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Corporate Governance and the Politics of Property Rights in Germany J. Nicholas Ziegler Political Science Department University

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Corporate Governance and the Politics of Property Rights in Germany J. Nicholas Ziegler Political Science Department University Corporate Governance and the Politics of Property Rights in Germany J. Nicholas Ziegler Political Science Department University of California, Berkeley Barrows Hall 210 Berkeley, CA 94720-1950 Tel. 510-642-4533 Fax. 510-642-9515 Email: <[email protected]> A revised version of this paper will appear in Politics and Society (June 2000) Abstract This paper analyzes debates over corporate governance in Germany. Germany is a critical case for property rights, because the German and Anglo-American concepts of property differ dramatically when applied to industrial assets. In particular, the Anglo-American concept of the firm as an instrument for maximizing shareholder value collides with the German view of the firm as a political construction for balancing the interests of contending social partners. In analyzing this tension, the paper examine three types of political contestation: the enactment of formal-legal changes in the rules of corporate governance; state promotion of a deeper equity market and a more sympathetic culture for shareholding; and the mobilization of labor against Anglo-American practices for hostile takeovers in the market for corporate control. While these instances show evidence for the features of incrementalism and negotiated change that are well-known in German politics, the appearance of increasingly powerful transnational coalitions reveal a potential for change that is much greater than indicated by the modest extent of formal-legal change to date. Corporate Governance and the Politics of Property Rights in Germany J. Nicholas Ziegler Few issues have moved from the dull and dreary to the politically contested as quickly as the rules of corporate governance. Since these rules specify the rights and obligations of owners, managers, and employers, they are central to the practical meaning of property in industrial economies. Fundamental though the concept of property may be, even thinkers as sympathetic to market institutions as John Stuart Mill have pointed out that its meaning is far from self-evident. The idea of property is not some one thing, identical throughout history and incapable of alteration, but is variable like all other creations of the human mind.1 This variation in the way different societies and periods define property is precisely what makes corporate governance an increasingly contested issue in an era of economic globalization. Germany is a critical case for the definition of industrial property because its rules for corporate governance differ dramatically from the Anglo-American model. Over the last several decades, the U.S. and British business communities have consolidated a financial conception of control in which shareholder value is the primary objective of management.2 Germany’s institutions of social partnership have by contrast provided the clearest case among advanced industrial democracies where long-term stakeholders – including banks and employee groups – have a regular voice in corporate affairs. In accordance with this stakeholder approach to the firm, German law treats the firm as a 1 constitutional construction for structuring a process of ongoing negotiation among different groups within the firm.3 During most of the 1980s, Germany’s relational approach to corporate governance appeared more successful than the “short-termism” from which U.S. firms seemed to suffer. More recently, however, a number of German firms have encountered serious financial difficulties that went undetected by German banks until they necessitated conspicuous rescue packages which in turn threw Germany’s stakeholder model of corporate governance into question. The German approach to corporate governance poses a revealing problem for one of the central components in economic globalization, capital mobility. As usually defined, globalization entails a lowering of barriers to cross-border transactions. Lower barriers expose producers to increased competition from outside national boundaries. Just as purchasers of retail and industrial products gain a larger choice of suppliers in an increasingly international economy, purchasers of corporate assets also have a larger choice of assets to invest in. When holders of capital search over a broader geographic domain for attractive investments, they presumably look for a better return on their investment. The ability of investors to predict the return on their ownership shares is largely defined by the rules of corporate governance. Unlike the relatively simple criteria by which capital holders measure return on investment, however, the rules by which enterprises are financed, managed, and organized are among the institutional features where national economies differ most sharply. Because capital holders have such a clear stake in these rules, corporate governance is an area where capital confronts national institutional arrangements particularly starkly. 2 The literature on globalization and its political consequences has hinged precisely on this question -- the convergence or continued diversity of existing institutions. This approach has been crucial in illuminating and delimiting the consequences of international economic change.4 At the same time, this formulation has often pushed the debate toward two dichotomous alternatives: either that globalization has become a dominant process overwhelming all other forms of politics, or that globalization is inconsequential. More recent contributions have articulated a growing consensus that, while globalization matters and matters very much, it is hardly an anonymous force which proceeds automatically or with uniform effects everywhere. Instead, globalization is a complex process, itself comprised of numerous political choices, which leave plenty of latitude for alternative strategies of economic growth and adjustment.5 This paper argues that the increasingly international scope of competition is indeed exerting strong pressure on the rules and practice of corporate governance in Germany. The effects of this globalization process are, however, far from uniform. Even though cross-border capital mobility is central to the force of globalization, corporate governance is an issue where the political interests of capital are much less coherent than those of labor. Organized labor in Germany has consistently tried to maintain the distinctive legal provisions that give German employees an institutionalized voice in business enterprises. Within Germany’s business community, some firms are likely to benefit more than others from access to non-German sources of capital. But this distinction has not yet led to any lasting cleavages -- for instance between large and small firms, finance and industrial enterprises, or export and import oriented firms. Instead, individual firms are assessing and 3 reassessing their interests in surprisingly piecemeal fashion. Amidst the business community’s fragmented preferences, one pattern is clearly emerging. The politics of corporate governance are becoming more transnational as domestic actors seek political allies outside Germany to support their preferred institutional agendas at home. If globalization refers to an economic process, it is not automatically forcing changes in domestic institutional arrangements. Instead, it is provoking a parallel political process of transnational alliance-building, in which domestic actors find allies abroad. Although their preferences on the issue of corporate governance are fragmented, business firms have shown significantly more success than labor in concluding transnational ties. The actors for whom transnational ties appear most effective, however, are a set of less well-known organizations -- including shareholder membership associations and certain state agencies -- that seek to bring German institutions of economic governance closer to the Anglo-American model. The evolution of corporate governance in Germany therefore depends critically on the relative ability of domestic actors to use transnational coalitions. If the proponents of neoliberal reform can use transnational coalitions to enhance their influence within Germany, they will be able to circumvent Germany’s customary politics of social partnership and shift the country’s rules of corporate governance more decisively toward the Anglo-American model. This article illustrates the incipient transnational politics of property rights in three steps. First, it reviews the received model of corporate governance in Germany and contrasts it with the Anglo-American model. Second, it examines the main mechanisms which might link the economic processes that comprise globalization to changes in the 4 institutions of corporate governance. Third, it analyzes three types of politics that surround changes in the rules and practice of corporate governance in Germany. These cases show clearly that formal-legal change has been limited, but that the customary patterns of social partnership in Germany are vulnerable to erosion from a persistent campaign by the proponents of neoliberal reform to create a culture and a set of institutions more conducive to Anglo-American arrangements for financing and running industrial enterprises. I. The German Model of Corporate Governance Germany’s framework for governing industrial enterprises represents Western Europe’s closest approximation to the ideal of the stakeholder firm. The stakeholder concept became popular in the early 1990s among English-speaking critics of the financial conception of control that prevailed in the Anglo-American economies.6
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