Short-termism in varieties of capitalism

Abstract

Short-termism seems to be a defining feature of contemporary capitalism. Studies have shown that public firms return most of their profits to shareholders in the form of dividends and share buybacks, leaving little for long-term investment in productive capacities and employees. Besides endangering the long-term future of the firm itself, such short-termism stifles innovation, threatens employment, exacerbates inequality, and hinders economic growth. Many scholars blame the stock market for corporate short-termism as it is associated with ‘impatient capital’ – i.e., footloose portfolio investors. However, anecdotal evidence from the ‘comparative capitalism’ literature indicates that publicly-listed firms in other ‘varieties of capitalism’ like Germany and Japan may not be as short-termist as their Anglo- American counterparts, even though they also face impatient capital in the stock market. Direct empirical comparisons of public firms to confirm national divergence on short- termism are, however, lacking in the literature. I thus set out to compare German and Japanese public firms to American and British public firms using firm-level financial data. I matched firms from different countries by size and industry before comparing them while also controlling for profitability and investment opportunities. What I find is that shareholder payouts (dividends plus share buybacks) are indeed substantially lower in German public firms and lower still in Japanese public firms compared to matched Anglo-American public firms. Although this does not translate into higher real investment in German and Japanese firms, it does nevertheless indicate greater concern for the long-term sustainability of the firm and for the protection of employment. The findings thus suggest that there is much more to short-termism than just the stock market and impatient capital.Although the structural features of the stock market such as high liquidity, ownership-control separation, real-time pricing, and openness (publicness) that make for impatient capital enable short-termism in public firms, I argue that they do not automatically cause short- termism. Short-termism, I argue, depends on institutions, which mediate the link between short-termism and the stock market. I show how the presence of certain institutions and the absence of others encourages short-termism in the Anglo-American system. On the other hand, I show how institutions in Germany and Japan impede stock-market-based short- termism. In this way, institutional differences help explain national differences in short- termism. A key question remains, however: Why do Anglo-American institutions promote short-termism while German and Japanese institutions restrict it in the first place? Institutions, I argue, are only the means to achieving ends. Ends are prescribed ultimately by power relations and culture (values and beliefs). Power relations and culture together shape business ideology, which, in turn, shapes institutional logics. Institutional logics then determine distributional outcomes such as high shareholder payout (short-termism). In this way, national differences in short-termism may be ultimately explained by national differences in power relations and culture. From this perspective, the ‘shareholder value’ ideology that derives from the dominance of finance capital in Anglo-America and is rooted in a culture of liberalism and individualism ultimately explains why shareholder payout in Anglo-American public firms is substantially higher than in German public firms, which are instead embedded in an ideology of ‘social market economy’ that is shaped by a more even power relation between capital and labour and rooted in a long-standing culture of corporatism and consensus. Moreover, shareholder payout is lowest in Japanese public firms because managers, who tend to be the dominant players, are embedded in a culture of groupism and paternalism. They have little regard for (stock-market-based) shareholders – who they see as outsiders – and view themselves as the custodians of the ‘enterprise community’ charged with ensuring its permanence and protecting its members (mostly employees).My focus on relatively enduring factors like power relations and culture does not mean that I ignore institutional change, however. Firstly, I argue that institutional change is usually an adjustment of the means (institutions) to changing conditions to achieve the same ends. Ends can change too, however; although less often. Power relations, which shape ends, can change as a result of structural changes (e.g., globalisation) or political changes (e.g., change in government). As the dominant ideology – which expresses the ends – is rooted in both power relations and culture, it too is likely to change when power relations change, but the change in ideology will still have to be consistent with enduring cultural values and beliefs if it is to last. From this perspective, then, regardless of power relations, enduring cultural differences will ensure the continuance of at least some degree of divergence in the foreseeable future. Indeed, I find through my longitudinal empirical comparison of public firms that German and Japanese public firms continue to diverge from Anglo-American public firms, even as globalisation and neoliberalism have tilted power relations increasingly in favour of finance capital since the 1980s.