From exit to control: The structural power of finance under asset manager capitalism

Political economists have theorized the structural power of finance as a function of the scarcity of financial capital, which empowers its owners and intermediaries to (threaten) exit. This theory has trouble explaining the non-death of the rentier at a time when financial capital is abundant and lacks a credible exit option. This paper presents a theory updated for a world characterized by financial capital abundance, and by a shift in the predominant function of finance from banking to asset management. Today, asset managers pool financial capital on a scale that often puts them in a position of (near) control, while also maintaining a high degree of portfolio diversification. This defining feature of asset manager capitalism, although observable across asset classes, is most pronounced in the corporate economy. Whereas the control-based dominance of finance capital during the early 20th century was characterized by credit-debt relationships between banks and corporations, today asset managers’ equity holdings dominate; and whereas the shareholder capitalism of the late 20th century was characterized by impatient investors wielding the threat of exit, the power of asset managers in corporate governance is based on their large and illiquid, yet fully diversified shareholdings. Theorizing the structural power of finance as based on control and diversification helps explain both the rentier’s longevity and asset managers’ contribution to that outcome.