Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting
Corporate governance in Germany : an economic perspective
Reinhard H. Schmidt
- A financial system can only perform its function of channelling funds from savers to investors if it offers sufficient assurance to the providers of the funds that they will reap the rewards which have been promised to them. To the extent that this assurance is not provided by contracts alone, potential financiers will want to monitor and influence managerial decisions. This is why corporate governance is an essential part of any financial system. It is almost obvious that providers of equity have a genuine interest in the functioning of corporate governance. However, corporate governance encompasses more than investor protection. Similar considerations also apply to other stakeholders who invest their resources in a firm and whose expectations of later receiving an appropriate return on their investment also depend on decisions at the level of the individual firm which would be extremely difficult to anticipate and prescribe in a set of complete contingent contracts. Lenders, especially long-term lenders, are one such group of stakeholders who may also want to play a role in corporate governance; employees, especially those with high skill levels and firm-specific knowledge, are another. The German corporate governance system is different from that of the Anglo-Saxon countries because it foresees the possibility, and even the necessity, to integrate lenders and employees in the governance of large corporations. The German corporate governance system is generally regarded as the standard example of an insider-controlled and stakeholder-oriented system. Moreover, only a few years ago it was a consistent system in the sense of being composed of complementary elements which fit together well. The first objective of this paper is to show why and in which respect these characterisations were once appropriate. However, the past decade has seen a wave of developments in the German corporate governance system, which make it worthwhile and indeed necessary to investigate whether German corporate governance has recently changed in a fundamental way. More specifically one can ask which elements and features of German corporate governance have in fact changed, why they have changed and whether those changes which did occur constitute a structural change which would have converted the old insider-controlled system into an outsider-controlled and shareholder-oriented system and/or would have deprived it of its former consistency. It is the second purpose of this paper to answer these questions.
The future of banking in Europe
Reinhard H. Schmidt
- At least in the past, banking in continental Europe has been characterised by a number of features that are quite specific to the region. They include the following: (1) banks play a strong role in their respective financial systems; (2) universal banking is prevalent; (3) not strictly profit-oriented banks play a significant role; and (4) there are considerable differences between national banking systems. It can be safely assumed that the future of banking in Europe will be shaped by three major external developments: deregulation and liberalisation; advances in information technology; and economic, financial and monetary integration. The overall consequences of these developments would be much too vast a topic to be addressed in one short paper. Therefore the present paper concentrates on the following question: Are the traditional peculiarities of the banking and financial systems of continental Europe likely to disappear as a consequence of the aforementioned external developments or are they more likely to remain in spite of these developments? The external developments affect the features specific to banking in continental Europe only indirectly and only via the strategies selected and pursued by the various players in the financial systems, notably the banks themselves, and in ways which strongly depend on the structure of the banking industry and the level of competition between banks and other providers of financial services. The paper develops an informal model of the relationships between (1) external developments, (2) bank strategies and the structure of the banking industry, and (3) the peculiarities of banking in Europe, and derives a hypothesis predicting which of the traditional peculiarities are likely to disappear and which are likely to remain. It argues that, overall, the peculiarities are not likely to disappear in the short or the medium term. First version June 2000. This version March 2001.