SAN DIEGO, CALIF. -- The conflict between finance and industrial capital ought to get business leaders thinking “about a different kind of capitalism”—one that privileges “stakeholders” over “shareholders,” a leading financial journalist told a packed hall during the Certification Luncheon at AFP 2017.
When the finance industry gets too big, it can slow growth, Rana Foroohar, global business columnist and association editor of The Financial Times explained to hundreds of certified treasury and FP&A practitioners. Currently, the financial industry accounts for 4 percent of U.S. jobs and 7 percent of the U.S. economy, yet it sector takes 25 percent of all corporate profits.
“Clearly, something is broken,” she said. “Financial assets within corporations are no longer being put, necessarily, in the right places. It doesn’t really make sense after a certain point to give more cash to the rich rather than investing in something that’s going to create real economic growth on down the future.”
Foroohar has recently published her book, “Makers and Takers: The Rise of Finance and the Fall of American Business,” which she says is her effort to document “the divergence between Wall Street and Main Street” and what she calls “the financialization” of the United States. The stock market has recovered from the collapse of the Great Recession and stocks are at near-record highs again, yet recovery has been lackluster in many parts of the country—and the world, Foroohar said
The rise of left- and right-wing populism in the U.S. and Europe might be one response of a stricken middle class that has seen its wages stagnate even while big companies continue to amass piles of money. Finance bears a big part of the responsibility, Foroohar argues. Despite the raging bull markets, only about 15 percent of Wall Street money ends up being reinvested in business. That doesn’t just short-change in the short-term: the lack of infrastructure and the hiring that comes with it has hollowed out the middle class so that the U.S. often seems to be even divided between “latte makers and latte drinkers.”
Among her examples were the recent fight between Apple—one of the world’s wealthiest companies—and “activist investor” Carl Icahn. When Icahn began agitating for higher returns on investments from Apple a couple of years ago, the company began borrowing money to make good—despite the fact that it had the largest cash reserves in history, Foroohar said. The Apple case may be a hard case, but it has too much in common with Wall Street’s modus operandi, Foroohar said.
“There is this bizarre system in effect now where companies that have the least need for cash have the most interaction with the capital markets,” she said.
What is needed, Foroohar said, is a decisive move away from what she calls “shareholder capitalism” and a move toward what she called “stakeholder capitalism.” In her version, business leaders don’t just worry about shareholder, but also the managers, the workers and even the communities where the companies operate so that there is a real, robust and top-to-bottom investment that builds from the ground up.
It may be a simple matter of survival, Foroohar said. “Companies are now recalibrating their political risks,” she said.