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

146 9 Financial Wagers, Hyper-Speculation and Shareholder Primacy
The emphasis of the shareholder-value approach, on the idea that shareholder
value must be realized in each and every year, corresponds to the shorter timehorizon
for reaping a return on investment that is characteristic of capitalist
democratic societies. This shorter time horizon also seems desirable from an ethical
perspective. Although prima facie it may seem counter-intuitive to prefer a shortterm
strategy, because decision-makers are usually inclined toward short-termism
in any case, and therefore everything that supports long-term investment seems to
have a higher ethical value, it is rational to insist that investments pay returns in
every period. The study of undemocratic, non-capitalist societies shows that the
population in these societies has often been deceived into sacrificing welfare in the
here-and-now on the promise of a more prosperous future. One example was Stalin,
who ordered the execution of the engineers who told him that certain longer-term
capital projects in northern Russia or in Siberia could never be profitable. Their
predictions were not what he wanted to hear, so he opted to shoot the messenger.
Leaving aside this tendency to demand and impose sacrifices for the future by
means of cruelty and terror, the fact that long-termism causes losses is of interest
with regard to the time-perspective of investments, the sacrifices that individuals are
expected to make for their own investment, and the ethical relevance of this question.
In a democratic, capitalist society, the population and investors calculate their
expected returns on investment over a comparatively short time period. An investment
that cannot prove its profitability in the short term will not find any takers.
This recommendation justified by the shareholder-value criterion is not only economically
efficient but also ethically legitimate for prosperous economies. Whether
this judgment also applies to societies that are in the process of economic development
and have to achieve higher savings rates is a question that must be left open
for the time being.
The other positive side-effect brought about by the shareholder-value criterion,
via this compulsion to declare a dividend each and every year, is that it increases the
difficulty of building up a monopoly or market-dominating position in the given
market. If the shareholders can compel the management to distribute dividends
rather than accumulating profits within the company in the form of reserves or
equity capital, then the shareholders can spend these profits on consumption or reinvest
them in the shares of other firms. Either way, without retaining profits it will be
more difficult for the firm to grow sufficiently to gain market dominance or control.