Structural power and corporate governance under asset manager capitalism

This article has been written by Kanishka Singh, pursuing a Diploma in Intellectual Property, Media and Entertainment Laws from LawSikho and edited by Shashwat Kaushik.

With the rise of globalisation, the financial sector has also changed its way of conducting business. This also led to changes in various other institutions, such as corporate governance and asset management. Corporate governance is a notion that has recently emerged in the corporate field. It is a process that aids the firm in meeting its objectives through its predefined rules and regulations, while asset management helps to ensure the balance of wealth within the firm. This article will focus on the relationship between these sectors, i.e., the financial sector, corporate governance, and asset management. The article will place its emphasis on how these two entities work together to create a balance within or outside the organisation.

Corporate governance is defined as the set of rules and regulations that help the firm work effectively. It contains certain corporate practises that help a firm direct and control the organisation. It tries to maintain a balance between the various actors, such as shareholders, stakeholders, senior management, executives, customers, suppliers, etc. The primary aim of corporate governance is to establish transparent and clear regulations among the companies. Transparency will help to protect the interests of shareholders, directors, management and employees, thus fostering leadership within the companies. The Board of Directors is mostly responsible for corporate governance as well as for taking important decisions. The Board of Directors needs to ensure that the strategic objectives and goals of the organisation are met. Corporate governance plays an important role in building trust between investors, the community, and public officials. Aside from protecting the interests of the shareholders, it also helps to protect the interests in relation to social, environmental, and regulatory contexts. To have a good infrastructure, it is important to have proper functions within the organisation. One of the main purposes of corporate governance is to ensure better fund management. If good corporate governance does not take place, it could harm the organisation as well as lead to financial losses to the shareholders.

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Corporate governance works on the basis of these values in order to ensure better regulation within the organisation. These are:

  • Accountability: It means making a person or a group take responsibility for their actions. Corporate governance ensures that the director stays accountable for their actions and works to resolve any issues that arise.
  • Transparency: Corporate governance ensures that the company stays clean and transparent to outsiders. This can be done in the form of financial as well as non-financial aspects such as the actions of the company.
  • Fairness: Corporate governance ensures fairness and balance among the shareholders and the management of the company. It helps to protect the interests of the shareholders, directors, officers and employees of the company. Fairness allows that relationships among management and employees stay positive and healthy, as well as that stakeholders become more accountable for their actions by engaging more in the community.
  • Responsibility: Corporate governance ensures that the company stays responsible to meet the company’s objectives as well as the shareholder’s interests. It helps to build confidence and trust as well as ensure reliability among creditors, employees and shareholders.

Asset management is a practise that ensures increased wealth over time through trading, investment and maintaining or acquiring various other assets. Some examples of different kinds of assets are stocks, bonds, real estate, commodities, alternative investments, mutual funds, etc. The main objective behind asset management is to maximise the value of an investment portfolio while mitigating the risk involved. Asset management is often conducted by the asset manager, who either works independently or works in an investment bank. They help the clients reduce the risk by looking at all the factors, such as taxes, inflation, and market volatility. Moreover, better asset management helps achieve business goals by determining effective management.

Structural power refers to a relationship through which one powerful actor or a few actors  influences the norms of society, institutions, and interpersonal relationships among organisations. It plays a significant role in shaping the economic and social aspects of the globe. The objective of  structural power in a business environment is to ensure the sustainability of the economy, job growth, tax revenue, etc. It also oversees investment decisions and other activities. This can be explained with the help of an example. If Company A is more influential than Company B,it will have a greater impact on society. It will create interdependency among the other actors, such as small industries, as they aspire to become like Company A. This will create a healthy competition among the players to meet the goals set by Company A. Even Company B, which had less influence, would still get an opportunity to compete with Company A. The job will increase, thus creating sustainability in the economy. With the rise of competition, companies will find better opportunities to increase their influence by opting for effective investment decisions. Structural power ensures that all the goals are met, which otherwise would not happen if such power were not given to authority. It also decides whether the firm should exit or not. Structural power exists both in the state and in private entities. One such example is shareholders. The other side of this is that it could also create exploitation of small players if powers are concentrated to few actors arbitrarily.

Corporate governance has started to play a significant role in asset management. It helps the managers work towards the client’s interests by creating transparency, independence, and better supervision within the firm. Investors tend to ignore the capabilities of effective governance, which prevents them from gaining profitable returns. Therefore, they should not overlook corporate governance. Poor governance can lead to various issues, such as misselling of submarine mortgages, incorrect assessment of credit rating agencies, poor risk controls, etc. In the banking sector, it can lead to lower returns. One of the examples that can be given is the Japanese sector. The country had a terrible history of generating shareholders due to its poor corporate governance. Poor governance focuses less on the value creation of the shareholders and creates low-profit margin hoarding as well as low pay-out ratios.

While the establishment of strong corporate management helps to balance a good corporate culture, it also helps to maximise the wealth of shareholders and ensure efficient management of resources. It provides the ability to deal with external factors that impact financial performance. It helps to maintain a favourable balance of working capital elements, which are included in the form of payables, receivables, and cash balances. According to one theorist called Gugler, the systematic ownership structure has a positive influence on investment decisions. Good practises lead to a positive return on equity and promote efficiency in the firm. Since such practises affect stakeholders positively, they also lead to economic growth.

Political changes in society also impact the management of assets. Political risk, also called geopolitical risk, is a type of risk that involves political decisions. Such decisions may have a meaningful impact on the performance of the company or government. Such situations affect policy decisions and shifts such as tariffs, taxes, labour conditions, privatisation, and regulation. Other situations that affect the companies are:

  1. Change in political leadership and government instability.
  2. Political uncertainty due to activities such as terrorism, riots, and coups or wars.

Due to these reasons, the company’s ability to execute strategy and deliver products and services is disrupted. This, in turn, affects the company’s performance and profitability. Instability in politics also affects trade with other countries. Moreover, such instabilities have the potential to influence the performance of individual securities. A decline in the market could affect the share price of the company. Political instability could generate uncertainties among investors, thus causing a decline in the market. A decline in performance or profitability causes the company to be unable to pay the debts, thus increasing the risk of default. Other reasons that could affect asset management are inadequate budgets, political ideologies, coalitions, and minority governments. According to the studies, it has been found that if the public aligns themselves with the political values of the ruling party, it has a positive impact on investment decisions.

The notion of corporate governance has been extended to banks and other financial institutions. Banks practise corporate governance in its traditional form. The creditor or debtor plays a more important role in shareholder governance. The role of banks is special because it includes a very low capitalisation of banks as compared to non-banking entities. Since banks are extremely important for economic growth, they can be associated with eminent dangers. Corporate governance at the bank also affects the asset management system.

It has been found that banks consisting of higher shareholder representatives on the board undertook greater risk. While the banks with an independent board were run poorly. Lack of competition can also lead to monopolistic profits, affecting asset management. Poor corporate governance also affects the client relationship as well as the lending ability of the banks.

Characteristics of efficient banks

  • Efficient board of directors: This includes directors who have greater equity share and better attendance rates. They should be part of meetings frequently.
  • Strong ownership: It includes a group or management whose interests are vested in the bank.
  • Better compensation for managing officers.

An exit point refers to the price at which an investor or trader closes a position. The reason behind the exit is that the investors wanted to buy assets for the long term. It is one of the trader’s or investor’s strategies. It also helps to determine real-time market conditions. Exit points also help to manage the risk or loss as well as aid in setting profit targets. Most of the conventional corporate governance methods rely on exit strategies, such as stock sales or shareholder activism. Though such methods are considered time-consuming and expensive.

Some of the ways in which asset management can be minimised are:

  • Asset management software: This is the software stored and used to increase asset life. It provides an automated approach to the tracks and helps manage the assets. It aids organisations in various stages, such as procurement, maintenance, and utilisation.
  • Development of strategy: It is important for the board to have a shared vision, strategy and action plan to ensure a life cycle asset management programme. It helps to assess the current activities of assets as well as provide recommendations for improvement.
  • Decisions should be made by key makers: Risk-based asset planning should be done by the top management by evaluating the potential risk by looking at past records. It helps to anticipate the assets that might cause risk in the future.

The role of corporate governance and asset management has been interlinked with a series of developments in various sectors. It is important to have effective corporate governance in firms and organisations. Such practises help to ensure better investment decisions, thus ensuring better asset management. Corporate governance and asset management had created their own influences in the banking sector. Though it has also been observed that corporate governance and asset management can be influenced by political decisions or through instability, Therefore, it becomes essential to strike a balance between political agendas and corporate goals, as it may hamper economic growth.

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