Evolution of German corporate governance (1995-2014): an empirical analysis

DOIhttps://doi.org/10.1108/CG-07-2018-0251
Published date07 October 2019
Pages1042-1062
Date07 October 2019
AuthorAndreas Rühmkorf,Felix Spindler,Navajyoti Samanta
Subject MatterStrategy
Evolution of German corporate
governance (1995-2014): an empirical
analysis
Andreas Rühmkorf, Felix Spindler and Navajyoti Samanta
Abstract
Purpose This paper aims to address the evolution of corporate governance in Germany with a
particular regard to whether there can be observed a gradual convergence to a shareholder primacy
corporategovernance system.
Design/methodology/approach To investigate apotential shift of the German corporate governance
system to an Anglo-Americantiled corporate governancesystem, the authors have empirically assessed
on a polynomial base 52 separate company and corporate governance variables for 20 years
(1995-2014).
Findings This research suggests that a gradual convergence has taken place pri or to the global
financial crisis. However, the results suggest that the conver gence process experienced a
slowdown in the aftermath of the global financial crisis, which may be linked t o the stability of the
German corporate governance system during the global financial crisis and the political
environment duringthis time.
Originality/value This paper contributesto the research by not only analysing the development of the
German corporate governance system but also identifying new reasons for this development and
explainingwhy a new convergence process maybe observed in the future again.
Keywords Governance, Corporate governance
Paper type Research paper
Introduction to the corporate governance debate in Germany
The international corporategovernance debate reached Germany rather comparativelylate,
in the second half of the 1990s (du Plessis and Saenger, 2012, p. 16). This was partly a
reaction to a period of economic difficulty that Germany experienced in the years after the
reunification in 1990. Till then the model of the so-called ‘Rhenish capitalism’ of West
Germany was characterised by features such as a strong welfare state, bank loans being
the primary source of finance, cross-ownership concentrated in few shareholders, little
institutional investor pressure and, most significantly, compulsory board membership of
employee representatives[1]. This system came under pressure in an era of increasing
globalisation. International competition, liberalised capital markets and the weaker
performance of the German economy in the 1990s questioned the viability of the German
economic model (Volk, 2001, p. 412). The discussions about necessary reforms of German
company law eventually led to the introductionof corporate governance in Germany. As this
article will show, Germany has witnessed several changes to its company law and
corporate governance system since the late 1990s. These reforms raise the question to
what extent the German system of company law and corporate governance has converged
or is gradually converging with the Anglo-American system of shareholder value (Gamble
and Kelly, 2001, p. 110).
Andreas Ru
¨hmkorf is based
at School of Law, University
of Sheffield, Sheffield,
South Yorkshire, UK.
Felix Spindler is based at
District Court
(Landgericht), Essen,
Germany.
Navajyoti Samanta is based
at School of Law, University
of Sheffield, Sheffield,
South Yorkshire, UK.
Received 29 July 2018
Revised 7 January 2019
Accepted 29 January 2019
PAGE 1042 jCORPORATE GOVERNANCE jVOL. 19 NO. 5 2019, pp. 1042-1062, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-07-2018-0251
We sought to empirically track the development and transmutation of German corporate
governance into an Anglo-American tiled corporate governance system. In the empirical
phase of the research, we collected data on 52 separate company and corporate
governance variables based on the OECD Principles of Corporate Governance and
previous indices for twenty years (1995-2014). The variables were scaled polynomially, i.e.
the value could be zero, or one, or two which meant the survey went beyond a simple yes/
no response to take into account systemswhich use optional rules or ‘soft law’.
We argue that Germany has experienced a period of gradual convergence towards
shareholder value corporategovernance system from the mid-1990s till the beginning of the
global financial and economic crisis. However, we find that whilst this convergence has not
stopped it has, at least, significantly slowed down since 2008-2009. It appears as if the
unique features of the Germancorporate governance systems such as the pluralist purpose
of the company and the employee representation at board level have enjoyed renewed
support since the onset of the crisis. In our view, this development is linked to the relatively
strong performance of the German economy post 2008 which has led to more content with
the present German system of corporate governance. We argue that in addition to the
economic parameters the political environment has further contributed to the stabilisation of
the German corporate governance system. Between 2005 and 2009 and again since 2013
Germany has been governed by a grand coalition of the two main centre-right and centre-
left parties. This focus on the political centre has also led to a consensus between labour
and the employer side which has reducedthe appetite for reforms. However, the process of
globalisation and the increasingly international investment structures will continue to put
pressure on the German pluralist model of corporate governance. It is to be expected that
those pressures will lead to a gradual, albeit slow convergence with some features of
shareholder value corporate governance. However, at present, we do not anticipate a full
convergence, but rather expect the German system to retain features such as employee
participation at board level at leastin the short to mid-term future.
Empirical methodology
This paper will thematically follow the shareholder primacy corporate governance principle
as outlined by Henry Hansmann and Reiner Kraakman:
ultimate control over the corporation should rest with the shareholder class;
the managers of the corporation should be charged with the obligation to manage the
corporation in the interests of its shareholders;
other corporate constituencies, such as creditors, employees, suppliers, and
customers, should have their interests protected by contractual and regulatory means
rather than through participation in corporate governance;
non-controlling shareholders should receive strong protection from exploitation at the
hands of controlling shareholders; and
the market value of the publicly traded corporation’s shares is the principal measure of
its shareholders’ interests
Based on this classification, the researcher will broadly look into increased shareholder
rights, increased market for corporate control, reduced managerial and stakeholder rights
as outlined in the OECD principles of corporate governance.
The dilemma in choosing between hard law and soft law, between statute books, private
contractual regulations (like listing rules) and non-binding governance codes impacts on
the aim of the research. It can be methodologically dealt with to a large extent by following
an ordered response model offering choicefrom multiple options instead of a binary option.
Financial development depends to a large extent on the availability of funds to primary and
VOL. 19 NO. 5 2019 jCORPORATE GOVERNANCE jPAGE 1043

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