Is the German system of corporate governance converging towards the Anglo-American model?

Marc Goergen 0 1 2 Miguel C. Manjon 0 1 2 Luc Renneboog 0 1 2 0 L. Renneboog (&) Department of Finance and CentER for Economic Research, Tilburg University and ECGI , 90153, 5000 LE Tilburg, The Netherlands 1 M. C. Manjon Department of Economics, Rovira i Virgili University , Reus, Spain 2 M. Goergen Management School, University of Sheffield and ECGI , Sheffield, UK This paper analyses whether the German corporate governance is converging towards Anglo-American practices. We summarise the extant empirical evidence on the various governance mechanisms that economic theory suggests ensure efficiency and describe recent legal developments. We find no clear signs of convergence in form, i.e. the main distinctive features of the German system have remained largely unaltered. However, changes occurred over the last decade (specially in the legal framework) suggest a certain convergence in function, i.e. some governance mechanisms have effectively incorporated aims and/or goals generally associated with the Anglo-American model. 1 Introduction The German system of corporate governance has traditionally been characterised by the important role that large shareholders and banks play, a two-tier board structure with labour participation on the supervisory board of large companies, the absence of hostile takeovers, and a legal framework based on statutory regulations deeply rooted in the German doctrine. Another distinctive feature of the German regime is the efficiency criterion that corporate governance is to uphold. Whereas in Germany (as well as in many other Continental European countries and Japan) the definition of corporate governance explicitly mentions stakeholder value maximization, the Anglo-American system mostly focuses on generating a fair return for investors. Because of its idiosyncratic configuration, German corporate governance has (sometimes rather critically) been labelled Deutschland AG or Germany Inc.. Recently, Germany has however witnessed a number of financial operations that do not fit well with this description. We can mention here the initial public offering of Deutsche Telekom AG, the successful hostile takeover of Mannesmann by Vodafone, and the cross-border merger between Daimler Benz AG and Chrysler Corp. The introduction of voluntary regulations such as the Takeover Code of 1995 and the Corporate Governance Code of 2002, however limited, is another major change. Last but not least, there is evidence that listed German firms are progressively applying the principle of shareholder value (Tuschke and Sanders 2003). All these events call into question the Deutschland AG paradigm. They have also generated an extensive debate (Krahnen and Schmidt 2004). Hence, the question that arises is whether the German system of corporate governance has indeed changed some of its basic features and whether these changes have resulted in a certain degree of convergence of the German system towards the AngloAmerican, market-centred system (see e.g. McCahery et al. 2002; Gordon and Roe 2004). This paper aims at answering this question by providing an exhaustive review of the literature. In detail, we describe the various alternative mechanisms that theory suggests ensure economic efficiency and summarise the empirical evidence on Germany. In particular, we examine the role of the control structure, the board, creditor monitoring, the market for (partial) corporate control, and product market competition as corporate governance devices. We also discuss changes in the legal framework. The picture that emerges from our analysis is not substantially different from the stereotypical view of German finance (Jenkinson and Ljungqvist 2001, p. 397). However, we also find that some of the features that underlie this view do not exist anymore (e.g. the use of voting caps and multiple voting shares). We believe that it is sensible to conclude that the German system of corporate governance is undergoing a process of transformations. Whether this process will eventually make the German system converge towards a market-oriented system remains to be seen. However, it is doubtful that such convergence will ever occur completely in light of the perceived superiority of governmental and/or collectivecorporatist strategies over market-based solutions (Baum 2004, p. 7) and the offhands approach to corporate governance that is predominant in Germany (Gehrig 2003, p. 661). In any case, to date the existing differences are important enough to claim that the stereotypical view of Germany Inc. is still a valid paradigm. Convergence, if any, seems to have occurred in the function that certain governance mechanisms perform (e.g. the supervisory board and the remuneration policy); the institutional structure of the system (i.e. its form), however, remains largely unaltered. The structure of the paper is as follows. Section 2 reviews the literature on the convergence debate. In Sect. 3, we address the characteristics of the internal and external governance mechanisms in Germany. The recent regulatory changes are then presented in section 4 and section 5 concludes. 2 The convergence debate Two strands of the literature have preceded the current debate on the convergence of corporate governance systems. Initially, researchers focused on describing the main characteristics of the national systems. In particular, the American and later the German and Japanese cases were deeply investigated. However, comparative studies went soon beyond studying these countries. Evidence from large international data sets revealed that national systems differ greatly along a number of dimensions (such as the control structure and the importance of capital markets) but, at the same time, common patterns can be found within this diversity (such as in terms of the legal framework). These findings made possible a classification of national systems based on two main models or regimes. In some countries, notably the USA and the UK, the ownership structure of the firms tends to be dispersed among a myriad of small shareholders and capital markets are highly developed, thus providing financing and monitoring. In a nutshell, this is the Anglo-American or market-centred model of corporate governance. In contrast, in countries such as Germany and Japan, the role of the stock market in the provision of financing is less pronounced, banks play a central role in both financing and governance activities, and most firms have a large, controlling shareholder. This is the bank-centred model of corporate governance (Barca and Becht 2001; McCahery et al. 2002).1 Once national systems were perfectly characterised and classified, the efficiency question arose. In the words of Shleifer and Vishny (1997, p. 739), which system is the best? Some authors declared the superiority of the Anglo-American model because the continuous exposure to takeovers keeps managerial autonomy under check. Also, subsequent changes in control enable t (...truncated)