The 2008 financial crisis revealed the hegemony of financial logic in company management. This dominance is seen in the emphasis placed on shareholder value by top management and the proliferation of financial performance indicators (operating margin, return on investment, return on equity, etc.).
Most studies argue that the rising of financialisation is caused by macroeconomic mechanisms (such as banking disintermediation) or to the development of shareholder structures in large companies, which have benefited institutional investors. Investment funds, for example, impose higher profitability targets and an increase in the portion of dividends distributed to shareholders.
Other studies refer to sociological and organisational phenomena, and explain how economic elites have embraced shareholder values and how professional groups such as management controllers have helped to spread financialisation mechanisms and representations within their companies.
But financialisation philosophies and practices also appear to spread via a contagion effect. In a study published in 2015, we suggested that the relationships between purchasers and suppliers are the preferred pathways through which this effect occurs. This is particularly the case for commercial exchanges and collaborations between large financialised companies and their supplier networks, comprised of intermediate-sized companies and small and medium-sized enterprises (SMEs) in the manufacturing and service sectors.
Purchasers under pressure are converted to the financial approach
Let’s take a more explicit example. Purchasers are under pressure from their management to align suppliers with the company’s cost reduction and margin improvement plans. To do this, they often employ aggressive commercial strategies toward their external partners (introducing competition, continually renegotiating contracts, threatening to cancel). In the automotive and aeronautics sectors this has led to a loss of skills and the weakening of the whole supply chain.
But hierarchical expectations and pressure do not explain everything. The financialisation of companies has also been accompanied by a redefinition of the purchasing strategies and culture. Purchasing professionals, graduated from business schools are less likely to be product experts and more likely to act as managers. Well-versed in managing through their use of financial management tools and return on investment methods, they also adopt and justify purchasing savings and cost reductions for the processes linked to subcontracting.
An arsenal of tools designed to spread financial language and representations
Buyers employ a multitude of tools to manage the performance of their suppliers, including budgets and cost management methods such as “target costing” or “design to cost”. To meet the reporting requirements, the supplier must promote a culture of producing and using financial data in his or her business.
The use of financial decision-making criteria (such as payback, free cash flow, or operating margin) encourages suppliers to steer their investment, production system, and logistical organisation choices towards actions that improve the short-term financial performance of their customers. Conversely, proposals that fail to produce rapidly observable accounting effects will not be chosen.
The transfer of risk to suppliers: the other side of financialisation
The importance accorded to purchasing risks and their consequences is another path for transmitting the financial approach from customer to supplier.
On the one hand, the concept of risk is widely used for suppliers qualification and project allocation processes. Suppliers need to demonstrate their ability to put financial and operational risks under control and must provide assurance that the customer will not suffer any related consequences.
On the other hand, the major companies (from the automotive, aeronautics, textile or construction sectors, for example) attempt to transfer part of their strategic and operational risks to their suppliers and subcontractors (i.e. their risk-sharing partners). These partners therefore have to bear certain development costs, ensure the operation of certain processes, and suffer the impact of the customer’s commercial failures.
In both situations, being confronted with these risks accentuates the pressure on suppliers to adopt the language, way of thinking and mechanisms of the financial approach. The spread of financialisation has led subcontractors to redefine their priorities. They now explicitly target short-term profitability, putting at risk their long-term relationship with the customer. They have also redefined their internal criteria for managing exchanges, moving from relational norms to financial decision-making norms.
On the purchasing professionals’ side, there is a genuine identity issue. This raises the question of how purchasers can reconcile the spread of financialisation with the goal of building a long-lasting network of suppliers.
Assistant Professor of organizational behavior and human resource management at emlyon business school, my research interests include organizational justice effects on newcomers’ adjustment, social exchange and heuristics theories of fairness, and interactionist perspectives of organizational socialization. I am a member of the organizing committee and a discussant in the annual Workshop on Research Advances in Organizational Behavior and Human Resources Management (University Paris Dauphine).
More information on Mohamed Ikram Nasr:
• His CV online
• His ResearchGate page
Hicham Sebti is an associate professor in management control at ISG International Business School.
Further readings…
- Sebti, H.& Nasr, M.I. (2015). Les acheteurs, « modérateurs » de la financiarisation : L’échange social pour pallier le sentiment d’injustice. Revue française de gestion, 2015/3 (248), 57-75. doi: 10.3166/RFG.248.57-75.
Read abstract online - Legalais, L. & Morales, J. (2014). Interfaces, narrations et légitimation de la financiarisation. Revue française de gestion, 2014/3 (240), 165-184. doi:10.3166/RFG.240.165-184.
Read abstract online - François, P. & Lemercier, C. (2016). Une financiarisation à la française (1979-2009): Mutations des grandes entreprises et conversion des élites. Revue française de sociologie, 2016/2 (57), 269-320. doi:10.3917/rfs.572.0269.
Read abstract online - Chiapello, E. (2015). Financialisation of Valuation. Human Studies, 38 (1), 13-35. doi:10.1007/s10746-014-9337-x.
Read abstract online
Fort intéressante analyse, que celle de la diffusion des approches financières par la relation acheteur-fournisseur.
Mais comment établissez-vous que cela conduit à des décisions tournées vers le court terme ?
Les contrats en risk sharing, par exemple, peuvent être considérés comme léonins, mais ils amenent justement les équipementiers à se projeter dans le long terme.
Parlons en à l’occasion.