Corporate Governance

The paper deals with a number of integration challenges due to the merger of the former Chrysler Corporation and the Daimler-Benz Aktiengesellschaft. In the first section the model of corporate governance in a German stock company is outlined, and thereby at the same time pointing out the essential differences between the German and the US American concept. The second section focuses on other, international relevant forms of corporate governance. In the following main section, the corporate governance of DaimlerChrysler AG is explained within the described environment and the reasons for choosing this particular form. The paper closes with some references to the European stock corporation.

This paper contributes to the current corporate governance debate through describing changes that have taken place in Nokia during the past decade. It can be seen that traditional ways of corporate governance and management do not apply for companies operating in a fast changing business and technology environment. The transformation of Nokia from a Nordic conglomerate to a global synergetic communications company is visible in a number of changes in the structure and principles of governance. From closed ownership, closed domestic markets and a board composition reflecting ownership, Nokia has moved to open capital markets, open global markets, and a board composition based on professional diversity and balanced dynamics of the board and the markets.

In global markets, companies can be seen as being owned by a collective called ‘the market’, which is impossible to identify. The market reacts as owner to events inside and around the company. For the company, it is necessary to be very sensitive to these reactions in any situation. Since markets focus on short-term developments, the role of the board in a company should be to have a long-term perspective.

The case of Nokia supports the hypotheses found in the corporate governance literature that governance systems are pushed by the market to become more efficienty and different systems may generate satisfactory outcomes. However, the case study also shows that if markets are allowed to control alone, a short-term, “quarterly earnings”-thinking reigns. Therefore, the role of the board in a platforms like values, competenceis and processes as sources of product leadership and cost leadership and customer satisfaction.

Why are there such pronounced differences in patterns of ownership and control of corporations across countries? This paper proposes that these, together with many of the stylized facts of corporate finance, can be explained by private benefits. Private benefits create waste and inefficiency but they can also act as powerful commitment devices that overcome capital market failures. The paper argues that the evolution of institutional arrangements in different countries has been determined by political and regulatory interventions which, in turn, have affected the balance between public and private benefits of control. The paper calls for an evaluation of the relationship between institutional design and corporate activity and for a debate on the public policy choices affecting this design.

In most Japanese firms, the untold “real power” of the firm is the core employee of the firm, including the management. In that sense, the author characterizes the Japanese concept of the firm as ‘employee sovereignty’, in order to contrast it with the typical American concept of ‘shareholder sovereignty’. Though born in chaotic post-war conditions of the Japanese economy with much labor unrest, the concept and the practice of employee sovereignty by the Japanese firms had various elements of economic rationality in the sense of incentive compatibility, informational efficiency and social persuasiveness. That rationality contributed in many ways to economically rational and efficient behaviors by the Japanese firms and explains in a large measure the post-war success by the Japanese firms. As in many social phenomena, however, the employee sovereignty has had not only positive effects but also negative sides, too. Foremost is the vacuum in corporate governance that it creates when it is silently practiced within the legal system of usual corporation law, which Japan has. The law presupposes that it is shareholders that will exercise the power to check the top management. The practice of employee sovereignty has tried to escape this legal power. As a result, there is no effective check mechanism for top management from outside.

Stock option programs (STOP’s) have become an important part of executive compensation in many countries worldwide. However, the question of whether executive stock options contribute to the creation of shareholder value is unsolved so far. There is only limited empirical evidence of positive wealth effects for shareholders due to the introduction of option programs. One reason for the limited results of the empirical research so far could be the lack of discrimination between good and bad stock option programs. Based on incentive, tax and insider arguments, I suggest a catalogue of criteria which should be met by a good program. I then present my findings on the quality of stock option programs of a sample of German firms. It can be shown that most programs are of inferior quality. While an inefficient design with respect to German corporate tax is the most striking indicator of low program quality, the majority of firms fail to meet other criteria as well.

Governance in the firm is a mechanism to help empowered claimants protect their interests, principally by giving them “voice” in corporate decisions. Germany and some other European countries have explicitly mandated a formal role for employees in corporate governance, whereas the “Anglo-Saxon” systems of the United States and United Kingdom have basically restricted governance to representatives of the providers of financial capital. The recent relative success of the American economy — transforming itself in the 1980s and achieving low unemployment and sustained growth since then — has raised the question whether shareholder value should also become the over-riding objective of European (and Japanese) business.

At the same time, the purportedly increasing importance of knoweledge and human capital might suggest that the provides of this capital shouls be accorded more representation in governance processes: they are providing more of the total capital and these investments may need protection. Note that, in fact, in professional service firms, where the only important capital is human, the full powers of ownership are in the hands of providers of this human capital. More generally, employee stock holdings are often significant in human capital-intensive corporations.

In this paper we discuss these matters in light of a series of comparative statics exercises that examine the effect of increasing the ralative importance of human capital on the optimal role of workers in governance. We find support for the position expressed in the preceding paragraph. We also find that the attractiveness of shareholder-dominated governance when significant reallocations of capital are indicated depends on the extent that workers’ interests are protected by outside employment options (“exit”) and on the possibilities that they have to use value-destroying bargaining devices such as strikes to promote their interests.

For decades, some governments have fiercely opposed any statute of the Societas Europaea that foresaw German-type co-determined supervisory boards. Considering firms as pools of specific investors, we ask about the conditions that are necessary to secure the interests of ‘specific human capitalists’ in an efficient way, if the real capital owners’ right to residual control does not solve the ex-post bargaining problems over the sharing of quasi-rents. We disregard contract-theoretic approaches as solutions to the ex-post bargaining conflicts and suggest a constitutional approach to this major problem in the theory of the firm. From a constitutional perspective, the (non-executive) board members of the German Aufsichtsrat (Supervisory Board) — unlike the Betriebsrat (Works Council) — essentially dispose only of marginal, extremely symbolic, i.e., non-enforceable rights to represent worker investors. Legally, however, these rights are to be used first in the interests of the corporation and only secondarily in the interests of partial investors. Marginal and symbolic rights as well as fiduciary duties will make a difference in distributive bargaining, if they are legally imposed. Who is to be heard and to be involved in decision-making and what is counted as a legitimate argument or action — these are basically questions of political culture that in principle leave room for efficient international diversity. Option rights in the European directive on the Societas Europaea should thus be considered as an apt and wise decision.

The purpose of the paper is to show that corporate governance is an increasingly important opportunity for professional investors to create value in the long run. It means pursuing a well balanced relationship between the parties that are decisive for the company’s strategy and performance: the management, the supervisory board and the shareholders as owners of the company.

The emergence of the modern corporation has resulted in professional managers developing into a significant group of actors in society. Consequently, it has been argued that owners have lost control of their corporations to managers. This had already been pointed out in 1932 by Berle and Means, and was further stressed by scholars such as Burnham in 1941, and later, in the post-war period, by Galbraith (1967) and Marris (1964). However, in their studies of managerial work, Carlson (1951), Mintzberg (1973), and Stewart (1967), among others, also noted that top managers appear to have limited control of their work. In addition, recent studies of the management of multinational corporations have found that headquarters had difficulties in controlling the activities of subsidiaries in their worldwide operations. These circumstances constitute the points of departure for the present paper, which analyses the conditions for managerial capitalism in a globalised world. In particular, it considers the interaction between an ownership that has tended to become increasingly institutionalised, and a managerial class that has become more and more professionalised. For this interaction, it is of great significance that management principles have become widely spread in modern society through management education, media, and consultants. This has largely implied that short-term financial performance is increasingly dominating long-term orientation. The main purpose of the paper is to analyse the mechanisms behind this development and their effects.

(This research is supported by a grant from the European Union (TSER Contract SOE1-CT97-1072) and a grant from the Swedish Council for Work Life Research (Contract 97-0944). For further information, see the home page for the CEMP programme: www.fek.uu.se/cemp.)

The purpose of the paper is to reflect on the impact of rising pressure from corporate governance arrangements on management in general. The experience of Deutsche Bank in that regard is reviewed as an example. Five general propositions and two specific ones related to banking, in general, and Deutsche Bank itself, in particular, are presented.