I've posted a couple of times previously about my belief that we are going to see a shift away from a market-focused approach to governance to one in which others (primarily regulators) play a bigger role. Despite the publication of the Stewardship Code, and the apparent desire amongst the key interested parties in the UK to keep a shareholder-centred model, I am increasingly convinced that a regulatory turn is on the cards.
1. I am not convinced that the asset management industry in general is concerned enough to lobby hard in defence of the UK model. IMA research seems to bear out the intuition that most managers think governance matters a bit, but not enough to put real resource behind it. And most clients are not bothered - so where is the commercial incentive? The Stewardship Code may result in some upskilling across the industry as a whole, but I think this will be overwhelmed by other trends.
2. Regulators and/or states have real power to intervene in companies in a very forceful way. They have been reluctant to do so pre-crisis, but the situation is surely reversed now. It is more risky (reputationally) to not intervene. The govt booted out Fred Goodwin, not the shareholders, the FSA barred Johnny Cameron. I don't think that asset managers who are not as a whole even convinced of the intellectual/economic case for activism are going to achieve anything similar. And what matters is what works, I seem to remember someone saying.
3. Pay. Governance isn't well paid, except for a handful, but regulators are belatedly open to the idea that you have to shell out if you want to attract poachers turned gamekeepers. A lot of good people wouldn't think twice about a job in corp gov at an asset manager because it offers neither financial or reputational rewards comparable with those elsewhere. That matters - companies see how much money asset managers put into corp gov too.
4. Europe. The tone of the EC Green Paper looks to me like the direction of travel. It's worth noting that beyond a couple of nods to employee representation and a wider conception of directors' duties, it doesn't herald a turn back to the Rhineland model. It's a regulatory turn, not shift to stakeholder capitalism.
5. Politics. I don't think the restart of the upwards march in exec pay, return of big bonuses etc, can survive another attempt by politicos to kick it into the long grass by saying 'it's a matter for companies, rem comms and their shareholders'. There will be pressure to intervene more directly.
In all of this I am by no means expecting an overnight change. It may take several years to work through and the direction of travel won't always be obvious. But I think the signs are there already, and I struggle to see how an investment industry that is structured around an entirely different conception of what share ownership is about can make stewardship work quickly enough to fend off the inevitable.
It's also worth noting that this is no way a triumph for the Left or other critics of the existing model. As is no doubt obvious given my background, my personal sympathy would be with a model that had a greater employee involvement in governance. The fact that such an alternative is not a realistic option suggests on the one hand that we don't have the capacity to deliver it, but perhaps on the other that we don't have the collective belief to argue for it.