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In depth: The future of capitalism - -

By Francesco Guerrira

A need to reconnect

By Francesco Guerrera in New York

Published: March 12 2009 20:20 | Last updated: March 12 2009 20:20

"NYSE

 

In different times, the offer from the check-in attendant would have been accepted with alacrity. But in the midst of the worst economic downturn since the Great Depression, with an angry public, populist politicians and an aggressive press baying for a crackdown on Wall Street’s “excesses”, the senior banker paused for thought when he heard those usually welcome airline words: “Sir, you have been upgraded to first class. Please follow me.”

Finally replying, “I am fine in coach, thank you”, he gave up the better seat and opened another chink in the armour of beliefs and practices that corporate America had built and spread around the world over decades.

Once hailed as examples of an American dream that rewarded success with large pay cheques, lavish perks and popular admiration, executives and their companies have been caught in the grip of a storm that will revolutionise business. The deep freeze of capital markets, the implosion of financial groups and the resulting rise in governments’ sway over the private sector have called into question some of the foundations of Anglo-Saxon capitalism.

Long-held tenets of corporate faith – the pursuit of shareholder value, the use of stock options to motivate employees and a light regulatory touch allied with board oversight of management – are being blamed for the turmoil and look likely to be overhauled. “We are in uncharted waters,” says Jack Welch, the former General Electric boss who embodied an era when the untrammelled interplay of market forces, domineering chief executives and the laser-like focus on quarterly earnings rises reigned supreme.

EUROPEAN INDUSTRY:

‘I hope some of the lecturing will die down now’

European business got through previous crises with a mixture of restructuring, denial and government intervention, writes Richard Milne. A similar outcome seems likely from this crisis even if the speed and scale of the downturn are testing companies as never before.

Take German private engineering companies, renowned for conservatism, which even in the middle of last year were bullish and saw their orders rising by 2 per cent. By November the monthly growth was minus 30 per cent; by January minus 42 per cent. Now, the groups are cutting jobs, investment and fighting for survival – as they are across Europe.

For many big European companies, the most significant event in the last decade was the shift in ownership from governments or other national companies to private, often foreign, shareholders. This has seen a big rise in stakes held by US and UK investors, leading in turn to a broad push for more “Anglo-Saxon” corporate policies, as many continental Europeans call them.

According to Gerhard Cromme, chairman of Siemens, foreign capital “revolutionised the way Germans do business”. Across Europe, companies were forced to adopt more shareholder-friendly strategies and boards came under pressure over corporate governance issues, prompting investor revolts at the likes of Eurotunnel, the channel tunnel operator, and Deutsche Börse, Germany’s stock exchange. Financing arrangements changed as local lenders proved less willing to prop up domestic groups and foreign banks flooded in.

How much of that is now likely to be rolled back? Already – as in most parts of the world – the state is more active, both in taking stakes in companies and prodding them to do what the authorities would like, such as a French suggestion that carmakers should close no domestic factories. Foreign lenders have withdrawn from many countries and banks are being encouraged to lend locally again.

Restructuring is likely to be a dominant theme, with millions of jobs to be cut as profits slide. The question is how radical that restructuring will be. Although the automotive industry may be prime am



    
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