In recent years, scholars have frequently criticised Britain's market-based system of corporate governance. In particular, theory has focused on whether the German system should be viewed as an alternative to the UK model. The purpose of this paper is to
Table of Contents
1 Introduction
2 General Observations of Cultural Differences
3 Legal Forms of Firms and Distribution of Ownership
4 The Structure of Shareholdings in Germany
5 Legal Structure of a Join-Stock Company
6 Merger and Takeover Activity
7 The Role of the Banks
8 Adaptability to Change
9 Conclusion
Objectives and Topics
This essay explores the structural differences between the German and British systems of corporate governance, evaluating the German approach as a potential alternative to the market-based UK model. It examines the mechanisms of control, the role of institutional stakeholders, and the unique influence of the banking sector in Germany.
- Two-tier management board structure
- Employee co-determination and representation
- The role and influence of major banks
- Market for corporate control and takeover activity
- Influence of cultural and institutional factors
Excerpt from the Book
7. The Role of the Banks
In Germany, relations between banks and companies are traditionally much closer than in the UK, i.e. German banks have always subscribed to the principle of relationship banking as opposed to a transaction-oriented approach. Individual transactions are seen within the context of a comprehensive business relationship with the customer. The house bank (Hausbank) principle is linked to this philosophy, where stable relationships with the customer and vice versa are seen as being very much to the long-term benefit of both the company and the bank (Schneider-Lenné, 1992). What the banks provide is a cross between management consultancy and counselling. The major banks have developed into what the Germans describe as Universalbanken - a term applying to the range of services they provide.
The close ties between banks and their customers are also based on the banks' industrial holdings. In this context, a disproportional role is played by the so-called 'big three' (Deutsche Bank AG, Dresdner Bank AG and Commerzbank AG). In addition to their own shares German banks also look after and vote private and corporate investors shares. "Banks can vote vast numbers of shares which they do not own, giving them significant power at general meetings of shareholders." (Clarke and Bostock, 1997, p. 237) This is shown by the fact that on average banks collectively represent 82.67 per cent of all votes present in the meetings with the 'big three' accounting for 45 per cent of the votes present (Baums, 1993; Charkham, 1994).
Summary of Chapters
1 Introduction: This chapter introduces the critique of the British market-based governance model and sets the objective to examine the German system as an alternative.
2 General Observations of Cultural Differences: This section explores how German corporate culture and the "embeddedness" of companies in society influence governance structures.
3 Legal Forms of Firms and Distribution of Ownership: This chapter outlines the primary legal business forms in Germany and discusses the relatively small size of the German stock market compared to the UK.
4 The Structure of Shareholdings in Germany: This section explains why institutional investment in German shares is lower than in the UK, citing pension systems and corporate financing strategies.
5 Legal Structure of a Join-Stock Company: This chapter describes the two-tier board system involving the management board and the supervisory board as a central pillar of German governance.
6 Merger and Takeover Activity: This chapter analyzes why hostile takeovers are rare in Germany, focusing on ownership structure and voting rights limitations.
7 The Role of the Banks: This chapter details the close "relationship banking" model and the significant influence of major banks through shareholding and board representation.
8 Adaptability to Change: This section addresses the tension between the German consensus-based model and the need for flexibility in response to changing market conditions.
9 Conclusion: The concluding chapter summarizes that the German system is a unique evolution tailored to its specific historical and social context.
Keywords
Corporate Governance, Germany, UK, Two-tier Board, Co-determination, Relationship Banking, Universalbanken, Shareholder Structure, Hostile Takeover, Supervisory Board, Management Board, Industrial Holdings, Capital Market, Equity Market, Stakeholders
Frequently Asked Questions
What is the core subject of this paper?
The paper provides a comparative analysis of the German system of corporate governance in contrast to the market-based system prevalent in the United Kingdom.
What are the central themes discussed?
Key themes include the two-tier board structure, the role of employee co-determination, the influence of banking institutions, and the distinct nature of the German capital market.
What is the primary objective of this study?
The objective is to identify the advantages and drawbacks of the German model of corporate governance and to determine how it differs from the British approach.
Which methodology is employed in this essay?
The essay utilizes a qualitative, comparative literature review approach, drawing on established academic research and historical economic data.
What does the main body of the text focus on?
It covers structural elements such as firm ownership, the legal framework of stock companies, the influence of banks, and how these factors inhibit or facilitate takeovers.
Which specific characteristics define this work?
The work is characterized by its focus on "relationship banking," the "two-tier board" structure, and the sociocultural context of German corporate law.
How do German banks maintain influence over non-bank corporations?
German banks hold industrial stocks, serve on supervisory boards, and exercise significant voting power through deposited shares owned by private investors.
What is the impact of the "two-tier" system on board decision-making?
While the two-tier system separates management and control, it can lead to communication gaps between the supervisory board and the daily management of the company.
Why are hostile takeovers largely unknown in the German corporate environment?
Hostile takeovers are limited by concentrated ownership structures, voting right limitations in by-laws, and the protective, long-term involvement of house banks.
- Quote paper
- Dr. Klaus Schöfer (Author), 1998, Corporate Governance: A Contrast of the German system with that prevailing in the UK, Munich, GRIN Verlag, https://www.grin.com/document/185874
