Q3:Explain the key features of financialization in the context of change and evaluate how such features have shaped HRM?
Measures of financial efficiency have penetrated every aspect of life. Saving costs for efficiency purposes and distributing money to shareholders have become without a question standard practices for corporations. The process of financial strategic corporate goals to please shareholders is called financialization.
Financialization and neoliberalism have been around the 1970s and have deeply impacted the global economy. The neoliberal agenda with deregulation of labour and financial markets facilitated financialization of organizations in almost every country in the world, though to various aspects. Despite the possibility of wealth for just a few people, financialization left its marks on production regimes and labour rights. Workers find themselves increasingly at risk of precarious work environments, insecurity, exploitation and low wages. This in turn puts a lot of pressure on corporations to yield to the demands of shareholders with high return on investments and at the same time invest into its employees. HRM is the link between management and employees and therefore has to face pressures from both camps. On the one hand HRM has to enforce the managements will and on the other hand maintain a strong and qualified workforce.
This essay explores the distinct features of financialization and what forces facilitated the global spread among organizations. Following, the impact and challenges of financialization in corporations will be outlined, specifically in the area of HRM and finally what the implications for HRM are.
What is distinctive about financialization?
The concept of financialization is increasingly used to describe the dramatic shift in capitalist activity which has happened over the last decades (Van der Zwan 2014). The principal idea is that capitalist companies used to make profits through production or trade of goods and services but their profits now become more and more dependent upon financial activities. The capitalist business model, which came to be known as managerial capitalism and emerged in the first half of the 20th century, return on investment was achieved by value created through productive enterprises (Lapavitsas 2013).
Since the 1980s, corporations were working within an era of “financialized” capitalism (Van der Zwan 2014). Financialization is a distinct form of capitalism which places great significance on financial markets, financial actors and financial motives (Cushen and Thompson 2016). Major political and economic changes were the drivers towards this new form of capitalism. Deregulation of financial systems and the labour market were implemented in any countries, while neoliberalism has replaced the Keynesianism of the long boom (Lapavitsas 2012).
Companies are increasingly seen by investors as assets to maximize their profits through financial strategies. Some of these financial strategies include mergers and acquisitions, trading and selling companies, hostile takeovers, leveraged buyout, using debt for tax advantages, outsourcing of productive activities, selling off assets and share price manipulation. These strategies are solely for profit maximizing without any regards on how companies, workers and the environment are effected in the long-term (Van der Zwan 2014). Financialization pressures corporate management to prioritize shareholder value over other stakeholders. Shareholder value refers to the concept that it is the first and foremost purpose of a corporation to create profit for its shareholders (Van der Zwan 2014). Contemporary shareholders are normally temporary, institutional investors who are mostly interested in making correct predictions about a firms performance to outperform indexes rather than make decision for the long-term benefit of the firm.
The short-term nature of such investments means that there is a constant need for higher share prices in corporations. Thus resulting in activities and achievements that are centred towards investor-favoured methods of financialization and performance metrics. Realizing these performance metrics results in a depletion of internal organizational investments because shareholders always expect a higher return of investment. Productivity gains and profits are distributed among shareholders rather than being reinvested into the corporation (Van der Zwan 2014, 104). This trend can be destructive to the long-term productive and innovative capacity of business enterprises (Cushen 2016).
Financialization also profoundly impacted labour and employment relations. During the 1970s, the changes in the nature of technologies in information processing and telecommunication (Lapavitsas 2012) along with the rules governing product markets are factors that have impacted the bargaining power of capital and labour through trade unions (Batt and Appelbaum 2013). Consequently, the deregulation and globalization of product markets in recent years have significantly shifted the power balance from labour to capital. This has lead in turn to stagnant wages, an increased income inequality between workers and managers and a decline in the quality of jobs resulting in e.g. precarious and part-time work (Batt and Appelbaum 2013).
The changes towards financialization and globalization in corporate strategies also affected the human resource management in these companies. HRM is compelled along with top management to contribute the corporations profits and increases of share prices by cutting costs but at the same time committing to maintain an effective workforce. However, the reality of HRM leans more towards financialization. Large US corporations disassembled their work communities and the coordination function of the market, which is characterized by depersonalized short-term exchanges, became the focal point for HRM policies (Palpacuer et al. 2011).
Features of Neo-liberalism/financialization
The social structure of accumulation theory (SSA) is an approach to analyse periodic changes in the capitalist institutional structure (Kotz 2015). Kotz (2015) defines an SSA as “a coherent, long-lasting capitalist institutional structure that promotes profit-making and forms a framework for capital accumulation”. Each SSA exists at the level of global capitalism in addition to an individual country level. Despite similarities, there are variations of institutions across countries. Each SSA promotes predominantly profit-making for several decades but at some point enters into a stage of crisis which leads into a new SSA.
One of the more recent SSA was developed in the late 1940s and lasted until around 1973. This post-war SSA was characterized by active state regulation and guidance of economic activities on a global scale as well as within countries. Other features include well developed welfare states, such as in Europe, substantial cooperation between capital and labour and a co-respective form of competition among large corporations. This SSA was substantially different to different from previous ones where the role of the state was very limited and individuals had to take care for themselves. The post-war system is also referred to as “regulated capitalism” because the role of the state expanded significantly during that period (van der Zwan 2014). Around 1973 the post-war SSA entered a period of crisis and at the end of the 1970s a new SSA formed which came to be know as “neoliberalism” since it champions a free market and is characterized by the belief that the government should not interfere with the economy (Batt and Appelbaum 2013).
The “new” SSA, which came to be known as the neoliberalism, was established in the late 1970s and was again very different from the previous one. The neoliberal SSA mainly rests upon the four pillars of globalization, neoliberalism, weak labour and financialization (Kotz 2015).
Globalization can be summarized in several developments. The first development is concerned with the international movement of capital, goods and money as a result of declining political and physical barriers to the market. The development relates to new regions in the world such as China and Eastern Europe opening up for production, thus providing new markets for global capitalism along with new investment opportunities and an enormous amount of cheap labour (Clegg et al. 2015). In consequence, the new global mobility has led to the fragmentation of production across many countries but at the same time to broader supply chain of corporation (McDonough and Dundon 2010).
Neoliberalism is multi-layered entity which comprises political-economic institutions, policies, theories and ideology. Neoliberalism advocates privatization and price stabilization along with individual choices rather than coordination or regulation of markets through institutions. Neoliberalism seeks to change the role of the state by withdrawing it from regulating and guiding the economy, cutting social programs and open public services to privatization (Batt and Appebaum 2013). In addition, there should be a regressive from of taxation and a shift form cooperation between labour and capital, which occurred during “regulated capitalism”, with the focus on capital over labour. Finally, the co-respective from of corporate behaviour should cease in favour of unrestrained competition. Neoliberal ideology, which worships the free market, denies any positive function of the state apart from its coercive functions (McDonough and Dundon 2010).
Globalization has led overall to a weakened role and position of labour throughout the world. The greatest threat to labour is the constant relocation of production location which is a control strategy employed by transnational corporations. As a result, it has become challenging for labour to organize and this goes in hand with the decline in trade union density, influence and power across many developed countries (Lapavitsas 2013). In addition, new production regimes such as world class manufacturing reduce collective labour organisation.
Financialization has led to a growing amount of accumulated wealth in the possession of a few financial institutions and people. This resulted a redirection of investment into the economic financial sector rather than the productive sector. The measures of success in a corporation have become short-term performance goals and quarterly returns (Clegg et al. 2015). In addition, managers continue to move jobs quickly due to an increased mobility thus also to losing stakes and interest in a health of the corporation. Through financialization, regulations that restrict the unrestrained movement of finances across borders have been systematically eliminated (McDonough and Dundon 2010). The neoliberal SSA has paved the way for financialization to take root in all aspects of life and across all institutions which is manifested that there is an increasing focus of finances across traditionally non-finance enterprises.
Challenges and debates for HR
Neoliberalism along with financialization, which grew out of it, pose great challenges to corporations and especially to HR departments. Increasingly, financialization and HRM have conflicting and contrasting ideas about the resources and employment relations in a company.
Corporations and employee relations are much affected through shareholder value orientation. Firms must engage in a range of short-term targets and metrics along with constant restructuring to minimize costs and increase the return of investments for shareholders. The perpetual restructuring involves often a headcount reduction, centralization, precariousness of work, outsourcing and the use of fixed-term and peripheral employment (Van der Zwan 2014), even when the organization is strong in regard to growth and profit, thus reducing employment protection and stability (Palpacuer et al. 2011). Financialization has led to a wage reduction of common employees across capitalist nations which resulted in a shrinking of labours share on national income.
Macroeconomic inequality is reflected in corporations where there is a consistent pattern of wage inequality due financialization. Employee wages have been falling in recent decades whereas top managements remuneration has dramatically increased. Financialization has greatly benefitted managers of large corporation because their reward has been tied to the corporations performance on the stock market (Van der Zwan 2014, 107) and therefore managers have become the champions of constant organizational restructuring. The effects of constant restructuring are negative for corporations as well as employees (Cushen 2013 .
Thompson (2003) developed the “disconnected capitalism thesis” which provides an explanatory framework to connect the increasing significance of financialization in the economy to largely negative outcomes for employment relations. He sees a triple disconnect in the industrial relations system “between employer objectives in the work and employment spheres; between managerial levels and layers within firm governance; between corporate dynamics and state regulation in national business systems” (Cushen and Thompson 2016, p. 354). The core disconnect are the objectives of the manager who are looking for employee engagement, commitment and discretionary effort but at the same time lack the ability to support their employees in establishing a trust and support relationship with job security, investment in training and development along with career development (Thompson 2016).
Thus, financialization undermines the ability of a corporation to adopt “human capital” or “resource based” approaches to HRM (Thompson 2013). These approaches see employees as valuable resources and a potential competitive advantage. Therefore organizations should invest, engage, develop and commit to its employees. However, due to financialization and performance metrics, employee-related expenses are viewed not as investments but rather as costs to be minimized (Cushen and Thomson 2016).
Blackburn (2006) argues that corporations have become “disposable” which means that financial gains are not reinvested into the corporation but rather are distributed among shareholders. Managers must keep corporations share prices high for current and potential investors through constant restructuring and increasing control over costs. Shareholder value orientation and constant organizational restructuring severely weakens the HRM position which promotes sustainable high-performance work systems.
The dominance of financialized pressure create problems for HR to generate highly committed and motivated individuals. Cushen (2013) argues that this is a difficult and a counterproductive endeavour as employees “increasingly view themselves as an insecure disposable commodity rather than a valuable organizational asset”. Such processes and views “erode the ability to sustain high-trust relationships at work between employers and employees” (Dundon et al. 2017, p. 37). Palpacuer et al. (2011) found evidence in their study that through the marketization of HRM practices and policies, junior employees were distancing themselves from the companies to the extent that there was no trust relationship with their managers which led to unsatisfied work force and low job performance (Palpacuer et al. 2011). Furthermore, some workers in management positions are more treated as internal customers. They may not feel disposable but they are seen as contractors and not as somebody who has a stake in the company and therefore they are the object of many training initiatives in order to maintain a decent level of motivation to get a sufficient work performance.
Lastly, Palpacuer et al. (2011) argue that financialization, globalization and the marketization of HRM have proven to be destructive for collective dynamics and values because individuals are more exposed to corporate performance pressures to achieve financial targets and to perform more work with less resources in an environment that is already characterized by much uncertainty. Individual exposure along with other factors such as outsourcing or the externalization of labour limit the prospects of collective labour action and a decreased level of employee engagement when collective action is appropriate (Palpacuer et al. 2011).
Implications for HRM
Financialization has put increasing pressure onto HRM to navigate successfully between the short-term demands of shareholder and the long-term demands of the stakeholder and to come up with solutions beneficial to the company and its employees. HRM has to somehow has to bridge the disconnect between the contradictory objectives of managers and employees but it will be clear that there is greater pressure from shareholders to achieve their goal. This leads to a continual and increased view of employees are resources rather than anything else and that all future decisions concerning HRM will be dictated by financial goals and continuous cost cutting, undermining the purpose of HRM. Financialization and globalization have exacerbated unstable employment relations in corporations and contributed to greater employee turnover (Palpacuer et al. 2011) with expectations of HRM to maintain high employee commitment and stability towards the company. It is uncertain how HRM will play out its future role in corporations and how it will fulfil their role but it will always be dictated by finances.
Moreover, HRM will have to face the change in the expectations of its future employees. This refers to the Generation Y or Millennial as they are also known. It is estimated they will comprise 75% of the workforce by 2025 and therefore it is important for management understand their values and expectations (Buchanan and Huczynski 2017). In contrast to older generations of employees they have somewhat different expectations of work. Dan Matthews (2015) argues that Gen Y lives in an interactive an collaborative world and therefore they expect to be involved at work, will share their views and are interested in personal development. Many Millennials in addition look for ethical employers, opportunities for progression, a good work-life balance, flexibility and tend to be independent and resist micromanagement (Buchanan & Huczynski 2017). All of these factors are more important to them than financial gain. Moreover, many of this generation are also not afraid to switch jobs if the working conditions are not right (Buchanan & Huczynski 2017). However, the financialized environment in a company is the stark contrast to the expectations of millennials (Palpacuer et al. 2011). Companies aim for market-oriented approaches with their employees where financial compensation is based upon individualized performance (Palpacuer et al. 2011). Thus, HRM managers will face problems retaining a well-qualified workforce without investing into them.
This essay has outlined that through the economic, political and technological changes in the 20th century, there occurred a shift from managerial towards financial capitalism. These changes have led to the emergence of neoliberal agenda in capitalist countries which resulted in financialization of corporations which are now more dependent upon financial activities for profits. Shareholder value orientation has brought companies to a point where it is more important for management to focus upon market stimulation to keep share prices up than to invest back into the company. Financialization has driven a deep wedge between the share- and stakeholder because shareholder value inevitable leads to a neglect of stakeholder demands which creates an array problems for organizations and their employees.
HR managers are increasingly caught in between contradictory demands of shareholder for more profitability of the corporation and the demands a workforce for security, involvement career development. Financialization also significantly undermines the HR philosophy of the resource-based view of the firm that the competitive advantage of a company is directly attributed to the way how the workforce is managed. HR managers are supposed to develop the workforce but at the same time cut labour costs. The short-term character of financialization undermines the long-term character of high performance work system practiced by HR. These developments heavily impact the workforce within a corporation. Employee commitment and involvement can not be expected of a workforce that sees itself as costs rather than a competitive advantage. In addition, the new generation of workers, the Gen Y or Millennials, have much different expectations of work and are willing to make sacrifices to achieve a better work environments.
HR managers continue to be an important link between the management and the employees. However, HRM needs to prove its value by effectively managing and engaging the workforce and not just listen to management cries for cutting labour costs. HRM must create an innovative work environment where employees fell they have a future and a part of a corporation in order to retain them. Employees are the future of corporations and not the shareholders.
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