Financialization is the process by which financial institutions increase in size and influence on the overall economy by strengthening the country’s financial sector. The process occurs in countries that are perceived to have shifted their economies from industrial capitalism. It has been occurring in the United States and other parts of the world since the 1970s. The process has affected both the macro economy and the micro-economy by changing the manner in which financial institutions are structured and operate in the entire economy.
The United States has experienced high levels of financialization through the loss of manufacturing and transformation to the service industry, which has made the financial sector to become the essential sector driving the United States economy. The process has also resulted to the scrapping of higher value jobs and encouraging high consumption levels regarding cash flows. It is associated with strategic activities, such as the development of labor productivity and wages, development of executive compensation, changing the shareholder structure to incorporate corporate governance, and principle agency theory. This paper aims at analyzing all these activities associated with financialization process and determine their short term and long term implications of the United States future developments (Tomaskovic-Devey, Lin & Meyers, 2015).
United States of America has experienced the rapid development of labor productivity and wages over the last 30 years since the introduction of the financialization process that involves the strategic development of productivity and wages within all the sectors of the economy. According to the Federal economic statistics, the employee compensation in the United States has grown tremendously at par with the increased labor productivity. The level of productivity has risen by 100 percent between 1973 and 2012 while the compensation per hour for the employees, which is responsible for the increased productivity, has increased by approximately 77 percent (Lewis, 2015). The analysis of the federal economic data reveals that the small gap between the level of productivity and compensation can be associated with the measurement problems encountered in the data collection and data analysis process (Lewis, 2015). Technically, the United States workers have benefitted from the total gains resulting from higher productivity.
The productivity growth in the United States economy has risen significantly over the last few decades, but the hourly compensation of employees has grown in a more modest manner, especially in the last ten years (Peet & Hartwick, 2015). The gap between productivity and the compensation growth had been very wide in the old days of post-World War II but since the early 2000s, the gap has narrowed significantly making the compensation growth rate to be at par with the current productivity growth rate. Productivity growth involves the growth of the output of goods and services per hour worked, and it is perceived to provide the basis for the growth of the living standards of the United States labor force (Peet & Hartwick, 2015). However, from the most recent experience, the workers view the productivity growth as a provision for a potential rise in their standards of living but not a guarantee for better living standards.
The relationship between the wages paid to workers and the level of productivity has become a point of concern in European countries economies. The raising trends of productivity and wages level in the United States have spread to the European countries in the last few decades (Peet & Hartwick, 2015). This particular concept has been used by economists to develop remedies for the recent economic crisis and the developing imbalances among the Eurozone countries. In the past 30 years, there has been a positive relation between the productivity growth and the compensation levels in the European countries economies. The positive trend has resulted into the resumption of output growth previously affected by the world wars and achievement of higher employment levels through the creation of more employment opportunities (Lewis, 2015). The growth of productivity in the European economies has helped in closing the competitiveness gap that existed between different economies as a result of the recession period.
The European economies have adopted the United States strategies of harmonizing the growth of productivity with the growth of compensation for employees. For instance, in Germany, employment and wage increase policies have been formulated to ensure that the employees are well compensated for the increased level of productivity in all the sectors of the economy (Peet & Hartwick, 2015). Despite the German wage increases remaining below the productivity levels since the mid-1990s, Germany has attained tremendous economic growth after the recent recession period, which signifies the prospect of attaining high wage rates to match the increased productivity levels (Peet & Hartwick, 2015). The harmonization of the compensation levels with the productivity levels in European countries economies has been based on the critical variables that affect productivity growth, such as the changes in the composition of the workforce.
Executive compensation entails the salaries, financial, and other non-financial incentives offered to the executives in an organization for the services they offer. Executives are responsible for performing their duties in the best interests of the shareholders; hence, they need to be compensated well to motivate them to maximize the shareholders’ wealth. The development of the executive compensation initiatives in the United States has been on high in the recent past since the introduction of the financialization process. Due to the expansion process of different economic entities as a result of the financialization process, many companies in the United States have developed comprehensive executive compensation programs to reward the top management for their outstanding performances (Hitz & Müller-Bloch, 2015). The executives are responsible for formulating strategies and policies aimed at increasing productivity; hence, the executives ought to be appreciated for the rise of productivity in the United States economy.
The development of the labor productivity and wages in the United States in the last 30 years is similar to the development of executive compensation. Both the subordinate employees and the executive employees form a common workforce, which ought to be compensated for their contribution towards the growth of production. The executives are responsible for developing the strategies for increased productivity while the subordinate employees ensure that these strategies are fully implemented to attain optimal production rate. However, the difference between the two developments is that the labor productivity and wages development are not very costly compared to the executive compensation, which may turn out to be very costly (Hitz & Müller-Bloch, 2015). Besides, the executives may be compensated for the overall performance of the company while the other employees may be compensated in agreement with their individual productivity within a given period.
Modern corporations are restructuring their shareholder structures to match the developments resulting from the introduction of the financialization process. Most organizations have altered their shareholder structures to incorporate corporate governance and principle agency theory concepts in their corporate structures. The transformation of the manufacturing industry to service industry in the United States since the 1970s in the process of financialization has led to this significant restructuring activities. The financialisation process has led to a very rigorous restructuring of the shareholder structure to establish the concepts of corporate governance. Corporate governance is responsible for the support of economic efficiency, sustainable growth and financial stability of the company (Byrne, Fernald & Reinsdorf, 2016). Such roles are bestowed on the management, which acts on the interests of the shareholders. Therefore, corporate governance ensures that the management facilitates the access of long-term investments that ensure that the shareholder and other stakeholder’s interests are met, and they are treated fairly (Hitz & Müller-Bloch, 2015).
The changes in the shareholder structures to incorporate corporate governance aspects are a good response to the financialization process introduced in the United States companies. The role of the changes in the shareholder structure to incorporate corporate governance principles is that it enables the policy makers and regulators to deal effectively with the rapid changes in both the corporate and financial perspectives of the company. The main aim of the financialization process is to expand the company financial size and influence on the overall economy. Considering that the company's shareholders are the main contributors of the finances used to run the operations of the company, they expect to get maximum returns for the funds invested in the company. Therefore, the introduction of the financialization process in a company should be accompanied by rapid changes in the shareholder structure to include corporate governance concept (Kumar, 2015). The concept is meant to ensure that the managers are responsible for the wealth maximization of the shareholders funds through making viable investments decisions which guarantee significant returns for creating high value for the shareholders money.
The financialization process has also led to the altering of the shareholder structure to incorporate the principle agency theory. Shareholders’ interests are very important for the running of the company because they guide the strategies and policies developed overtime. The principal agency theory involves the corporate relationship between the principals of the company who are the shareholders and the agents who are the management. Failure of the management to meet the interests of the shareholders may result to agency problem which occurs whenever the agents are motivated by their self-interests at the expense of the principal’s interests (Lewis, 2015). Therefore, the changes in the shareholder structure to include the principal agency theory for companies embracing financialization process signifies there concern to address the interest of the shareholders through making investments which support the company’s strategic objectives.
The main forms of shareholding embraced by the modern shareholders include direct, indirect, and institutional shareholding with each having different implication on the shareholder structure. Due to the introduction of the financialization process in the modern America, companies have embarked more on investing in the financial services industry due to the rapid growth experienced in this sector. As a result, many shareholders have embraced the direct shareholding option because they have gained more confidence in the United States financial system. Moreover, the changes implemented on the shareholder structure to incorporate the corporate governance principles and principal agency theory have improved the corporation’s performance. It has encouraged more shareholders to embrace direct shareholding more than the other forms of shareholding (Byrne, Fernald & Reinsdorf, 2016). The direct shareholding forms the largest percentage of shareholding followed by the institutional shareholding then lastly is the indirect shareholding. Therefore, the changing of the shareholder structure has contributed to the changes in the levels of shareholding because the introduction of a more credible corporate governance and effective principal agency theory has strengthened investors’ confidence.
Shareholder value entails the value possessed or delivered by the company to the shareholder for possessing a certain number of shares of the company. Therefore, the main interest of the shareholders in the company is to receive the maximum wealth from their investment in the company shares. It is the responsibility of the company management to respond by making strategic investment decisions, which yield the best returns to maximize the shareholder value (Kumar, 2015). The concept of maximization of shareholder value has been in existence for a while, but it has gained more predominance in the United States corporate field. The pressure on the management by the shareholders to make investment decisions which provide the highest return has been high in the modern economy (Stout, 2012). The increased demand by the shareholders shows that the concept of maximization of the shareholder value is still valid in the modern economy.
On the other hand, the agency theory plays a major role in ensuring that the implications of the introduction of financialization process do not affect the interests of the shareholders in a negative manner. It describes the nature of the corporate relationship that exists between the principals who are the shareholders of the company and the agents who are the company management (Tomaskovic-Devey, Lin & Meyers, 2015). An effective principal-agency relationship is the one whereby the management acts to fulfill the interest of the shareholders while for an ineffective principal-agency relationship, the management acts to meet their self-interests at the expense of the shareholders’ funds. In cases of misunderstanding between the principal and the agents, there arises an agency conflict which may have severe implications on the performance of the company. The agency costs involved may constrain the available funds and affect normal operations of the company.
The current stakeholder structure adopted by the modern companies in the United States affects the relationship between individuals, executive compensation, the entire business and the society at large. The current shareholders of many companies in the United States have embraced the concept of corporate governance, which ensures that the management treats all the shareholders of the company fairly irrespective of the value of their shareholding. This shareholder structure has influenced individual investors to develop confidence in the corporate structure and consider making a direct shareholding. Shareholder structure with the concept of corporate governance has restricted the extent of the executive compensation because it advocates for equality for all the employees and shareholders such that the management is prohibited from taking unnecessary bonuses in the form of incentives (Stout, 2012).
Corporate governance incorporated in the current shareholder structure has made a positive implication on businesses and the society. It is caused by the strict principles of corporate governance that have reformed the manner in which many companies operate. It has instilled principles of transparency, accountability, and honesty in the operations of the companies; thus, replicating the same culture to all other businesses and the society at large. The current shareholder structure has also incorporated the agency theory concept with the aim of developing a positive relationship between the management and the shareholders (Kumar, 2015). The introduction of the agency theory has provided and assurance to the individual investors that their interests will be given priority in all the investment decisions made. The theory prevents excessive executive compensation because such policies conflict with the policies of maximization of the shareholder value. On the businesses and the society, the current shareholder structure with agency theory builds a strong corporate structure, which shapes other businesses and the society by showing the need for prioritising the needs of the shareholders to those of managers.
The United States has experienced numerous historical cases of income-wealthy disparity, which have shaped the United States economy to attain the current state. The period after World War II was characterized by rapid growth of incomes but the income gap between the wealthy, the middle-class, and the poor continued to wide. It provoked for more aggressive economic strategies to try and narrow the income gap and eradicate the income-wealth disparity. At the beginning of 1970s, the economic growth slowed while the income gap widened more (Stout, 2012). The income growth for the middle class people and the poor slowed drastically while the incomes of the wealthy continued to grow. The implications of these historical examples of income/wealth disparities on the future developments of United States have been positive. Income/ wealth disparity has led to formulation of policies to facilitate equal distribution of resources for all the Americans without any form of discrimination.
References
Byrne, D. M., Fernald, J., & Reinsdorf, M. (2016). Does the United States have a productivity slowdown or a measurement problem? Retrieved from http://www.brookings.edu/~/media/projects/bpea/spring-2016/byrneetal_productivitymeasurement_conferencedraft.pdf
Hitz, J. M., & Müller-Bloch, S. (2015). Market reactions to the regulation of executive compensation. European Accounting Review, 24(4), 659-684.
Kumar, J. (2015). Capital Structure and Corporate Governance. Journal of Entrepreneurship and Organization Management, 4(143), 2.
Lewis, W. A. (2015). The evolution of the international economic order. Princeton: Princeton University Press.
Peet, R., & Hartwick, E. (2015). Theories of development: Contentions, arguments, alternatives. New York: Guilford Publications.
Stout, L. A. (2012). The shareholder value myth: How putting shareholders first harms investors, corporations, and the public. Berlin: Berrett-Koehler Publishers.
Tomaskovic-Devey, D., Lin, K. H., & Meyers, N. (2015). Did financialization reduce economic growth? Socio-Economic Review, 13(3), 525-548.
