Market for corporate

Market for corporate control and take-over mechanisms – take-overs transfer control to outside efficient management, encouraging it to share interests with shareholders, and restructure assets63, even failed attempts disciplining management64; partial share sales between shareholders and management are instead more popular in UK and Germany.

While in UK 18, 7% of total market capitalisation in 1985-1990 was through domestic take-overs, in Germany it constituted only 2, 3%66. 79% of world-wide targets in 1990-1998 in hostile take-overs were US and UK companies, which also acted as acquirers in roughly same percentage of take-overs67; UK had 4% of listed companies taken over annualy68. The increasingly active European acquirers still lag far behind as continental companies’ fortress-like structures make control uncontestable. Their defence mechanisms differ much from British.

While Dutch, Belgian, Italian companies defend themselves best, through complex pyramidal holding structures (ING Groep, Solvay, Fiat69)70, British and German companies are weaker in anti take-over measures71, despite British strong management and German influential blockholders72. EU take-over code73, finally enacted in December 200374, challenges different national take-over rules which do not guarantee minority shareholders’ equal protection75; in UK shareholder acquiring 30% stake must offer to buy all shares so that minority shareholders can leave before self-interest control hits them.

Board System – one-tier boards have executive and non-executive directors on one board. In two-tier boards, highest tier – supervisory board – comprising non-executive/outside directors, elected by shareholders in general meetings, with supervisory functions, and second tier – board of directors – executes strategic decisions. The German two-tier system differs from British unitary system in directors/auditors’ independence, though practically management and monitoring have similarities.

Two-tier boards with independent/outsider directors best fit German culture of controlling shareholders and weak management to guarantee respect for all stakeholders’ interests, particularly minority shareholders. They have, however, been criticised for inefficiency, not meeting regularly and communicating informally77; self-checks have recently been introduced.

Unitary boards risk conflict of interests between strong management and weak shareholders79; since Cadbury Code 1992 required independent supervisory directors80 – Combined Code 1998 – 1/2 of board from 2004 – many British boards have majority of these, meeting more often than German counterparts. Research shows how this benefits companies81, though management compensation schemes have raised doubts82. German supervisory boards, having biggest number of directors, represent shareholders and employees equally83, which shows their long-term importance for company, coinciding with social democracy policies.

Companies respect their voice85, for example voting on audits86, rather than just share profitability. British companies have least non-executive directors per board87 – 75% controlled by non-independent directors88 – lacking employee representation and shareholders’ empowerment89. European labour involvement is not harmonised90 partly for unacceptability to UK91; only information and consultation measure exists92. While Germany has strong legally mandated works councils co-determining employee matters, though not management, collective bargaining in UK is unregulated by company law.

Many continental companies have imported board audit94, remuneration and nomination committees from Anglo-American companies95. Disclosure and accounting – well-developed capital market countries (USA, UK) have wide transparency requirements as fast growth industries, with skilled workforce and larger share of output devoted to research/development, are market equity dependent96. Continental European companies dominating mature high cash-flow industries with low stock valuation lag behind due to no significant stock market pressure for transparency97.

EC Directives are criticised for non-compliance with international standards, though Large Holdings Directive98 requires 10% and higher voting blocks’ disclosure; implemented in Germany at 5%99 and in UK – 3%100. Becht reports that transparency lacks in cash-flow rights ownership, detailed group and control structures, board remuneration and stock options, related party transactions, conflicts of interests and anti take-over provisions101. Europe’s disclosure enforceability varies from liberal publicity system – despite criticisms102, recently the disciplinary Greenbury principles forcing directors’ remuneration full disclosure were applied in many continental countries103 – to legally prescribed rules.

Most countries (Germany104) use minimum soft-law enforcement with ‘comply or explain’ approach; Germany has promised class action suits from 2004-2005105. Practically, many European codes and recommendations – German Cromme Kodex and UK Combined Code106 – prescribe disclosure of financial performance, stressing non-financial information’s importance too (environmental, social, ethic issues107), and directors’ interests in company’s annual reports and issues for shareholder’s vote at general meeting108.

Board practices attract specific requirements. Interlocking directorships should be avoided to secure independence; all British companies and 90% of German companies disclose directors’ main executive position109. German companies do not, however, disclose directors’ shareholdings, unless stakes are large, while British companies do. British companies also disclose directors’ remuneration almost fully110, but across continental countries limited disclosure differs greatly111.

This emphasises German companies’ privacy aspect and British companies’ publicity112; meanwhile, compliance with Kodex rises113. While IASC114 and British ASB115 accounting standards aim to provide company information for market participants, German and French accounting practices are justified by contractual arrangements’ verification and determination of company contributions. Some countries have seriously reformed national regulations – like on pension liabilities116 – to fit International Accounting Standards, preferred to US GAAP117, from 2005 as proposed by EU.

Deutsche Bank publishes share value information since 1996119. This is necessary to enable investors and stakeholders to compare company performance, preventing repulsion by certain countries’ practices120. Company’s role and accountability – in developed market economies, companies are almost exclusively profit-making121, maximising wealth of shareholders with whom they have flexible, short term relationships and directors are accountable to them only, not other stakeholders122.

In countries with transaction costs-saving internal organisation (Germany) longer, participatory co-operation with shareholders and employees makes companies seek stable, continuous growth, while high wealth is halted by illiquid equity market, and balance shareholders’ interests with all stakeholders123; in German Siemens, employee held 6% of stock124. Corporate social responsibility is, however, becoming propagated world-wide as anti-globalisation movement, supported by supra-national organisations’ recommendations125, calls for more sustainable growth than in pure economic optimisation models126.

Despite international recommendations’ voluntarism, globally listed German companies start to appreciate shareholder value more, while British companies begin to respect stakeholders’ interest127. Yet, shareholder/stakeholder model differences largely remain. The surveyed differences in corporate governance models, with UK and Germany at opposite extremes, are explainable by factors like suitability to different strategies and activities, company’s development cycle phase, its performance, etc.

Despite US/UK ‘market-orientated’ model’s influence on ‘network-orientated’ Germany with expected equity market finance growth, further ownership and voting rights dispersal, rising foreign institutional investment and exposure to market for corporate control128, the different speed of European countries’ convergence with market-orientated model creates increasing divergence within EU where Germany may remain loyal to traditional stakeholder approach longer129.


Books: 1) L. Van den Berghe, Corporate Governance in a Globalising World: Convergence or Divergence? A European Perspective, Kluwer Academic Publishers 2002. 2) C. Mallin, Corporate Governance, Oxford: Oxford University Press 2004. 3) Corporate governance: a survey of OECD countries, Paris: Organisation for Economic Co-operation and Development 2004. 4) The Control of Corporate Europe, ed. by F. Barca and M. Becht, Oxford: Oxford University Press 2001. 5) Comparative Corporate Governance: the State of the Art and Emerging Research, ed. by K. J. Hopt et al. , Oxford: Clarendon Press 1998.