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Alternative Governance Systems: Germany and Japan

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The American corporate governance system is a market-based system. Corporations raise funds in public capital markets, and their managers are subject to the discipline of capital markets. Theoretically, a company is run in the best interests of its shareholders, whose interests are considered to be “above” those of the other stakeholders of the company. Banks provide debt capital but do not own shares of companies and deal with borrowers at arms length.

The two major alternatives to the American governance system are the German system and the Japanese system (the governance systems of other countries are variations on the American, German, or Japanese system). The German system is a bank-based system, often referred to as a universal banking system. The Japanese system is one of cross-ownership of firms and interlocking relationships called keiretsu. Both systems are also described as relationship-oriented systems.

The ownership of German corporations is far more concentrated than the ownership of U.S. corporations. Furthermore, as we showed in Figure 2–3, more than 40 percent of the shares in German companies are owned by other German companies. Individuals own very few shares of public corporations, and, for all practical purposes, no institutional investors (mutual funds, pension funds) exist. In short, Germany does not have a shareholder culture. The market capitalization of listed stocks in Germany is about 30 percent of gross national product, compared to 152 percent in the United Kingdom, 122 percent in the United States, and 103 percent in Sweden.

Another major difference between the American system and the German system is the role of banks. In the United States, banks make loans to corporations but do not take ownership positions in those firms (own shares of stock in the company). In Germany, though, banks can and do take ownership positions in the companies they lend to, and also place their representatives on the companies’ governing boards. Thus, there is a much closer and stronger relationship between German firms and German banks than there is between American firms and American banks. This relationship is buttressed by the fact that shares owned by Germans are usually deposited in banks for safekeeping and that the banks get to vote these shares, even though they don't own them.
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Document Type: Research Article

Publication date: February 25, 2003

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