The lack of understanding of most economists about human nature and nature (or the universe) per se is astounding to frightening. Shareholder value and competition do have a relationship that is not as direct as one might think because it involves human perceptions. Economy is a natural ecological (complex adaptive) system whose entities are after all humans. Rather than competing on natural resources of space and food, they compete on the abstract resource of money. The entity of a business and the even more abstract entity of shareholder value are illusions that have no counterpart in reality. Therefore it is the human illusion of perceived value that drives competition in economy and naturally the same applies to shareholder value.
Anyone involved in running a business knows how flexible accounting is when it comes to portraying a certain business result. That business result is used to sell the business as profitable on the stock exchange. Maddoff produced a lot of shareholder value for a long time by paying out newly received capital as interest, because there is only one value that produces profits and it is ‘perceived value’.
Stock markets are therefore a legalized form of Ponzi schemes because apart from being a gambling venue, their role is nothing else than to create illusionary shareholder value. I am not referring to influencing the shareprice with false information or cooking the books as Enron did. The price of one share being traded one day can change the market value of a large business by millions. That is nothing else than an illusion, because you cannot sell those shares at those prices as it will influence the price as such.
Can you see the wonderful tool that can be used to create ‘perceived value’ from nothing? You create some good illusionary story, or even fire people and reduce the competitive and service capability of a business and its value goes up in expection of the the coming rise in shareprice? Fantastic, self-fulfilling prophecy! In the very, very special situations of corporate takeovers – when one buyer wants to buy all outstanding stock – that shareholder value can be realized. The larger the merger the less it happens in cash terms and illusionary share values are exchanged for each other, therefore documenting the fact that the value is unreal.
Thus there are two reasons why we have global corporations: creating market dominating virtual monopolies of incompetence that thus can compete with much more competent smaller businesses and creating buyers for smaller corporations that as such can convert illusionary shareholder value to less abstract cash. The shareprice of the buyer typically goes down as a result of the diluted value, next to the problem of making money with a merger.
The problem is now that the share ‘value’ of the largest corporations can not be realized as there is no larger buyer. Therefore the value of the largest businesses are purely illusionary. It is supported by pooling the stocks into pension funds that are then bought by small citizens who buy them in hope of participating in a business. When that story pops, we need to call in the government so that the Ponzi scheme does not crumble. Apart from the CDO counterfeit money produced by the real estate lenders, that is the reason governments have to secure the debts that can no longer be secured by the collateral of illusionary shares.
Large public businesses have stop to compete for buyers for their products but they compete for buyers of their shares as otherwise their value and ability of dominating the market by buying much better competitors would erode. That is the true nature of relationship between shareholder value and competition. Competition is not only stifled within an organization only but also externally. Which is why global businesses sell product illusions today as they do no longer have the ability to compete on a product level. They need to outsource everything to smaller businesses, ideally in low-wage countries and resell it at an illusionary perceived value in their home market.
The profits that these large businesses produce are not real. They are created by constantly buying and selling other businesses at abstract market values, wringing them dry of assets and writing off illusionary market values to reduce the taxes on the book profits they would have to pay otherwise. No, I am not a communist or socialist. I am an observer who sees that a truly free market economy his destroyed by large monopolies. An unregulated flow of capital in stock markets kill the competitve drive of a large business and it kills the smaller competitors that are either dominated by sheer marketing power or gobbled up by using illusionary share price.