Corporate Governance, Innovation, and Economic Performance in the Eu (cgep)

The dominant role of banks, the system of co-determination and company-centered management are traditionally seen as the critical elements of the German system of corporate governance. Important changes have taken place in recent years in this system. Of particular importance have been developments in the relationship between German corporations and the financial system. Particularly in the late 1990’s, Germany experienced a marked growth in the overall stock market capitalization of its corporate sector and in the number of listed companies. The successful development of the ‘Neuer Markt’ and the boom in the venture capital industry were seen as indications that Germany would in the future see further growth in the importance of the stock market in its corporate economy. The profile of the shareholders of German listed companies is also evolving: the importance of non-financial companies is declining and institutional investors are emerging both domestically and from abroad. M&A activity reached record levels in 1999, although there have been few hostile takeovers of or by German firms. Overall, however, the financial changes outlined still concern only a very limited proportion of the total German industrial base. The pace of change in the relationship between German corporations and their employees has been even slower. Of particular importance is the fact that co-determination has remained a relatively unchallenged aspect of German management. It should be noted, however, that the number of German firms without formal employee representation has been growing significantly over a number of decades. Relocation to low-cost manufacturing locations and possible moves to develop international codes of practice pose further challenges for German co-determination. New employment practices involving incentives linked to shareholder value creation have been introduced in a growing number of large German firms. The motivation for the adoption of such practices appears to lie in the recession of the early 1990’s and recently they are being introduced along with the limited but growing use of programs of stock options and other employee participation schemes.