Before its 1997 merger with McDonnell Douglas, Boeing had an engineering-driven culture and a history of betting the company on daring investments in new aircraft. McDonnell Douglas, on the other hand, was risk-averse and focused on cost cutting and financial performance, and its culture came to dominate the merged company. So, over the objections of career-long Boeing engineers, the 787 was developed with an unprecedented level of outsourcing, in part, the engineers believed, to maximize Boeing’s return on net assets (RONA). Outsourcing removed assets from Boeing’s balance sheet but also made the 787’s supply chain so complex that the company couldn’t maintain the high quality an airliner requires. Just as the engineers had predicted, the result was huge delays and runaway costs.
Boeing’s decision to minimize its assets was made with Wall Street in mind. RONA is used by financial analysts to judge managers and companies, and the fixation on this kind of metric has influenced the choices of many firms. In fact, research by the economists John Asker, Joan Farre-Mensa, and Alexander Ljungqvist shows that a desire to maximize short-term share price leads publicly held companies to invest only about half as much in assets as their privately held counterparts do. Pressure to reduce assets made Sara Lee, for example, shift from manufacturing clothing and food to brand management. Sara Lee’s CEO explained, “Wall Street can wipe you out. They are the rule-setters…and they have decided to give premiums to companies that harbor the most profits for the least assets.” In the pursuit of higher stock returns, many electronics companies have, like Boeing and Sara Lee, outsourced their manufacturing, even though tightly integrating R&D and manufacturing is crucial to innovation....
Scholars and executives alike have criticized Wall Street not only for promoting short-term thinking but for sacrificing the interests of employees and customers to benefit shareholders and for encouraging dishonesty from executives who feel they’re being asked to meet impossible demands. The financial sector’s influence on management has become so powerful that a recent survey of chief financial officers showed that 78% would “give up economic value” and 55% would cancel a project with a positive net present value--that is, willingly harm their companies--to meet Wall Street’s targets and fulfill its desire for “smooth” earnings. …
The jump in size and profits has also increased finance’s influence on government. From 1998 through 2013 the finance, insurance, and real estate industries spent almost $6 billion on lobbying…
My research shows that leaders’ paths to power crucially shape their actions in office. People who have spent their careers immersed in the financial sector are highly likely to share its worldview. Every one of those six men either had a substantial career in finance before joining the government or was sympathetic enough to the interests of the sector while in office that he had no difficulty finding a very senior, well-paid position in it once he left the job (or both)….
In a financialized economy the financial tail is wagging the economic dog. An IMF study found, for example, that while a strong financial system is crucial to a country’s early and intermediate-stage growth, once the sector becomes too large—when private-sector credit reaches 80% to 100% of GDP-- it actually inhibits growth and increases volatility. In the United States in 2012, private-sector credit was 183.8% of GDP. Apart from its effects on firms like Boeing, there are two major ways in which financialization undermines economies. First, larger and more-complex financial systems may be more prone to crashes—a point made by a variety of economists, including Hyman Minsky, Charles Kindleberger, and Raghuram Rajan….
Second, an overdeveloped financial system may misallocate resources. As far back as 1984 the Nobel Prize–winning economist James Tobin observed that “very little of the work done by the securities industry…has to do with the financing of real investment.” He was troubled that “we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services…that generate high private rewards disproportionate to their social productivity.”…
The British economist Roger Bootle argues that all economic activity can be classified as either “creative” or “distributive.” Creative work increases a society’s wealth. Distributive work just moves wealth from one hand to another. Every industry contains both. But activity in the financial sector is primarily distributive.
The financial services industry also has a very high level of a form of distributive activity called “rent seeking,” which involves trying to make a profit by manipulating government policy….
Just as a black hole’s gravity shifts the orbits of stars many light-years away, great power and prestige change the behaviors of everyone around them, both directly and indirectly. The direct way is through coercion and inducement: Do what I want, and you’ll be rewarded; disobey me, and you’ll be punished. Direct power shows up every time donations sway a politician’s vote. The indirect way is far less obvious but even more important. Real power comes not from forcing people to do what you want but from changing the way people think, so that they want to do what you want. https://hbr.org/2014/06/the-price-of-wall-streets-power
No comments:
Post a Comment