The Paradox of Trust under Investor Capitalism

A 1948 poll found that 90 percent of Americans were opposed to buying stocks as an investment, either because they were unfamiliar with them or thought them 'not safe,' a 'gamble' (Berenson, 2003, p. 34). [Berenson, Alex. (2003). The Number. New York: Random House.] Before that only bankers made investments in the stock market - except for a brief period just before 1929 crash when there was a frenzy of interest in booming stocks, a development that ended up, when the market crashed, confirming for most people they were right to stay away from stocks. Today, in the age of 'Investor Capitalism,' we are all invested. Not all of us have brokerage accounts, but almost everyone has bank accounts or savings funds, 401k's, mortgages, certificates of deposit, or college loans, and they are dependent on pensions and endowments. Some of us hire professional money managers, most rely on local consumer bank branches. We read magazines devoted to investment, subscribe to newsletters, check websites. We are all deeply woven into the financial system, reliant on agreements being honored, interest paid as agreed, investment vehicles being funded and sound, and subject to honest reporting. Financial markets are not just for the rentiers or the wealthy. The financial system requires such assurances -- and we are all enmeshed in it. As a result, managements of businesses are being forced to pay a great deal of attention to the price of their shares, what has come to be called 'shareholder value.' Up until quite recently, the focus was on shares that paid good and reliable dividends, the 'blue chips.' Now, fixed income securities and bonds, while they still have their place in balanced portfolios, are of less interest. At one point, before the rise of the financial industry, when we thought of businesses we thought of managers and workers. With the exception of some family businesses, owners were largely irrelevant, dispersed among a myriad of shareholders who sought stable and secure investments. They tended to be passive. But in the past few decades, with the rise of large institutional investors such as pension funds, hedge funds, a new interest of individuals in investments, the focus has shifted to the price of shares and the opportunity to profit from buying and selling them. Most businesses have established offices to mange shareholder relations. Moreover, top executives will frequently meet with key investors to deal with their concerns. Activist investors can destabilize companies, but the most substantial issue for management is that stocks are being constantly scrutinized by investors -- large institutional investors and small private investors -- for changes in potential value. Near the start of this phase, Michael Useem, at the Wharton School, noted that Investor Capitalism 'helped force out self-serving and poorly-performing executives, and bolstered boardroom prevention of executive malfeasance. Yet in doing so, it created two byproducts that have become increasingly dysfunctional for both companies and the country. 'The first is an unrelenting pressure of the equity market on company leaders to meet quarterly TSR expectations, regardless of the impact on the domestic workforce. 'The second is an incessant equity-market demand on company leaders to focus on their own advantage whatever the disadvantage for others. Fewer executives and directors have thus been able to step forward to advocate what is required for a vibrant economy, not just what is required for their own advantage.' These were points that turned out to be valid, but they just began to sketch out the profound implication of how Investor Capitalism has transformed out economic system.