A case study of financialization and EVA®
Introduction
This research stems from an interest in financialization and the implementation of shareholder value from the perspective of key stakeholders affected by the changes. The little research that exists on this subject tends to be partisan rather than independent (but see Malmi and Ikaheimo, 2003, Riceman et al., 2002). There are few intensive case studies of EVA and this paper provides a grounded account of management control under financialization. The focus is on a factory, Midco, in the northeast of England, chosen because of the apparently dramatic turnaround achieved during a relatively short period of time.
The paper's key contribution is to describe the way in which EVA was implemented. While our focus is upon local management, we provide contextual information on how Midco's financial situation was communicated to the shop floor and how corporate solutions were sold to them. This can be viewed as part of a complex whole or as the next stage of a process that had been previously manifest by the introduction of TQM. There are two main strands to this paper. Firstly, the story itself is one of the successful implementation in financial terms of EVA. This result reflects the context: it is not that EVA is a magic solution, but that prior experience of change, plus economic insecurity, provided conditions in which EVA could work. Secondly, we explore the implications of our findings, comparing those from Midco against findings from the FWAP (Ezzamel et al., 2004), Conglom (Ezzamel et al., in press) and Kaedtler and Sperling, 2002a, Kaedtler and Sperling, 2002b case studies.
The paper is structured as follows. First, we explore the phenomenon of financialization in the context of shareholder value and coupon pool capitalism.1 Following earlier work of Armstrong, 1985, Armstrong, 1986 and Miller and O’Leary (1994), we suggest that these frameworks might provide further insights into the implementation of shareholder value. After discussing methodology and methods, we introduce the case of Midco, concentrating on the Team Valley factory in the northeast of England during a period from the late 1980s until 1995. This period saw a dramatic turnaround in fortunes of the plant. In our discussion, we explore likely reasons for the outcomes in Midco, focusing on the roles played by particular organizational actors and on Midco's particular, prior, history of TQM. We then broaden the discussion to compare the Midco outcomes with those in the studies mentioned above so as to extract possible new insights. The paper concludes by returning to the original research questions and suggests that the specific outcomes in Midco were attributable to particular local conditions: Midco's prior experience of change and the presence of economic insecurity. Finally, we draw out the implications for further research.
Section snippets
Literature review
The growing literature on shareholder value and financialization considers the impact of the stock market's increasing demands for financial returns on corporate behaviour and performance (Froud et al., 2002b). According to Froud et al. (2006) financialization is not anchored in some behavioural fundamentals of firms or households. Instead Froud et al. (2006) argue that financialization leads to coupon pool capitalism, where the capital market stands between households and firms both of which
Researching Midco
The overall study of the company researched, ‘Midco’, is a sub-set of a larger study (Gleadle, 2000) of four companies based on 65 semi-structured interviews lasting on average one hour. The initial Midco case, based on one of these companies, is exploratory (Yin, 1984) and informed by 17 in-depth semi-structured interviews with key informants, primarily managers from across production and sales and marketing, as well as from finance, in order to avoid an overly functional bias. These
Background to the Midco group
Midco group is a US multinational (MNC), with three-quarters of its sales arising domestically while the rest are to Latin America, Africa, the Middle East and Europe. The group produces floor coverings, insulation and ceiling and wall systems, with an annual turnover in the 1990s, the period under consideration, of over $2 billion. It sells to the residential and non-residential markets through independent distributors and large commercial contractors. Midco was founded in 1860 as a
Discussion
In this paper we have examined the role of accounting, specifically shareholder value, in the transformation of Midco from what was characterized as an under-performing company into ‘an economic engine of growth’ to quote the CEO. Following Miller and O’Leary (1994) accounting enabled the visualization of operations and instilled in actors the need to cooperate in the face of external competitive market pressures. This happened with the changing of behaviour under financialization within Midco.
Conclusions
Returning to our research aims this paper has provided a grounded account of management control under financialization. While the Midco case can be regarded as a ‘success story’ for financialization and EVA, this result reflects the context. Specifically, prior experience of change and in particular the implementation of a version of TQM stressing employee empowerment provided at least part of the conditions in which EVA could work. This prior experience of change allied with the presence of
Acknowledgments
We would like to thank Judy Day, Paul Edwards, Trevor Hopper and Janette Rutterford as well as two anonymous referees and the editor for helpful comments on earlier drafts of this paper.
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