Tuesday, 20 July 2010

One of the Book of (Last) Year: Management by the Markets

I'm doing some work with colleagues on HR and governance and writing another paper on HR and the global financial crisis.  Both projects have been influenced by my book of the year (which came out last year - takes me a while to get up to speed) and some academic papers that have shaped its formation.  The book is by Gerald Davis and is entitled 'Managed by the Markets: How Finance Re-shaped America' published by Oxford University Press.

As Jeff Pfeffer described it and I agree, this book is an intellectual tour de force account of the American economy by a sociologist who is as comfortable with financial economics as he is with history.  To quote, his core argument is that 'financial markets have shaped the transition from an industrial to post-industrial society.  For most of the twentieth century, social organization in the United States was shaped by the gravitational pull of the large corporation.  It is now oriented around financial markets to a degree that was unfathomable until it was revealed by a global economic crisis' (p. 1).  Given the UK's dependence on the financial services sector, the argument applies with almost equal force to this country, though with a few differences.

Davis provides compelling evidence of rise of shareholder value as a mantra for corporate governance and the decline of the traditional corporation.  This was associated with increased stock ownership in the early 1980s, mainly resulting from George W Bush's plan to privatise Social Security so ending defined benefit pensions.  What emerged was what Davis describes as a portfolio society in which 'free agent' individual investors began to treat themselves, their homes and their colleagues as human and social capital with a view to securing financial returns on their investments.  This was evidenced by the huge take up of 401 (k) pension plans and the purchase of investment properties (not just second homes) that individuals felt free to walk away from if their speculations turned sour.  It also resulted in the growth of the bond market and the growth of the shadow banking sector, which forced changes in behaviour among the traditional banks, most notably the growth of investment banking.  The rest as they say is history. 

Davis concludes with some speculations on a 'society of investors', in which everything and everyone is commoditised, a continued decline in the power of corporations and a rise in importance of the financial services industry - broadly defined.  These developments will have important implications for employees, with a continued decline in the potential for them to form long term 'resourceful human' attachments to corporate 'feudalists'. Instead they are likely to treat themselves (and be treated) as 'human resources' or 'human capital', which will lead to a further erosion of employee engagement levels, commitment to and identification with individual employers.  It will also lead to less mobility, more inequality, educational insecurity (already happening in this country) and the end of the corporate safety net (again already happening).  Is this what is driving David Cameron and Vince Cable to reduce the reliance on increasingly dangerous financial services?

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