Madi – Teaching finance and the social effects of business models
Teaching finance without any discussion about the social effects of business models has been the routine in most Economics graduate and undergraduate courses. However, among the main changes in the global financial scenario, the emergence of private equity funds as major transnational employers has resulted from new global business models where companies are managed and traded in order to get short-term returns.
Why teaching the private equity business model matters in any attempt to reshape the Economics Curriculum? Private equity funds currently centralize endowments from banks, institutional investors – also pension funds- and high net worth individuals in order to assume a key-role in high profit investment buyouts. These new investment practices have been overwhelmed by the financialisation of wealth that has reinforced “short-termism” in American and European business. As a consequence of a global wave of mergers and acquisitions, workers have been confronted with over more than $ 1 trillion dollars in concentrated buyout power. In Great Britain, for example, 1 of every 5 employees has been working for a company owned by private equity funds since the middle 2000s (BVCA, 2006).
Private equity funds have significant impact both on how companies are run in the current business environment. On behalf of the role that private equity investors play in many companies’ board of directors, higher expectations for short-term profits subordinate the evolution of labor relations. Among larger companies, private investment funds have been mainly responsible for mergers and acquisitions—a process that can also favor increasing unemployment. Besides, as the private equity fund – as an investment group- decides to sell a business, managers of private equity firms can adopt downsizing strategies with layoffs and other cutbacks to improve the balance sheet and make the company’s short- term profits more attractive to potential buyers.
As managers are committed to short- term profits and the payment of debt, private equity firms must subordinate labor and employment relations to efficiency targets. Under the private equity business model, the generation of cash flows to pay non–equity based fees, dividends and debts after the take-over has usually required growing cost reductions with deep effects on labor relations, employment trends and social rights and benefits. Indeed, short-term returns under this model come at the expense of good jobs, secure pension plans, higher investments in operations and product development, and the upskilling and training of workers.
Commentary by Maria Alejandra Madi 6 September 2014
Also published here on the WEA Pedagogy Blog.