The Impact of Financialization on the Real Economy
Financialization refers to the growth of a countries financial sector with respect to the whole economy in terms of size and importance. When financial markets and financial institutions have a greater influence in the economic policy and outcomes, it leads to rise in the incomes in the financial sector than in other sectors of the economy (Tomaskovic and Meyers 2015). This occurs when the countries shifts from industrial capitalism. It can adversely affect the whole economy in both micro and macro level. The Financialization can lead to increase of the dominance of financial sector than the real sector. Transfer of income from the sectors and may lead to income inequality and wage stagnation. In addition to this, the economy may suffer from a prolonged recession or a risk of debt deflation (Aalbers 2017). In the real world scenario corporate governance aids the firm to manage and direct the business in a right path to have sustainable growth in future. For instance, if the case of the HSBC is considered, then it can be seen that corporate governance has helped the firm to create value by the mechanism of strong innovation, never ending exploration of new markets for the firm and along with this outstanding entrepreneurism has grown in the firm largely (Hann and Vlahu 2016). With the help of strong corporate governance and financialization HSBC is one of the renowned lenders in the world. This essay is meant to analyse and demonstrate necessity and usefulness of the financialization and importance of corporate governance in real world scenario. Besides this, the essay will try to highlight the loopholes and drawbacks of the corporate governance and provide recommendation on behalf of the selected organisation to make it financially strong and potent to have sustainability in future.
The factors that lead to financialization are structural changes in the financial market operations, change in the operation process in the real market, and any economic policy changes. There are multifaceted agenda that the finanacialization calls for, which deals with restoring the financial market policy and control, changing the “Neo Liberal Economic Policy” patterns, making corporations responsive to the stakeholders interests other than just financial markets (Aalbers 2017). It also Reforms the political process of diminishing the influence of businesses and wealthy elites. The real economy on the other hand, opposes the financialization. It deals with the productions of the goods and services rather than transacting in the financial markets; however, the finance and the real economy cannot go hand in hand (Aalbers 2015). In a real economy the profit from the productions are more focused, whereas in a financial sector highlights the value of the shares. At present, the predominance of finance and its priorities poses a great threat in the real economy. In a finance dominated nation, economy is more prone to severe crisis and recession. The money to be invested in the real economy is less and more and more investments are made in the financial sectors, which is slowing down the economical growth (Palley 2016). In addition, when the business strategies are dictated by the finance, the labor market gets affected. The job standards are poor and there is a fall in the job opportunities owing to the fact that key dynamics of the financialization focuses on creating enticing incentives in order to ramp up the leverage level and debt relying on the back of the real economy. According to the Gordon, if a firm refuses to load up the debt of the company, then it may so happen that private equity financier will force the firm to scoop up itself through private buyout (Zero 2018). This will lead the firm to face massive amount of profit and again loading it with the debt. Then again, it will lead to sell of the hollowed shell of the firm to the public and repeat the policy again until nothing is left in it. Thus financialization will not only lead to the excess debt on behalf of the firm and moreover it will lead to reduced amount of goods and services along with ever rising price of the commodities (Fuller 2016). Considering the case of the HSBC the theory of destruction of the firm with the financialization can be seen clearly. Stock price of the HSBC is rising at a steady rate; whereas the capital debt is also raising leading to lowered interest over the time as well as reduction in quality of the service. If the firm run according to the natural economic laws, then it would have improved its service quality as well as enhance the versatility in its service, however it is also true that the HSBC has a well structured corporate governance with the help of the financialization. Empirical studies have been seen that various firm, which were not productive in nature and about to shutdown has been given much needed stimuli with the usage of the financialization (Kalleberg 2015). Thus, it is clear that there are various views regarding the implication and usefulness of the financialization and how it has helped the firms to have greater level of corporate governance.
Key Challenges Faced by Finance
In a finance-based economy, Financialization dominates the function of the whole economy, it has become the face of capitalism, at the level of the company, and it is linked with the shareholder oriented corporate governance. The financialization encourages the maximization of its share value rather than long-term profit maximization (Palley 2016). There is no sustainable investment in the productivity of the real economy. There are various challenges faced by the banks and financial institutions at present. The banking sector and the financial institution are not making enough money and are being unable to meet consumer expectations. Another recent challenge faced is there is the technological advancement in the banks (Imran, Maqbool and Shafique 2014). The traditional banks are facing challenges to cope up with the new software and techniques.
The financialization phenomenon in the recent decades has had an impact on the economies and societies that is universal and pervasive. The mode of accumulation has become more international, integrated and intensive in the global finance. The finance sector has progressively increased its share of GDP, and even for non-financial corporation’s the pursuit of interest, dividends and capital gains outweigh any interest in productive investment (Coyle 2015). The financial corporations have less capital available for productive activity as they are too much used to the traditional financial pattern. These financial pressures are translated into the operations of corporations through the enveloping regime of maximizing shareholder value as the primary objective. Agency theory has provided the rationale for this project, prioritizing shareholders above all other participants in the corporation. According to the Bosse and Phillips (2016), origin of the financialization of corporations is hidden in the early of agency theory development and shareholder value in Anglo-American corporations. The enduring myths of shareholder primacy are examined. Concept of the financialization came into existence back in 1980 from the outburst of the new business cycle theory and one of the main aim of this theory was to bring in asset price inflation and boom while considering the there will be collateral to support the debt financing from both the firms and consumers (Palley 2016). This will allow the introduction of the new financial products, which will allow widening of the assets for the firms and enhanced scope of leverage. However, in present day scenario, financialization faces challenge of debt crisis and hollowing down the firm to the core and reduced scope of customer service as well as the poor range of goods and services. As mentioned above, the scenario is same for the chosen organization of this essay, which is HSBC because it s facing reduced amount of the service and quality in their products. Finacialization in savings is rising in the HSBC, which is presently reflecting rising domestic asset on behalf of the firm, where as the debt rate of the firm is gradually rising (Eurochamvn.org, 2018).
Weaknesses in Mainstream Financial Ideas and Corporate Governance
Corporate governance is one of the systematic mechanisms of the firm that abide it within the direct control of the company’s profile and portfolio. It essentially focuses on balancing the company’s interest and stakeholders aim to fulfill the personal goal with the organizational goal. This provides formal framework to maintain the organizational goal as well as fulfill the personal goals; however in real world scenario, there are various conjecture from the theoretical ideas regarding the financial ideas (Griffith et al. 2016). Bad financial ideas lead to disastrous situation for the firms because it can lead to deterioration in the financial condition as well as reduced quality of the service. However, in recent days there is continuous rise in importance of corporate governance because it aids to assess and forecast the future trend of the firms in order to provide them sustainable growth. Coming to the real world scenario, corporate governance has some weakness too that has constrained it to assess the extent of the Global Financial Crisis. Moreover, due to lack of proper implementation of the corporate governance, it restricts the risk buffering of the firms (da Silveira 2015). Considering the case of the HSBC it can be seen that foreseeable risk disclosure of the firm has lead t to face substantial amount of the management risk (Eurochamvn.org, 2018). Besides this, regulatory requirements and accounting standards of the HSBC have become insufficient over the time that has shattered the company profile (Griffith 2015). In addition to this, remuneration system of the firm has faced a series of cases in terms of risk and strategy appetite along with the long term interest rate that has deteriorated the revenue prospect of the firm.
Financialization is aimed to bring in parity among the stakeholders and the organizational goal; however, over the time it has failed to prove itself as a bane rather than a boon. However, according to the Mike, financialization brings in inequality in distribution of wealth and complexity in the case of rent seeking the (Mayvelin et al. 2018). In other scenario, it enhances the risk of privatization and scope of loss of socialization of the firms gets aggravated largely (Aalbers 2016). For instance, if the case of HSBC is considered, then it can be seen that, financialization of the firm has enhanced the leverage ratios of the firm; and increased the inequality in the firm’s framework massively (Acharya, Pierrer and Steffen 2016). Moreover, it has sorted all the wealth of the firm to the 1% top tier stakeholders associated with the firm’s activities. This has efficiently reduced the parity in the firm and reduced the inter bonding in the operational framework of HSBC. According to the Mayvelin et al. (2018) during the period of 2013 to 2014, the risk appetite has increased by 38% leading the business risk for the firm. Thus financialization can lead to demotivated shareholders leading to lack of fund for the business and hampering the sustainability.
Corporate governance is one of tools that bind the shareholders, management team and the other people related with the firm’s operation under a single roof. However, there are various limitations to the corporate governance, which are as follows (McCahery et al. 2016):
Cost incurred is high: larger amount of administrative requirement will lead to higher amount of cost incurred by the firm. Higher amount of cost for the corporate governance has made it hard for the firms to implement and maintain it.
Principal agent conflict: corporate governance leads to conflict among the shareholders and the business performance due to lack of professional management. It polarizes the power to the managers rather than distributing it among the shareholders as can be seen in the case of the HSBC (Tricker and Tricker 2015).
Conclusion:
The above discussion has highlighted various issues, advantages and disadvantages of the corporate governance. From the above analysis it can be seen that corporate governance acts as the bane for the firms rather than what it was meant to do. Moreover, the analysis has found that financialization leads to polarization of the power and reduction in quality of goods and services. Considering the case of the HSBC, it can be said that it has become evident that corporate governance can pose societal stakeholders. Besides this, statistical data highlights the case of polarization in presence of financialization.
References:
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