements with the workforce (Cushen, 2013). Conversely disputes relating to pay have significant consequences on stock price; the announcement of strikes at US automobile producers lowered the value of automobile shares by $229 million to $328 million on average (Abowd, 1989). Strikes are interpreted as costly surprises (Kramer et al, 2002). • Stronger and more significant hierarchical and financial controls: The need to deliver key numbers to investors has given rise to centrally driven, short term financial measures of performance. The consequences for labour relate primarily to: • Increased use of numerics in performance management, reflecting the ratcheting down of corporate profit targets (Ezzamel, Wilmott, & Worthington,2008) • Increased use of internal financial measures to assess and measure progress of internal investment prompting employees across a range of skill levels and disciplines to consider and quantify their contribution at the point of valorisation (Alvehus and Spicer, 2012; Cushen, 2013; Gleadle and Cornelius, 2008; Gleadle and Haslam, 2010) . • Marginalisation and/or undermining of normative control interventions (Cushen and Thompson, 2012; Cushen, 2013; Thompson, 2013).

10. LP Interventions continued • Perpetual restructuring and insecurity: Organisational restructuring has surged in recent decades in order to create a vision of a better future for investors. Arises from the desire to deliver value through the disposal and acquiring of corporate assets based on their status within accounting techniques. Also driven by the difficulty in quantifying product market returns, e.g . Big Pharma (Andersson at al, 2010; Gleadle et al, 2012). The main consequences for labour are: • Job insecurity related to externalization, centralisation and outsourcing of employment • Role insecurity caused by internal re-organisations (Cushen, 2013) • Shifting risk to labour and other stakeholders and breach in bargains (Thompson, 2003) and trust (Appelbaum et al, 2013). • Financial engineering and doing more with less: interventions designed to return more value to investors , such as moving to high dividend ratios, share buybacks and taking on debt all deplete internal investment (Lazonick and O’ Sullivan, 2000). The consequences for labour relate primarily to: • Work intensification is a consequence of heightened competition, depleting internal investment and associated initiatives such as reduced headcount, use of peripheral employment, falling R&D and less investment in human capital (e.g. internal development and training, other than leader development): ‘financialization and especially securitization is intensifying competition between capitals, with direct implications for the intensification of labour within production’ (Bryan et apl 2009: 461). • Depleting internal investment in skills and R&D is claimed to be damaging entire labour markets (Lazonick, 2012).

11. Conclusions • Financialization is only part of the explanation for many of these processes: ‘interacting with accelerating and exacerbating longer term trends such as labour market insecurity, externalization and internationalisation’. Labour process change continues to reflect product and labour market competition and sources of value. The extent to which financialization is a primary or secondary driver of change varies by sector. • Back to ABC. It is true that value extraction arises from a variety of sources inside and outside firms, and that lower returns on ‘relationship-specific investments’ can adversely effect other stakeholders. Nevertheless, their own evidence indicates a focus headcount reduction and performance management in some of the cases.

12. Appendix 1: Searching for Intrinsic Value in Equity Is this security fairly priced, overpriced, or underpriced relative to its current estimated value and relative to the prices of comparable securities? Relative Valuation Models: • Price to earnings ratio • Earnings per share • Price to earnings growth (PEG) ratio • Growth rate • Sum of perpetuities • Nerbrand Z • Return on Invested Capital • Return on Assets • Price to Sales • Market Cap • Enterprise Value (EV) • EV to Sales • EBITDA • EV to EDBITDA Absolute Valuation Models: • Present Value • Discounted Cash Flow • Dividend Discount Models • Free Cash Flow to Equity • Free Cash Flow to the Firm • Residual Income • Sensitivity Analysis

15. Additional references • Thompson, P. (2013) ‘Financialization and the Worlplace: Extending and Applying the Disonnected Capitalism Thesis’, Work, Emloyment and Society, 27/3: 472-88. • Gospel, H., Pendleton, A. and Vitol, S. (2014) Financialization, New Investment Funds and Labour, Oxford: Oxford University Press. • Applebaum, E., Batt., R. and Clark, I. (2013) ‘Implications of Financial Capitalism for Employment Relations Research: Evidence From Breach of Trust and Implicit Contracts in Private Equit Buyouts’, British Journal of Industrial Relations, 51/3: 498-518. • Martin, R., Rafferty, M. and Bryan, D. (2008) ‘Financialization, Risk and :Labour’, Competition & Change, 12/2: 120-132. • Bryan, D., Martin, R. and Rafferty, M. (2009) Financialization and Marx: Giving Labour and Capital a Financial Makeover, Review of Radical Political Economics, 41/4|; 458-72. • Van der Zwan, N. (2014) ‘Making Sense of Financialization’, Socio-Economic Review 12: 99-129). • Bohn, S. and Land, C. (2012) ‘The new “hidden abode”: reflections on value and labour in the new economy’, The Sociological Review 60/2: 217-40.