The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

The Principle of Shareholder Primacy and Hyper-Speculation 139
The goals of stakeholders are subordinated to the overall purpose of the firm,
which means that their claims upon the firm’s total yield are limited not only by
their strategic power, which they can exercise in contention with the claims of other
stakeholder groups, but these claims are primarily limited by their contribution to
the purpose of the firm, by the extent to which they fulfill the demands that the
firm must make on all its stakeholder groups for the sake of its own preservation
as an institution over time. This principle also applies to banks, which cannot measure
their success by shareholder value alone. The main criterion for the success of
financial institutions, as in the real economy, is the product; in the case of banks, the
financial service and its quality.
The purpose and condition of the firm’s existence, consistently to produce firstclass
goods or services in response to market demand, constitutes the disciplining
principle and the disciplining power in the strategic negotiations between the different
stakeholder groups. It is the central disciplining principle alongside the
disciplining instrument of profit or of shareholder-value maximization. Productivity
as an obligation, and the product as the purpose of the firm, take pride of place
as the main purpose of the firm and relegate the other purposes to the status of
subordinate purposes. The effect of the “product as purpose” is that shareholdervalue
maximization is only the second-most-important purpose, a purpose that is
subordinated to the productivity goal. Nevertheless, as a control principle, it carries
the preponderant weight among the many other purposes that are pursued by the
firm’s stakeholders and ranked lower than the productivity goal in the hierarchy of
the firm’s purposes. The purpose of the firm is the production of its specific good,
service or product, which amounts to its contribution to society.
When an entire industry so seriously jeopardizes its contribution to society as the
banking industry did, by producing losses amounting to trillions of euros or dollars,
it has not fulfilled its purpose, either in terms of product or service provision or
in terms of shareholder value. Given that the banking industry constantly extolled
shareholder value in the past, yet parts of that very industry subsequently consigned
both its shareholders and its customers to de facto bankruptcy that was only avoided
by the bailout from the state, it is now necessary to reappraise the purpose of financial
institutions and the industry as a whole. The debacle that resulted from the
primary pursuit of the purpose of shareholder value, the principle of shareholder
primacy, forces the finance industry to think again.
The Dominance of the Shareholder-Value Orientation
and the Holding Structure of the Firm
The overemphasis on the finance aspect and the financial purpose of the firm in
industrial and banking businesses is particularly apparent from the rise of the holding
company, a trend that has lost momentum recently, interestingly enough, despite
the continuing pre-eminence of the shareholder-value principle.
In the transformation of the industrial firm into a conglomerate and into a holding
firm which serves as a monitoring institution with oversight of the firm’s investments