NFU News

Who is top management actually trying to please?

OPINION. Given today’s tendencies, a corporation that changes tracks and enforces sustainable social and environmental policies will only survive if the rating agencies agree in their change. The problem is, not much indicates that they would. On the contrary. Top managers in our Nordic corporations seem to be marionette dolls to the rating agencies demands.

Why else does a bank with an end-year result better than ever, pocketing some 26.8 billion SEK, still want to reduce staff by a further 10%? Exactly why do they have a 15% return of equity target? Who is benefitting from these massive substantial increases in dividend pay-out? And ultimately, who is top management actually trying to please with all of this…?

For a moment let’s be rational about answering these questions. Well, a company basically does what it does to uphold its market share and market value. Some succeed and some fail as “the market” judges them in or out. A strong company equals good branding. Branding is important for not only attracting and holding customers, but also to attract the best employees. However, as good as this sounds, it is probably not enough to explain the tendencies listed above. So what is?

Market value and shares are more determined by whether or not the company lives up to market ‘expectations’. If it fulfils these, the market value goes up. If the company on the contrary ‘disappoints’, the market value drops. Simple.

But again, who is this market that has personal attributes and can fulfil, disappoint and judge? One thing is for sure, the market is not a person. It is a bunch of investors acting in and through, for example, stock exchanges. They mainly buy and sell shares according to a range of criteria and company performance evaluations. They only partially act on personal, often risky, judgements.

Fine. Keep reading we are nearing the crunch here.

The main source of evaluations and judgements are rating agencies. Their ratings act as a sort of security for investors in the trade-off between risk and return. There are only three significant rating agencies across the world: Standard & Poor’s, Moody’s and Fitch. This oligopoly has enormous impact on corporate strategies and naturally investment behaviour (see the boxed example).

As the example shows, the rating agency judges that environmental and social policies are not good for the company’s survival. The rating agency down-rates the company, which in turn suffers the severe consequence of folding. What the rating agency is doing is making a judgement that is essentially normative. Norms define what is perceived as something good, bad, satisfactory, excellent etc. And here is the crunch.

Since listed companies are dependent on the value of their shares, and ultimately therefore the rating of their company, the rating agencies’ NORMS define what corporate leaders do, and do not do, in terms of strategies and policies.

In other words, by turning this on its head, we can suspect that the banks mentioned above, are only doing what they are doing to secure a good rating. There are NO other main reasons, no obligations to society, employees or customers. The power of rating agencies is therefore enormous and the impact of their assessments on society is huge. Their assessments are the root of what is going on right now.

NFU takes these, admittedly crudely described, relations seriously. We are off to meet a rating agency’s vice-president and key staff in London. We want to hear what they make out of this, and also whether they think they could change market behaviour by assessing other types of actions as good, bad, necessary or evil. Maybe we should even suggest them to be first movers on creating peer stakeholder groups of a wide range of actors, including us trade unions, with the task to question and develop the norms ratings are based on? Or maybe we should go one step further, and demand the EU to create an independent rating agency consisting of a wide range of interests and not only industry’s?

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