German Codetermination and German Securities Markets

Thursday, January 1st, 1998 at 12:00 am by Mark J. Roe
Mark J. Roe, German Codetermination and German Securities Markets, 1998 Colum. Bus. L. Rev. 167

Germany lacks good securities markets. Initial public offers are infrequent, securities trading is shallow, and even large public firms typically have big blockholders that make the big firms resemble “semi-private” companies. These “private” firm characteristics of German ownership are often attributed to poor legal protection of minority stockholders, the lack of an equity owning culture, the lack of an entrepreneurial culture (one that would create many new businesses and IPO’s), and permissive rules that allow big banks and bank blockholding in ways barred in the U.S. German institutions though provide another, probably additional, potentially alternative, explanation for the weakness of German securities markets. German codetermination (by which employees control half of the seats on the German supervisory board) undermines diffuse ownership for two related reasons. First, stockholders may wish that the firm’s governing institutions have a blockholding “balance of power,” a balance that, given German law’s mandate that half the supervisory board represent employees, diffusely owned firms may be unable to create. Second, managers and stockholders sapped the supervisory board of power (or, more accurately, prevented it from evolving into a serious governance institution in the face of the 1980’s and 1990’s global competition and technological change) to reduce employee influence in the firm. Board meetings are infrequent, information flow to the board is poor, and the board is often too big and unwieldy to be effective. Instead of boardroom governance, out-of-the-boardroom shareholder caucuses and meetings between managers and large shareholders substitute for effective boardroom action. But, because diffuse stockholders will at key points in a firm’s future need a plausible board (due to a succession crisis, a production downfall, or a technological challenge), diffuse ownership for the German firm would deny the firm both boardroom and blockholder governance. Blockholder governance would be gone (if the block dissipated into a diffuse securities market) and board-level governance would be unavailable because the shareholders and managers had divested the board of authority beforehand. Stockholders would face a choice of charging up the board (and hence further empowering the employee-half of the governance structure) or living with sub-standard (by current world criteria) boardroom governance. In the face of such choices, German firms (i.e., their managers and blockholders) retain their “semi-private,” blockholding structure, and German securities markets do not develop.

Author Information

Professor of Law, Columbia Law School