9 - Regulatory trends and their impact on corporate governance

Summary

Introduction and overarching market trends

This chapter reviews recent regulatory developments in corporate governance, identifies emerging trends and offers thoughts as to the possible impact of these trends on the behaviour of market participants. The second part of the chapter discusses key regulatory trends at EU level and their impact on the European corporate governance landscape. The third part turns to a discussion of US regulatory trends while the chapter closes with some brief concluding remarks. The analysis of EU and US trends is organised around the two most important governance principles: transparency and accountability of agents to principals.

Since the 1980s, privatisation and technological change have fuelled the development of equity markets around the world. In the context of these developments, institutional investors have become by far the dominant owners of securities in the largest equity markets in the world, as Figure 9.1 shows. There is a fundamental challenge for regulators from institutional dominance: in view of the changing ownership and control environment, they need to revisit regulatory assumptions about market failures and question some of the basic objectives of investor protection.

The US regulatory model for the financial markets, the 1930s blueprint for securities regulation worldwide, may be losing its relevance. The US model is predicated on a market dominated by small retail investors who cannot fend for themselves: insurmountable information asymmetries exacerbated by the high cost of collective action mean investors cannot effectively exercise voice. Their only power is to buy and sell securities.