Corporate Governance in Germany: Institutional Background and Empirical Results

Abstract

I survey empirical studies on German corporate governance and conclude that they raise intriguing questions for future research and have important political implications. First, current German transparency legislation (WpHG) is not adequate to achieve the objective of transparency as stated by the European Commission and the German Parliament. Compared to other developed economies, the German stock market is dominated by large shareholders. However, even after introducing the WpHG in 1995, the ultimately controlling parties are often not disclosed and transfers from smaller shareholders are legally possible. Second, due to proxy votes and board memberships, banks control a substantially higher fraction of voting rights than cash-flow claims. Moreover, banks extend more loan money to the typical firm than they hold as equity. Consequently, it is unclear whether their voting power is used in the interest of shareholders. Empirically, bank involvement appears to have a very limited effect on performance. Several open questions remain to assess the efficacy of the German model in relation to more market-based systems.

Keywords: Corporate governance, Germany, Large shareholders

JEL Classification: G34, K22, G15