Abstract

The world of business and finances presents a lot of challenges, and the first part of this paper will be analyzing eight selected articles each tackling various issues within the umbrella topic the financial crisis, debt, and monetary policies. Some of the articles advocate for increasing debt and risk as a way to expand investments and diversify a portfolio while other materials discourage liabilities and risks. The paper will then look into the article of managing financialized firms which involves the value of the shareholder property in addition to the agency problem. A practical example of the Lehman Brothers is used to relate the issues mentioned in the article with occurrences that have happened in the business world. The last section also contains information from the research fund outside this article relating to the issues of management of financialized firms.

Bank for International Settlements 84th Annual Report

This particular reading is the 84th Annual Report for the Bank of International Settlements. This article begins with an analysis of where the company stands within the global economy. According to the article, the global economy has shown some encouraging signs over the last year. However, there remains one large issue which is a mystery in the financial world regarding the forces that led up to the Great Financial crisis. The author talks about how the world is still struggling to understand these forces and many countries across they ought to focus on the reconstruction of the balance sheets and the implementation of structural reforms (Clegg, Hardy, & Nord 2003, P. 25).

The article then discusses the sensitivity of the financial markets to monetary policies both of the actual and anticipated nature. Throughout the fiscal year covered in the report, the monetary conditions have been favorable leaving the volatility of the financial markets low and thus, leaving room to search for yields. At the same time, emerging markets have become more vulnerable to shifting global fundamentals while the economies with stronger fundamentals are doing better. With all these factors considered it becomes challenging to understand the disconnection between the buoyancy of the market and the underlying economic developments around the world. The article then discusses the drivers of both growth and inflation. According to the author, world economic growth in the last year has had a general improvement with the rate of inflation remaining reasonably subdued (Bis.org 2019). The author concludes that the key to a more robust and sustainable growth of the economy is increasing the level of productivity.

According to (Bis.org 2019), debt and the financial cycle in both the domestic and global economy is another key issue raised in the article. The author breaks down financial cycles as the perception of value and risk, risk-taking and financial constraints which eventually translate into either financial booms or busts. Many economies are still recovering from the 2007-2009 Financial Crisis and at some point could find themselves in a debt trap. This debt trap will require stimulation of the economy using low-interest rates which is an encouragement for more debt which is pilling on to the problem it is supposed to solve in the first place. The struggles facing the monetary system in its attempt to normalize is a critical issue discussed in this article in addition to the financial crossroads confronting the financial system.

The Reinvention of Prudence;

Household Savings, Financialisation, and Forms of Capitalism

This article under discussion here is titled The reinvention of prudence: household savings, and forms of capitalism.’ One of the critical issues raised in this article is prudence and how it is being reinvented and redefined during a period of heightened financialization where households are increasingly owning a range of assets and are faced with complex decisions among the asset classes. Prudence is undergoing a reinvention in the sense that the old prudence rules advocate for safe investments with lower risks and minimal amounts of debts. Prudence has however evolved into maximum risk without fear of liability to build an extensive and potentially successful portfolio. However, the change in prudence has not advanced to a point where the financialization has converged due to the different financial services pushed by conglomerates around the world resulting in an unstable flow of funds (Ertürk et al. 2005, P.4)

Varieties of capitalism and literature on financialization are critical issues raised in this article with the question as to why there are limitations to the resulting solutions. The author brings about the fact that varieties of capitalism are popular as it is a representation of an easy way of understanding the role that institutions play in the generation of welfare differences and productive efficiency. Increased financialization and the effect of complex changes that it brings out. According to the author a statistical analysis of the most significant four economies in the EU shows that a bulk of the countries household portfolios point towards people undertaking riskier investments (Ertürk et al. 2005, P.10). In addition to this, the article finds that the reactions that households have to major economic events over the last two decades are much more complicated than that is explained by any literature that exists on varieties of capitalism and financialization.

Post–‐crisis central bank unconventional policies and financialised

Transmission channels

This article discusses the 1 Trillion Euro large scale asset purchase program (LSAP), which popularly goes by the name of quantitative easing (QE). LSAP in addition to other monetary policies have been in place for the last seven years, and evidence from the United States suggests that they have not been working. The mechanisms of transmission as facilitated by policies o not seem to work which means that the private investments are yet to return to the levels they were at before the financial crisis. Although the targeted levels of unemployment have been achieved, there is a serious question into the quality of the jobs created. There are also some doubts into the measurement of the health of the labor market especially since the rate of labor participation has declined without an improvement in productivity. The economy is financialized which promotes low costs of borrowing in an attempt to create value for the shareholder, which does not work. The article finds that it is crucial for both policy and academic debates on alternative central bank policies to address firm behavior, which is financialized (Ertürk 2019, P.2).

Central Banks Negative Thinking

According to this reading, critiques believe that the subzero rates plaguing the economy at the moment are a sure sign that the makers of policy are running out of new ways via which they can invigorate the economy. The article suggests that the Japanese people are outraged by the raising of the commodity process in an attempt to curb inflation, in addition to increasing the consumption taxes and lowering the rates of interest. The signs of Japanese distress are quite evident with shares taking plunges according to Japanese brokerage firms, and for the first time, the 10-year Japanese government bond yielded a minus.  The author is keen to articulate that Japan is not the only country affected and clarifies that this has spread across the world. The article finds that quantitative easing is no longer a valid form of dazzling the market which has left central banks around the world willing to try out new tools (Wigglesworth & McCrum 2019, P.5). Some countries within the Eurozone with the most recent on the list being Japan have introduced various forms of detrimental interest policies in the in an effort fight the forces of deflation by stimulating growth and wakening their currency. The paper finds that in spite of many markets across the world applauding their central banks for easing monetary policies but the main concern is the anxiety resulting from experimenting with negative interest rates.

The Market Will have You: The arts of market attachment in the digital economy

According to (McFall and Deville 2019), since the invention of digital internet marketing has been on an exponential increase leading to substantial growth of the digital economy. The author of this paper has some opinions on what it means to say that the market will have you finally concluding that it is the market that is the ultimate determinant of how a business performs. Companies highly involved in digital marketing are continuing to make strides that will inform the future of digital marketing. This is evident in the patenting of ‘anticipatory shipping’ by Amazon, which is a logistics system designed to ship products even before the customer makes a purchase. This article finds that for a company to succeed, they must master the art of market attachment within the digital economy which helps to create awareness and a digital presence.

Digital Globalization: The New Era of Global Flows

Due to the internet, the world is now a global community, and with every passing day, the world is becoming more interconnected. For the first time in history, emerging economies have become counterparts in over half of the global trade flows with South_South trade being the fastest growing type of connection. The author is keen to outline that the physical flow of goods and finances has lost its momentum with the digital flow of commerce, information, searches, video, communication and intracompany traffic continue to be on a surge. Digital technology has helped small companies become ‘micro-multinationals’ by making use of digital platforms like eBay, Amazon, Facebook, and Alibaba to mention a few (McKinsey & Company 2019). The article finds that it is crucial for companies to become digitized and join the global digital market to keep making money and remain relevant. However, to do this companies need to reinvent themselves within the global digital market to find their market niche within it. Reinvention takes a lot of aspects of working together, but one of the most critical elements in ensuring the company is prepared for any new risk that may occur.

Wealthy Corporations, poor societies: The Financialization of Apple

Some key issues have been raised in this article beginning with Apple acting as a representation of the globalized and digitalized economy that we now have shaped by communication and information technologies. The Apple Company has been very successful in its financialization especially because it caters to clientele that understands the importance of financialization in today’s business. This world has no physical barriers especially with the free flow of capital, and it is a product of Silicon Valley a place where Apple stands out as a class on its own. The article brings up corporate financialization the two successive policy regimes that the developed countries have been subject to since the postwar era. The first policy was the age of Keynesianism which lasted up to the seventies and was replaced by neoliberalism. The article brings up some indicators of the increase in global capital mobility (Fernandez & Hendrikse 2015, P. 6). The report finds that stagnating wages and reduction in public lending has encouraged many corporations to engage in financial services becoming continued contributors to the neoliberal trade. Apple has been able to attain financialization partly due to the offshoring and outsourcing of production, which speaks to the international division of labor. However, outsourcing labor has some negative effect on the economy of the host country since it takes away job opportunities from the people of that country.  In addition to outsourcing production to low-wage countries for the minimization of costs Apple also reorganizes its cash reserves, profits and global product sales with the aim of minimizing the tax returns payable by the company. The article finds that Apple uses a combination of strategies in the maximization of their financial returns including the exploitation of workers and dodging of taxes. From this it is clear that in order for a company to achieve thee right kind of financialization they have to maneuver the system and in some cases these maneuvers may not be on the up and up.

Who Owns a Company

The ownership of a company tends to be more complicated than anyone would manage to think. However, the ownership of publicly listed companies is quite simple since it is the shareholders. The shareholders are classified as owners since they are responsible for claiming the profits of the company, they exercise their controlling rights over the management of the company, and their primary objective is ensuring the company keeps on running smoothly. The author of the speech is keen to point out that the success of the company’s corporate model has not prevented questioning of the model. In the recent past, there have been some issues raised such as unethical practices of companies, excessive remuneration of executives, the powers of oligopolies and short-terminism (Haldane et al. 2019 P. 10)

The speech gives a brief history of companies followed by the movement of companies into incorporation in addition to the transition of companies from unlimited to limited liability, which occurred in the mid-19th Century. The speech continues to cover Britain’s new banks, the entrenchment of shareholder rights and shareholder primacy among others. The statement finds that there are increasing challenges to the shareholder-centric company model from both within and without the corporate sector. The most likely solution to the problem would be re-rooting of company law which would help tackle the issue at the source.

Description of an Industry Example

The Agency Problem of Lehman Brothers’ Board of Directors is an example from my business industry that shows and explains the extreme importance of this particular article in contemporary business. The name Lehman Brothers is synonymous with agency problems. The Lehman Brothers case is a perfect example from my business industry that encompasses all the issues raised in this particular article. The Lehman Brothers case covers the issue of agency theory covering the maximization of both the manager and the entrepreneur. It then goes ahead to cover the issue of hiring financially competent people with the capacity to align the interest of the manager with those of the shareholders as a way to solve the agency problem. The Lehman Brothers case also covers some shareholder metrics such as economic value added, risk-adjusted return on capital among others. Relating the article to the Lehman’s Brothers case makes the article much easier to understand (Kim 2019).

Managing Financialised Firms: Shareholder value and Agency Problem.

The issue of separating the ownership and the control of capital the value perspective of the shareholder is a contentious one in the world of financialization literature. This article is extremely relevant to contemporary business due to a wide variety of issues raised by the author of the article. Many companies in today’s world has not yet come up with a way of aligning the interests of the managers who are the agents and the shareholders of the company who are the owners (Ertürk 2019 P. 25).  What happens typically is that the managers are responsible for the daily running of the business while the shareholders are responsible for ownership in the sharing of profits and losses. Some economists have come up with many ways to respond to this challenge with Fama 1980 building on the earlier works of economist Alchian. Fama believes that some factors determine the viability of the firm such as the contractual relationships between the managers and owner in addition to other elements of production that fall under the efficiency of asset management and managing the labor markets. Fama is emphatic on differentiating his theory from previous theirs based on the agency literature by arguing whether the issue of incentives is relevant. The article raises a related point, which is that diffuses shareholders have portfolios of diversified assess which helps them to eliminate the risk pegged to the performance of an individual firm. Owing to this propose theory, it is imperative to conclude that the capital markets are not responsible for disciplining managers. However, according to the Heron and Lie 2006, stock options backdating scandal in the early 2000s tend to question Fama’s theory.

Jensen is another economist with an opinion on the agency theory problem, which is contrary to that proposed by Fama since he is of the school of thought that the primary role of the capital markets is the disciplining of managers. The market plays a significant role when it comes to corporate market control especially since both the product and the capital markets have undergone global revolutionary changes. Further research into the matter shows that the managers who cannot create shareholder value are responsible for running inefficient firms. A real-life example of agency problems is the Lehman Brothers who failed in their corporate governance especially because their Board was poor in their oversight duties. Both of the theories proposed in Jensen and Fama apply in the case of the Lehman brothers since at the time of their bankruptcy in 2008 they sighted the board as the reason (Fama 1980) However, the former CEO of the Company does not agree with this as indicated in a speech he gave in 2015 sighting risk management as the problem. The Lehman Brothers also reinforce Jensen’s theory since another agency problem that the staff owned a minute portion of the company stock. The bankruptcy of the Lehman’s bothers occurred in the year 2008 which was during the height of the financial crisis which is another reinforcement of the Jensen theory (Bolton & Scharfstein 1988, P. 65).

Basing my research on the property of rights approaches the article implies that the way to solve the agency problem is to align the interests of the managers to those of the shareholders. According to the article, when a business makes profits, they are divided among the shareholders leaving no money to plough back into the company and minimal bonuses from the employees.  This is an extremely applicable especially in the case of the Lehman Brothers, where their employees owned only a small portion of the company, which meant that their interests were not aligned with the shareholders’ interests especially in terms of risk management. However, further research into the matter has shown that an alignment of the managers and shareholder interests does indeed work as an incentive but is not a full proof plan when it comes to dealing with the agency problem as a whole.

The article criticizes the value principle of the shareholders as a hindering factor when it comes to managers investing in skilled labor and research development. Managers would be more incentivized to invest in skilled labor and research development if they were granted art ownership of the company based on their output. Further research into the matter supports this idea since when managers are included as owners of the company in addition to the shareholders they have the incentive to invest into making the company better by hiring skilled labor and research into developing the company. This is because in ensuring the company is at its best they are looking out for their own interests as well.

References

Bis.org. (2019). 84th Annual Report, 2013/14. [online] Available at:     https://www.bis.org/publ/arpdf/ar2014e.htm [Accessed 19 Feb. 2019].

Bolton, P., & Scharfstein, D. (1988). Agency problems, financial contracting, and predation.     Cambridge, Mass, Sloan School of Management, Massachusetts Institute of Technology.     https://archive.org/details/agencyproblemsfi00bolt.

Clegg, S. R., Hardy, C., & Nord, W. R. (2003). Handbook of organization studies. London,     Sage.

Kim, Y. (2019). The Agency Problem of Lehman Brothers’ Board of Directors – Illinois     Business Law Journal. [online] Publish.illinois.edu. Available at:     https://publish.illinois.edu/illinoisblj/2016/04/28/the-agency-problem-of-lehman-    brothers-board-of-directors/ [Accessed 19 Feb. 2019].

Ertürk, I., Froud,, J., Solari, S. and Williams, K. (2005). The reinvention of prudence: household     savings, financialisation and forms of capitalism. [online] Hummedia.manchester.ac.uk.     Available at: http://hummedia.manchester.ac.uk/institutes/cresc/workingpapers/wp11.pdf     [Accessed 19 Feb. 2019].

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Ertürk, I. (2019). AMBS66801 Leading and Managing in a Global Environment: Part A. Ismail     Erturk | The University of Manchester. [online] Manchester.rl.talis.com. Available at:     https://manchester.rl.talis.com/lists/C71E68F1-C864-26DC-AFB4-D2CC366FB125.html     [Accessed 19 Feb. 2019].

Fama, E. (1980). Agency Problems and the Theory of the Firm. Journal of Political Economy,     88(2), pp.288-307.

Haldane, W., The economic outlook: Fading global tailwinds, .., The economic outlook: Fading     global tailwinds, i., Carney, T., Carney, T., Martin…, P., Taylor, P., Broadbent, D. and Broadbent, D. (2019). Who owns a company? – speech by Andrew Haldane. [online]     Bankofengland.co.uk. Available at: https://www.bankofengland.co.uk/speech/2015/who-    owns-a-company [Accessed 19 Feb. 2019].

https://www.researchgate.net/publication/283289637_Rich_corporations_poor_societies_The_fi    nancialisation_of_Apple

McFall, L. and Deville, J. (2019). The Market will Have you: The Arts of Market Attachment in a     Digital Economy – Open Research Online. [online] Oro.open.ac.uk. Available at:     http://oro.open.ac.uk/45956/ [Accessed 20 Feb. 2019].

McKinsey & Company. (2019). Digital globalization: The new era of global flows. [online]     Available at: https://www.mckinsey.com/business-functions/digital-mckinsey/our-    insights/digital-globalization-the-new-era-of-global-flows [Accessed 20 Feb. 2019].

Wigglesworth, R., Llewis, L. and Mccrum, D. (2019). Central banks: Negative thinking |     Financial Times. [online] Ft.com. Available at: https://www.ft.com/content/7333e92a-    d4a2-11e5-829b-8564e7528e54 [Accessed 19 Feb. 2019].

 
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