Global Policy Forum

By Dominique Plihon

The string of disasters suffered by the Enron, WorldCom and Vivendi-Universal (VU) groups are not independent events, and there are several lessons to be learned from their study. These accidents reveal serious breakdowns, if not failures, in the stock market system, as recently revealed by the majority of professionals and media organisations. Today's idea itself of what a company signifies is now to be challenged. A company is seen as a financial object whose stock market value has to be increased at all costs: buying in of shares, mergers, selling off of less profitable sectors, funding... The apogee followed by the bankruptcy of Enron has had nothing to do with its industrial activity - the buying and selling of gas and electricity - it is uniquely a result of its financial activities. Behind the spate of more and more risky loans destined to subsidise profitable mergers and acquisitions, Enron offered no real contribution to the functioning of the energy market, which has been barely affected by its disappearance. Again, Vivendi-Universal has become a financial holding based on the piling up of financial assets that have no industrial coherence, but that are destined to create market value for its shareholders. This explains the uncontrolled hiatus at the origin of the VU crisis between the traditional sector of the ex-Compagnie Générale des Eaux (French water board) and the activities linked to the new economy.

What is equally questionable is the capacity of the financial markets to regulate the productive sector. In the new shareholding capitalism the stock market is supposed to play a triple role. Firstly, that of financing enterprises. Now we have noted that this not really the case; over the last few years the net issue of shares by companies (the gross figure minus the buying back in of shares with dividends) has been negative in Europe as it has been in the U.S. This means that companies give out more money to their shareholders than they take from them. The second function of the stock market is to increase company trade value. This function is also to be doubted! The totally unreal levels reached by shares in both new technologies and in the traditional sector (such as those of Enron) show that very often the stock market quotes give no serious indication of a company's real value. Finally, the stock market is supposed to encourage industrial restructuring, with the shares playing the part of exchange currency during a take-over. We have noted that in almost all cases these re-organisations have been chosen purely for their financial interest, and have no industrial coherence at their base.

We are therefore faced with a fundamental contradiction: on the one side, the stock market dominates new capitalism; on the other side, the stock market has proved itself incapable of guiding companies towards choices that ensure their long-term development. The famous self-regulating market theory does not work! The shareholders, and in particular investment funds, push companies into conforming to short-term financial norms (the practice of 'bench marketing'). This is what led the management of Enron, WorldCom and VU to fiddle their accounts in order to display the expected results. As for the other actors on the financial market who are supposed to exercise control over companies, they do not provide the counter-balance associated with their role in the face of company directors for whom they are often the active or passive accomplices. This has been the case for audit companies (such as Andersen), for regulating authorities (notably stock market commissions), but also for business banks, quoting agencies, financial analysts and stock market journalists. It is noteworthy that the most emblematic economic and social fiasco has taken place in telecommunications, the sector that the free trade supporter wished to hold up as an example of market regulation. In brief, today's episodes confirm what history has already taught us: capitalism is incapable of regulating itself, and left to its own devices it can only lead to major breakdowns which are paid for by employees and, on a wider scale, the general public around the world.

As a whole, the principal mechanisms of stock market capitalism are in a state of crisis, and profound reforms are necessary. Their main objective should be to reduce the dramatic hold the financial markets have over companies, and globally, over the economy. Two lines of reform are primordial: the first should be to aim for a different idea of the meaning of commercial companies. This should be defined not as an 'object' owned by shareholders, but as a 'community of interests' for which the final goals are not making profits, but creating jobs and wealth. What must be done away with is the concept of company direction being aimed entirely towards 'the creation of profit for the shareholder'. This implies the remodelling of current legislation in order to recognise the rights of all partners within the enterprise, the front line being composed of its employees. These employees, whose work skills represent the fundamental source of value in today's economy, should have the right to new laws limiting the power of company capital and reinforcing workers' rights in the face of shareholder strategy. The second series of reforms should be to go back on the excessive opening of trade restrictions and to reinforce the role of the state, in particular that of maintaining a strong public sector. This should include the reinforcing of administrative supervision, including efficient public institutions for financial control on European and international levels.

It is vain to sit and wait for governments and international institutions to spontaneously take account of the current situation and to commit themselves to putting things right by challenging neo-liberal dogma. The reforms we have just described will never come about unless there is a social movement on a national and international level capable of demanding them. Today's international movement against financial globalisation, of which Attac is a part, shows the way forward.

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