The German Corporate Governance System

Thursday, January 1st, 1998 at 12:00 am by David Charny
David Charny, The German Corporate Governance System, 1998 Colum. Bus. L. Rev. 145

Among American corporate law scholars, contemporary appreciation of the distinctive features of the German corporate model has proceeded in two stages. The first stage, epitomized by Mark Roe’s pathbreaking study of the political origins of corporate finance, accomplished an intellectual paradigm shift–a genuine exemplification of this much-overused concept. American law-and-economics understanding of the corporate form had assumed that there was a single efficient form of corporate governance towards which the United States and other industrialized economies should, and perhaps inevitably would, evolve. Roe’s work blew this out of the water by demonstrating that the features American scholars had taken to be the inevitable signs of efficiency–centralized and specialized management, an active market for shares, and corporate control–were artifacts of a peculiarly American set of political choices and ideological preconceptions. Germany with its dissimilar economic conditions and political history had made very different choices, but ones that appeared at first glance to be as “efficient” as the choices made in the United States. Conceptions of multiple equilibria reached by divergent evolutionary pathways, which had been hinted at in some theoretical work, were shown to have stunning real-world embodiments in the divergent corporate systems. Inevitably, as with any paradigmatic reconceptualization, a second wave of empirical testing and theoretical refinement followed. As Roe and other scholars had anticipated, the broad picture of several radically different corporate systems presented more a set of ideal types than a complete description of the corporate world. Each system spawned deviant cases and evolutionary “mutations,” which thrived in their peculiar economic niches. Further, each system involved complex trade-offs between the competing virtues of a governance system: flexibility vs. stability, innovativeness vs. predictable success. Finally, the systems have been subject to contemporary economic pressures such as globalization, the dissemination of new production methods, and the collapse of welfare-state regimes that made the stable post-war equilibria appear to be mere temporary stopping points on the way to some yet unspecified but undoubtedly brave new world. Taken together, these revisionist claims suggested to some commentators that American corporate scholars had discovered the virtues of an alternative system at the very moment of that system’s collapse. This was the flight of Hegel’s owl of Minerva, but with a vengeance. However, reports of the demise of a distinctive German regime are overly exaggerated. Within the scope of this brief conference paper, I will offer a more nuanced assessment of where we stand in light of the revisionist research. Two themes guide my analysis. One theme is that corporate governance systems serve diverse and potentially conflicting functions, of which three are important in the present context. The second theme is the interaction between “ecology” and background conditions, including the background legal regime and the corporate-governance features of particular firms. The rest of the paper considers, in light of these themes, the basic features of German corporate governance. The paper focuses on the Aktiengesellschaft (the “AG”), but merits some attention to other structures, such as the dual board, bank influence on management, codetermination, and the role of the shareholders. The two concluding sections provide an overall assessment.

Author Information

Olin Fellow, Columbia Law School