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

140 9 Financial Wagers, Hyper-Speculation and Shareholder Primacy
in its different divisions, the corporate head office becomes a financing institution
for the firm itself, modeled on a financial investor. Its role is to ensure that all divisions
of the firm generate maximum shareholder value for the holding company,
although the material purpose and product of the divisions themselves are of no
great significance to the holding company’s goals.
For the holding company, shareholder value is both the purpose and the product
of the firm in the same way that, for investment funds, the maximization of their own
firm’s shareholder value and the shareholder value of investment clients is the firm’s
primary business purpose and its product. For the holding company, the products of
the divisions are only a means of maximizing the holding company’s shareholder
value.
The holding company is a particularly good example of the inversion of means
and ends. It implies that the purpose of the firm, the product, is appropriated as
a means of increasing the share price, although share-price growth was originally
just the means of controlling and ensuring that the firm was fulfilling its purpose of
producing good products.
The most recent trends in business show the holding structure in a very much
less advantageous light than just a few years ago. Industrial firms are turning back
to their original strength and primary task, the production of goods in their core area
of competence and are finding that this strategy is also the most profitable. They no
longer see themselves as the portfolio for their own holding company’s capital, or
their divisions as mere investment opportunities for the holding company.
Understanding shareholder value as a control principle ensures that the holding
company does not view shareholder value as its main purpose and, in this way, falls
short of its optimal productivity, but rather that the firm ensures the optimality of the
product and thereby its own optimal performance. The large firm can only maximize
shareholder value if it regards this as a control principle and not as the purpose of
its business activity.
As a control principle, the shareholder-value principle has the virtue that it is selffulfilling
insofar as it ensures that its purpose, the firm’s success, is only guaranteed
when it is not the main purpose of the firm, because it cannot realize maximum
shareholder value if it views the employees only as a means to this end. There is
no inherent tendency in the shareholder-value principle, of itself, to bring about the
inversion of means and ends or its own transformation from a means of verifying
success to the actual purpose of the firm. This transformation was caused by the
outside influences of an unbalanced overemphasis on the financing of the company
and exaggerated expectations of return on investment.
Perverse Incentives from Shareholder Primacy: Speculation
Instead of Production
The subversion of the firm’s purpose from the product as the primary purpose, to
maximization of shareholder value as the primary purpose, alters the task of management:
to the task of production is added the task of speculation. The idea that
the overall orientation to shareholder value will automatically bring out the best in