Shareholder Value and the Transformation of the U.S. Economy, 1984–2000¹

Abstract

Using data from 62 U.S. industries for 1984-2000, this article explores the connections between shareholder value strategies, such as mergers and layoffs, and related industry-level changes, such as de-unionization, computer technology, and profitability. In line with shareholder value arguments, mergers occurred in industries with low profits, and industries where mergers were active subsequently saw an increase in layoffs. Industries with a high level of mergers increased investment in computer technology. This technology displaced workers through layoffs and was focused on reducing unionized workforces. Contrary to shareholder value arguments, there is no evidence that mergers or layoffs returned industries to profitability.

Shareholder Value and Workforce Downsizing, 1981–2006

“…Recently, a number of prominent scholars of industrial relations as well as sociologists have maintained that the growing pressure from financial markets and the rise of shareholder value have brought drastic changes to the employment policies of leading U.S. companies (Budros 1997;Cappelli 1999;Fligstein and Shin 2007;Hirsch and De Soucey 2006;Osterman 1999). With a corresponding power shift within corporations to executives responsible for finance, U.S. firms have placed a low priority on human resources relative to financial and shareholder considerations (Kochan forthcoming).…”

“…In a series of studies using data on Fortune 100 firms from 1979 to 1994, Budros (1997; demonstrated that decline in shareholder value (measured as percentage change in a firm's stock price) triggered corporate downsizing. Using industry-level data, Fligstein and Shin (2007) also showed that industries with low profits relative to assets were more likely to engage in layoffs. Like most economic studies, they demonstrate that declining performance leads to downsizing but then argue that pressure from the financial community may explain such a relationship.…”

“…The prevalence of downsizing is indicative of this paradigm shift within the corporate sector since the 1980s. In fact, many prominent scholars of industrial relations as well as sociologists attribute the change to the norm of shareholder primacy (Appelbaum and Batt 1994;Budros 1997;Cappelli 1999;Fligstein and Shin 2007;Hirsch and De Soucey 2006;Kochan forthcoming;Lazonick and O'Sullivan 2000;Osterman 1999). …”

“…In addition, automation and computerization had begun to replace The prevalence of downsizing is one prominent indication of the revamping of postwar employment practice driven by the norm of shareholder primacy (Osterman 1999). In the changed economic and political context since the 1980s, which has been characterized by the growing influence of investors who demand maximum returns on their investment, workforce downsizing has become reconstructed as a means to enhance a firm's stock price (Budros 1997;Fligstein and Shin 2007;Lazonick and O'Sullivan 2000). In a book that popularized the business-process-reengineering movement, Hammer and Champy (1993) championed downsizing as an effective means to eliminate non-value adding work and thus to achieve immediate cost savings.…”

The Rise of the Super-Rich

“…3. In our discussion of financial markets, we note that changes in taxation coincided with the shareholder value movement that encouraged CEOs to focus on short-term stock price increases (Fligstein and Shin 2007), which is also related to increasing reliance on stock options as compensation. 4.…”