Corporate Governance in Germany: An Economic Perspective

A financial system can only perform its function of channelling funds from savers toinvestors if it offers sufficient assurance to the providers of the funds that they will reapthe rewards which have been promised to them. To the extent that this assurance is notprovided by contracts alone, potential financiers will want to monitor and influencemanagerial decisions. This is why corporate governance is an essential part of anyfinancial system.It is almost obvious that providers of equity have a genuine interest in the functioning ofcorporate governance. However, corporate governance encompasses more thaninvestor protection. Similar considerations also apply to other stakeholders who investtheir resources in a firm and whose expectations of later receiving an appropriatereturn on their investment also depend on decisions at the level of the individual firmwhich would be extremely difficult to anticipate and prescribe in a set of completecontingent contracts. Lenders, especially long-term lenders, are one such group ofstakeholders who may also want to play a role in corporate governance; employees,especially those with high skill levels and firm-specific knowledge, are another. TheGerman corporate governance system is different from that of the Anglo-Saxoncountries because it foresees the possibility, and even the necessity, to integrate lendersand employees in the governance of large corporations.The German corporate governance system is generally regarded as the standardexample of an insider-controlled and stakeholder-oriented system. Moreover, only a fewyears ago it was a consistent system in the sense of being composed of complementaryelements which fit together well. The first objective of this paper is to show why and inwhich respect these characterisations were once appropriate.However, the past decade has seen a wave of developments in the German corporategovernance system, which make it worthwhile and indeed necessary to investigatewhether German corporate governance has recently changed in a fundamental