Shareholder value in an adverse environment: the German case

Economy and Society Volume 29 Number 1 February 2000: 54–79 Shareholder value in an adverse environment: the German case Ulrich Jürgens, Katrin Naumann and Joachim Rupp Abstract The German political economy has often been cited as a classical case of non-shareholder value orientation. Its productionist, long-term, consensus orientation has often been contrasted with the ‘Anglo-Saxon approach’. The inuence of shareholders who press for shareholder value and the importance of the equity market have traditionally been low. But there are signs of change. In this article we describe some of these changes and try to assess the dynamics of this change process. First we show that the limited role of the equity market for company Žnancing and for private household savings still provides a very narrow base for a shareholder value economy in Germany. The central pillars of the German system of corporate governance – the dominating role of banks, the system of co-determination and the companycentred management system – are not crumbling. Change in the direction of shareholder value is therefore limited. Keywords: shareholder value; corporate governance; Germany; co-determination; Žnancial markets. Introduction Germany has often been cited as a classical case of non-shareholder value orientation whose productionist, long-term and consensus values have often been contrasted with the ‘Anglo-Saxon approach’. The inuence of shareholders who press for shareholder value and the importance of the equity market have traditionally been low. Ulrich Jürgens, Katrin Naumann and Joachim Rupp, Wissenschaftszentrum Berlin für Sozialforschung (WZB), Reichpietschufer 50, D-10785 Berlin. E-mail: [email protected]; [email protected]; [email protected] Copyright © 2000 Taylor & Francis Ltd 0308-5147 Ulrich Jürgens et al.: Shareholder value in an adverse environment 55 But there are signs of change. In this article we will describe some recent changes and try to assess the dynamics of this change process. The forces currently driving the German political economy towards a shareholder value orientation include a whole range of factors: • state measures to deregulate Žnancial markets; • the Žnancial problems of the German welfare state especially with the pensions system; • the need to develop new management control systems for decentralized company structures; • the wave of mergers and acquisitions; • pressure from managers of investment funds and pension funds, in particular from the USA; and • the debate about a new corporate charter for European companies and about ‘best practice corporate governance’. Shareholder value has become a topic of media debate in Germany only since around 1996. In this media debate about a new development, three different positions can be distinguished. The Žrst position is critical and negative: the shareholder value orientation is identiŽed with intensiŽed rationalization, an increase in unemployment, a ‘colder climate’ of social relations in companies, and an incipient ‘short-termism’ which threatens the fundamental strengths of the German economy. The second position is positive appreciation: shareholder value is represented as a pressure on company management to increase the competitiveness of their companies and to move faster into new areas of business. The third position is reluctant acceptance of the inevitable: here shareholder value is situated as a result of the developments of global Žnancial markets and difficulties of Žnancing the public pension system. If the media response and representation is divided and mixed, it is difficult to gauge the broader public response inside Germany. Impressionistically, the negative response to shareholder value seems to prevail. It should, however, be emphasized that the topic of shareholder value does not yet Žgure prominently in public perception and discussion because shareholder value has made limited inroads into the German political economy and is not yet associated with major changes in, for example, the pensions system. In Germany, shareholder value is thus a recent, interesting and ambiguous development in a generally hostile environment where the national political economy has previously respected different principles. In the German case, the overwhelming question is what does shareholder value portend? Will it initiate a major and permanent change in operating principles or is it a fashionable rhetoric which will quickly be superseded? Our article explores these issues in a preliminary way at a point in time when it is not possible to provide a deŽnitive answer as to what shareholder value portends. The article is structured in a straightforward way. Section one provides an essential empirical context by presenting evidence on the limited role of the equity market in company Žnancing and on patterns of private household saving. 56 Economy and Society The implication is that Germany provides a very narrow base for any shareholder value economy. The second section turns to institutional issues and describes the central pillars of the German system of corporate governance. In orthodox terms these include the dominant role of banks, the system of co-determination and the company-centred management system. Against this background, section three takes up the issue of the nature and direction of change: are the pillars of the German corporate governance system crumbling with the emergence of a shareholder value economy? The fourth and Žnal section offers a summary and interim conclusion. The narrow base for a shareholder value economy in the German system Whatever a shareholder value economy is or might be, it has deŽnite material preconditions. First, the stock market can inuence management behaviour directly on an economy-wide basis only where a large part of the corporate sector is stock-market quoted. Second, the value orientation requires a stock market and a corporate governance system where value-orientated investors are major players. In the British and American cases, the dominance of the value-orientated investor is guaranteed by the large-scale ow of household savings into professionally managed funds. As we will now argue, in the German case, none of these conditions is met, although there are interesting recent changes in a system where traditionally shareholders have played a minor role in the German corporate governance system. The Žrst, most obvious peculiarity of the German stock market is that it is relatively small in relation to the national economy. This point emerges very clearly from international comparisons of stock-market capitalization against national income. In Germany in 1997, the value of the stock market accounted for no more than 31.4 per cent of gross domestic product. The comparable percentages were signiŽcantly higher in France and Japan at 40.6 and 58.1 per cent respectively; and massively higher in the USA and UK where stock-market capitalization accounts for 100.9 and 154.4 per cent of GDP (Deutsches Aktieninstitut 1998: table 05-2). The German stock market is relatively small. In 1997, only 700 German companies were public corporations with stock-market listings. In terms of market capitalization a few large companies dominate the German stock exchange and they account for a small subset of all quoted companies. From a total of 700 companies quoted, thirty-Žve companies (or just 5 per cent of the total) accounted for some 73 per cent of total market capitalization (Deutsches Aktieninstitut 1998: table 06-4). This dominant group includes more or less exactly the same companies as the DAX 30 listing of the thirty largest German blue-chip companies. If the Dax 30 is the German stock market in terms of market capitalization, much of corporate Germany is of course not stock-market listed. This does mean Ulrich Jürgens et al.: Shareholder value in an adverse environment 57 that there is considerable scope for extending the public, quoted form of organization. SigniŽcantly, a new type of stock market for start-up companies has recently opened in Germany. This Neue Markt (New Market) has grown rapidly from small beginnings but, in terms of market capitalization, still plays a minor role. We shall return to this later. The next major point concerns the pattern of shareholding in Germany and the implications for shareholder personality and motivations. In Britain and America, the dominant shareholders are funds that consolidate household savings. In Germany, share ownership is heavily concentrated with over half of all shares owned by (non-Žnancial) companies, banks and insurance companies. Whether the other companies are Žnancial or non-Žnancial, they are often part of networks of cross-holdings where the main motive of shareholding is to strengthen long-term relationships and business interdependencies and this behaviour involves long-term commitment. In Germany, there has been only a minor role for the value orientation which focuses on return on equity and the value behaviour of trading stocks. This point is recognized in a recent OECD report on the German system of corporate governance: ‘The importance of cross-holdings of shares both among non-Žnancial enterprises and between banks and non-Žnancial enterprises is a principal feature of German corporate governance aimed at cementing long-term relationships between Žrms’ (OECD 1995: 97). These cross-holdings support a form of governance relying on longterm implicit contracts. The pattern of share ownership is worth considering in some detail because such consideration brings out the strength and stability of the existing system as well as some interesting recent changes in behaviour and motivation. As Table 1 shows, private households, investment funds and the ‘rest of the world’ – the types of shareholder who supposedly pursue shareholder value – account for no more than 40 per cent of share ownership in Germany in 1998. This pattern of share ownership above all reects the fact that, directly and indirectly, share ownership is much less important to German citizens and German households than in many other advanced capitalist countries. Only 6 per cent of the German adult population owned shares in 1998. This is a very low percentage compared to Sweden and the USA where 53 per cent Table 1 Share ownership in Germany in 1998 Shares held by Non-Žnancial companies Private households Insurance companies Investment funds Banks Public households Rest of the world Source: Deutsches Aktieninstitut (1999: 5) Percentage of all shares 30.5 15.0 13.7 12.9 10.3 1.9 15.6 58 Economy and Society and 40 per cent of the adult population own shares; even in Japan, some 9 per cent of adults own shares (Sanghera 1999: 9). Understandably, therefore, shares are not the largest element in the portfolio of Žnancial assets held by private German households. In 1998, shares and investment fund certiŽcates made up almost 19 per cent of this household portfolio whereas short-term savings deposits accounted for 28 per cent and insurance policies for 19 per cent (Deutsche Bundesbank 1999a: 50–1). Thus, private households have a reasonably stable but minority role on the share registers of German companies. Private households owned 15 per cent of all shares in 1998. This Žgure has remained quite stable over the years and has recently declined slightly. The importance of shares in the household Žnancial assets portfolio, however, has been increasing from 5.5 per cent in 1990 to 8.7 per cent in 1998 (Deutsche Bundesbank 1999a: 50–1). In Germany, industrial companies remain the largest owners of public company shares. As Table 1 showed, in 1998 their 30 per cent share is twice as large as that of any other category of owner. Insurance companies also play an important role in Germany. In 1998, they held almost 14 per cent of the total shares with the two companies Allianz and Münchner Rückversicherung controlling the greatest market value (Boehmer 1998: 41). There are however interesting changes in behaviour as the relative share of industrial companies is declining at the same time as some Žnancial companies are increasing their equity holdings. The relative share of industrial companies may be large but it is also declining rapidly. The ownership of shares by other non-Žnancial companies in Germany has declined from 41.6 per cent in 1990 to 30.5 per cent in 1998 (Deutsche Bundesbank 1999a: 105).1 As industrial companies are liquidating their holdings, German insurance companies are buying more ordinary shares. In the past, insurance companies managed their asset portfolio very much as banks did and favoured diversiŽed portfolios. Very recently they have changed their policy however and are increasingly investing in equities. If this change could be critical in shifting the balance towards a shareholder value orientation, the second important change is the rise of investment funds. Between 1990 and 1998, these investment funds rapidly increased their share from a small base: their share increased from 4 per cent in 1990 to nearly 13 per cent in 1998 (Deutsche Bundesbank 1999a: 105). New kinds of institutional investors, such as investment and private pension funds, play an increasingly important role in Germany’s political economy. Foreign-controlled pension funds, in particular USA controlled, are also becoming more important and dominate the foreign holdings which now account for 15 per cent of all German shares. The effects of these changes are magniŽed because the new kinds of institutional investor, like other Žnancial institutions, concentrate their inuence on just a very small group of companies. In 1997, institutional investors for instance owned 48 per cent of Daimler-Benz, 51 per cent of MAN, 85 per cent of Preussag, 65 per cent of Deutsche Babcock, 85 per cent of Linde, 71 per cent of Lufthansa, and 50 per cent of Hoechst (Deutsches Aktieninstitut 1998: table 08.5–1, 1997). In summary, on the argument so far, shareholder value in Germany still has a Ulrich Jürgens et al.: Shareholder value in an adverse environment 59 narrow economic base because it is focused on a very small group of agship companies. The structure of share ownership still supports non-value orientations, although the balance is shifting towards private and institutional shareowners whose primary interest is the increase of shareholder value. To understand what all this means we must now turn to analysis of the institutional structure. The German system of corporate governance If there are changes in the personality and motivations of shareholders, these changes will act through the institutional structures of corporate governance. In this section, we aim to describe these structures and, more importantly, explain how they work through reviewing research on the implications of these structures for business conduct and performance. This is not an excursus or distraction as our subsequent arguments on shareholder value rest on the basis of this analysis. The traditional German system of corporate governance rests on three pillars: Žrst, the dominating role of the banks in company Žnancing and supervisory boards; second, the system of industrial co-determination; and, third, the productionist, company-centred management system. In this section, they are described in turn, beginning with the dominant role of banks. The banks directly held 10.3 per cent of all German shares in 1998, much the same as in 1990 (Deutsche Bundesbank 1999a: 105). Deutsche Bank and Dresdner Bank are the two banks controlling the greatest market value (Boehmer 1998: 40). While the ownership stake of the banks is substantial, their dominating role is based on a system of proxy voting (Depotstimmrecht) under which they cast votes for other shareholders. Under this system, private shareholders authorize the banks that hold their shares in custody to represent their interests at the annual general meetings of the companies. Baums and Fraune investigated the bankers’ importance in twenty-four out of the top 100 listed Žrms in Germany in 1992. Banks had 13 per cent of the voting rights by virtue of their own shareholdings; 10 per cent of voting rights by virtue of their own subsidiary investment funds; and no less than 61 per cent of voting rights by virtue of proxy votes (Baums and Fraune 1995: 103).2 They controlled 84 per cent of voting rights on the average in the twenty-four companies studied, and the percentage was even higher in the case of some household name companies. Banks controlled 95 per cent or more of voting rights in Siemens, Hoechst or Mannesmann and more than 90 per cent in the case of BASF and Bayer. An interesting exception was Volkswagen which, for historical reasons, is to a large extent state owned so that banks controlled only 44 per cent of the voting rights (Baums and Fraune 1995: 103). The status of banks as dominant shareholder (mainly by proxy) explains the fact that bank representatives can be found on most companies’ supervisory boards. This way, banks and insurance companies – both in close cross-holding relationships– have become the spiders in a dense network of cross-holdings and mutual supervisory board representation. The resulting network of crossholdings is shown in Figure 1 which describes the situation at the beginning of the 1990s. 60 Economy and Society This Žgure has often been reproduced and brings out the dominant roles of banks and insurance companies by showing part of the cross-shareholdings of sixteen of the DAX 30 companies. The direct cross-shareholdings are immediately noticeable; as, for example, in the case of the insurance companies Münchner Rückversicherung, which owns 26 per cent of the shares of Allianz, and Allianz, which owns 25 per cent of the shares of Münchner Rückversicherung. The banks and insurance companies also have large indirect shareholdings through their independent holding companies. These Verwaltungsgesellschaften often bring together several banks and companies and are marked in the Žgure by an oval circle around the name. Indirect shareholdings play an especially important role in Germany: via holding companies, a company such as the energy conglomerate VIAG even has indirect shareholdings in itself. A system of cross-holdings leads to a system of interlocking directorates as a company with a signiŽcant ownership stake in another company usually has a representative on the supervisory board of that company. The extremely close relationships and interdependencies between board members of different companies is problematic: The members of the supervisory board have to control company management and to prevent the misuse of power. At the same time, they are part of an encompassing network which functions as a means of social integration and cohesion among the business elites and to which they owe the position they have. (Windolf and Beyer 1995: 25, our translation) The position of banks is further strengthened by their role in company Žnancing. As in the corporate sectors of other advanced capitalist countries, retained earnings and internal funds are the most important source of Žnancing for German companies which typically draw half to two-thirds of their funding requirements from this source. But, as Table 2 shows, banks are by far the most important external Žnancing source; short- and long-term banking credits typically account for up to 25 per cent of the corporate funding requirement. Financing via new issues on the equity market has traditionally played a minor role, although the share of funding supplied by issues has been volatile in the 1990s. For 1998 the data may indicate a paradigm shift with regard to Žnancing via new issues, but it is still too early to tell whether this is really the case. There is ongoing debate about the merits and demerits of the prominent role of banks in the German corporate governance system. The potential beneŽts were emphasized in a recent OECD report: Through their continued presence at shareholders’ meetings, banks provide an independent outside monitor of corporate decision-making. Outside monitoring is widely regarded as one of the building blocks of an efficient system of corporate governance because such monitoring serves to alleviate the so-called ‘free-rider problem’ which arises whenever many small sharehold- Source: Adams (1999: 107) Figure 1 The German network of cross-holdings Economy and Society 62 Table 2 External and internal Žnancing of German companies from 1991 to 1998 (in percentages) 1991 1992 1993 1994 1995 1996 1997 1998 Long-term bank credits Short-term bank credits Shares Other external Total external Total internal 17.2 21.7 20.6 6.7 13.2 13.7 13.5 16.7 12.7 4.1 –2.6 3.3 12.8 4.7 3.5 8.0 1.7 2.2 2.4 4.4 7.3 6.0 1.9 11.9 14.3 17.0 20.4 23.1 1.9 9.3 9.8 10.0 45.9 45.0 40.8 37.5 35.2 33.7 28.7 46.6 54.1 55.0 59.2 62.5 64.8 66.3 71.3 53.4 Source: Deutsche Bundesbank (1999b: 25) so-called ‘free-rider problem’ which arises whenever many small shareholders have to form a common standpoint vis-a-vis top management. (OECD 1995: 96) In a recent essay, Wenger and Kaserer oppose this view: In reality, large German banks are sheltered from outside pressures by a dense network of cross-holdings, proxy votes, and underdeveloped disclosure obligations. Therefore, bank managers are not forced to pursue a value-maximising investment and monitoring policy. (Wenger and Kaserer 1998: 531) In summary, banks play a critical role in the system of corporate governance for two reasons: Žrst, because of their direct ownership of shares and the system of proxy votes; and, second, because industrial companies still Žnance themselves mostly via long- and short-term bank credits. They are not however the only inuence on conduct and performance. The system of co-determination makes the German system of corporate governance unique. The system exists under German corporate law that creates a dual board structure where the managing board and the supervisory board are separate entities. Various laws determine the proportion of labour and capital representatives on the supervisory board and deŽne the respective rights and duties of the managing board, the supervisory board and the shareholders’ meeting (Markovits 1982; Streeck 1995; Leminsky 1998).3 More broadly, the codetermination system means that elected worker representatives have rights of information, consultation and rights of veto on certain issues above and beyond those which exist in a country like Britain where the one board of directors exists to represent the interests of shareholders. These rights of workers/employees are legally institutionalized on several levels: • At the level of individual plants, in companies with Žve or more employees, the employees have the right to elect a works council. • In companies with more than 500 employees (whatever the legal form), Ulrich Jürgens et al.: Shareholder value in an adverse environment 63 representation of workers on the supervisory boards is mandated by the plant constitution law of 1952. Under that law, one-third of the supervisory board members are employee representatives. In companies with more than 2,000 employees, the Co-Determination Act of 1976 stipulates that ‘labour’ should take half the seats on the board. The representatives of capital retain the right to nominate the head of the supervisory board who has the casting vote when the two sides are deadlocked. • At the corporate level, general works councils also can be established. If the representation of labour on company boards is an essential element of Germany’s industrial relations system, it was highly controversial in its formative years in the 1950s and, for a short period, in the 1970s when the system was revised by new legislation. Since then it has become a widely accepted, almost uncontroversial element of the German system. Experts take very different positions on the merits and demerits of the system of co-determination. In its evaluation of the German system of corporate governance, the OECD pays a half-hearted tribute to co-determination: There is little doubt that compared to the Anglo-American ‘model’ of corporate governance, German employees have more inuence on decision-making in Žrms. However, inuence ows in both directions, with employee views and attitudes being affected by their board representation and thereby potentially helping to foster the more consensual relationship. (OECD 1995: 98) But this endorsement is challenged by other more critical views of this peculiarly German institution. In a much cited article, Jensen and Meckling (1979) long ago questioned the rationale of co-determination from a shareholder value point of view: If co-determination is beneŽcial to both stockholders and labour, why do we need laws which force Žrms to engage in it? Surely, they would do so voluntarily. The fact that stockholders must be forced by law to accept co-determination is the best evidence we have that they are adversely affected by it. (Jensen and Meckling 1979: 474) Some empirical studies on the effect of co-determination on company performance claim to Žnd evidence of a negative impact. FitzRoy and Kraft (1993) investigated the effect of the co-determination law of 1976 and came to the conclusion that the return on equity of the company sample affected by the law decreased by about 5 per cent compared with a sample of companies not affected by the law. Schmid and Seger (1998), who studied the development of companies under the co-determination law of 1976 concluded that the market value of the equities of these Žrms until 1991 could have been up to 24 per cent higher if half-parity co-determination had not been introduced. According to another study by Baums and Frick (1996), the enactment of the co-determination law had no adverse effects on the share prices of the companies falling under the law. Altogether, empirical research has not generated consistent and convincing 64 Economy and Society evidence about the impact of co-determination on performance and innovation (Sadowski 1997: 9). Much the same is true for research on the effects of the codetermination law concerning labour representation on company boards as well as on the effects of the works council system.4 One of the underlying problems is that most of the quantitatively oriented studies on the impact of the 1976 codetermination law are methodologically awed. • One general problem is the absence of an appropriate control group of companies that would allow researchers to isolate the impact of co-determination. The research studies cited above have either distinguished between the situation before and after the introduction of co-determination, in 1976, or distinguished between companies which fall under the co-determination law and those which do not because they have fewer than 2,000 employees. Both approaches are problematic: due to the oil price shocks in mid-1970s, the situation after 1976 was different for all companies. Furthermore, the distinction between larger and smaller companies compares two quite different classes of companies that are dissimilar but not unrelated when the smaller companies are often suppliers to the larger ones. • Supervisory boards in these quantitative studies are conceptualized as a ‘black box’ so that the research studies do not analyse the composition of the supervisory board and the strategies of the members on the ‘capital bench’ (Sadowski 1997: 72). Gerum’s (1991) study is signiŽcant because it recognized the second complication about the politics of the supervisory board and developed both a taxonomy and an argument about the possibility of different outcomes. Gerum analysed the inuence of the supervisory board on company policy in seventyone publicly quoted companies selected in 1979. He differentiated between (a) supervisory boards dominated by shareholders or by other stakeholders and (b) supervisory boards seeking to inuence business policy5 and those conŽning themselves to their formal legally stipulated role. On this basis, he distinguished four types of supervisory board–management board relations: 1 In the ‘dominating supervisory board’ the representatives of capital have the majority of the seats in the supervisory board and determine the chairman on the supervisory board. By deŽning a detailed list of decisions requiring their assent, the supervisory board exerts complete control over the management board. 2 In the ‘controlling supervisory board’ shareholders dominate the supervisory board and the board refrains from deŽning decisions requiring assent. Thus, the supervisory board controls management board decisions only ex post. 3 In the ‘company-policy-oriented supervisory board’ the shareholders do not dominate the supervisory board and labour representatives have a dominating inuence; at the same time, the supervisory board makes deŽned decisions requiring assent and by this means actively inuences company policy. 4 In the ‘consultative supervisory board’ the supervisory board is again Ulrich Jürgens et al.: Shareholder value in an adverse environment 65 dominated by labour. In this case, the supervisory board conŽnes itself to an advisory and supportive role vis-à-vis the management board. If there are four types of companies in this classiŽcation, Gerum identiŽed two-thirds of the companies he investigated as type three or four, that is, not dominated by shareholders. The largest single group, some 37 per cent of the sample, were type three policy-oriented companies in which representatives of labour actively inuenced company policy. Overall, only 13 per cent of the companies were type one; or, only in one out of ten companies did shareholders exert control over company policy via the management board. More often, according to Gerum, management boards just use supervisory boards as an instrument to legitimate their policies (Gerum 1998: 56). Gerum concludes that the balance of power in companies underlying the co-determination law of 1976 clearly tilts in favour of company management; and for this reason: Co-determination has to be seen as an additional mean of control besides the capital and product markets. In addition to its consultative function, codetermination by employees remains the only structurally secured form of an (internal) outside control. (Gerum 1991: 729, our translation)6 In summary, the empirical evidence as we have seen does not support the Jensen/Meckling (1979) supposition that legal co-determination has had a principally negative effect on shareholder wealth. The existence of co-determination per se has no deŽnite implications for shareholders, mainly because the system can be implemented and operated in so many different ways. If we turn to an additional feature, that of a productionist, company-centred management orientation, it adds a further element of speciŽcity in the German case. This characteristic of German management was much emphasized in the literatures that addressed the contrast between German manufacturing success and British industrial decline through the 1970s and 1980s. Lawrence provided a classic epitome of managers in West Germany: The somewhat ‘de-economised’ view which German managers have of the business enterprise is central. The idea that a Žrm is not a ‘money-making machine’ but a place where products get designed, made and eventually sold, with proŽts ensuing, tends in Germany to restrict the allure of accountants and Žnancial controllers and to dignify the makers and those associated with them. (Lawrence 1980: 131) ‘Technik’7 has a central place in his account of German management: because, according to Lawrence: Technik exerts a pervasive inuence on German Žrms and on German managerial thinking. . . . The German company is Technik in organisational form. The skilled worker, the foreman, the superintendent, the technical director are all participants in Technik. Of course, there are many things which they do 66 Economy and Society not have in common, but Technik is something which transcends hierarchy. It may also transcend particular functions in the company. (Lawrence 1980: 98) One manifestation of the centrality of Technik is the high status of engineers in German companies. As Millar observed in her Anglo-German comparative study, this contrasts with the high status of Žnance and marketing people in the UK (Millar 1979: 63). In another Anglo-German comparison, Eberwein and Tholen (1993) concluded that engineers ‘are represented more in German industrial management, also at the top of the company, in numerical terms much more than in England, and indeed not only in the technical but also in the nontechnical functions’ (Eberwein and Tholen 1993: 173). In the context of Anglo-German comparisons and explanation of British industrial decline, the German orientation to Technik and the status of engineers tended to be somewhat idealized. Furthermore, as Porter observed, the grip of Technik on German management loosened by the end of the 1980s as Žnancially trained executives took the helm in more companies (Porter 1990: 717). Nevertheless, the culture and objectives of German management were and are different, so that even the most recent surveys disclose signiŽcant differences in management priorities. Table 3 presents recent survey results about the relative importance of Žnancial and productionist objectives for British and German management boards. Differences of orientation have obviously persisted as the British respondents attach so much more importance to meeting Žnancial objectives and managing merger, acquisition and divestment. In summary, the argument so far shows how changes in ownership patterns and investor behaviour coexist with structural stability because the three longstanding pillars of the German system of corporate governance continue to exist in various forms. The system sustains national priorities and behaviours and may create value for stakeholders but it does not put Žnancial value for shareholders at the top of the list of business policy objectives. Movement towards a shareholder value orientation If the summary above is correct, we must show how government and company management, through a variety of policy measures since the mid-1990s, have Table 3 Management board priorities in British and German companies (1998) Percentage of management boards ranking these in the top three items of importance: UK (Sole board system) Germany (Dual board system) 72 46 53 28 15 15 36 36 Meeting Žnancial goals Acquisitions, mergers, joint ventures & divestments Reducing costs Improving productivity Source: Korn/Ferry International (1998: Žg 21a: 35) Ulrich Jürgens et al.: Shareholder value in an adverse environment 67 tried to move Žnancial objectives up the list of policy objectives. Consequently, in their different ways, both are encouraging the development of a more shareholder value oriented economy. We begin this section by giving an account of these measures. Government measures in the area of Žnancial regulation and company law have been incremental and mostly marginal: there has been no ‘big bang’ liberalization of the Žnancial markets in Germany. In the area of Žnancial regulation, the second and third law on promotion of Žnancial markets, together with other measures, went some way towards creating a more American-style regulatory agency. As a result, the changes facilitated the development of a wider range of investment funds and consequently fostered both the demand and supply for risk capital. 8 The second law on promotion of Žnancial markets (Zweites Finanzmarktförderungsgesetz) was introduced in 1995 and set up the Federal Supervisory Office for Securities Trading,9 a German equivalent to the US Securities and Exchange Commission. But the German government has not yet met requests to regulate (hostile) takeovers in order to protect small shareholders. The current policy on this issue is to rely on voluntary enforcement of the strengthened code adopted by the commission of stock-exchange experts in October 1997. However, to date a number of Žrms have still not adopted the code, and the nonadopters include some of those in the DAX 30 (OECD 1998: 121). The third law (Drittes Finanzmarktförderungsgesetz) of 1998 created a more liberal framework so that German Žnancial markets could respond to competitive pressures. The operations of German venture capital were facilitated by changes in the regulations governing investment companies that allowed them to operate under a more exible regime. The most important changes include capital gains that are tax-free after one year (not six years), majority holdings in companies can be retained for up to eight years (not two years), investment companies are no longer obliged to go public within ten years and rules about the minimum number of shareholders have been eased. The operations of Žnancial intermediaries were facilitated by changes in the rules on liability: investment companies and Žnancial advisors are now liable for prospectus information and for Žnancial advice only for three years (instead of thirty years as previously) (OECD 1998: 188). In a parallel development, German Žnancial regulations were also reformed in an attempt to deal with a perceived problem about the funding of pensions. Thus regulations were changed to allow the creation of private pension funds. More broadly, several of the new Žnancial measures represent compromises between interest groups and lobbies with different agendas and the end result includes both compromise and signiŽcant unintended changes. Thus, pressure for reforms in company law originally came from the Social Democratic Party (SPD) in 1995 which aimed to reduce the power of the banks after a number of scandals about corporate control in metal-working companies. Due to resistance by companies and banks, the 1998 law on Control and Transparency in Companies10 did not greatly change the responsibilities of supervisory boards or 68 Economy and Society encourage greater transparency. Under the new legislation, supervisory boards must meet at least four times a year (previously two) and voting rights were put on an equal basis as shares with multiple voting rights were abolished. It also made major pro-shareholder value changes in the framework of rules about how Žrms could use their own equity. Before 1998, conservative and traditional rules designed to discourage fraud and share-price manipulation had, in Germany (as in other countries like the Netherlands), prevented companies from dealing in their own shares. The changes introduced by the law of 1998 can properly be seen as a signiŽcant change because stock options may now be used as compensation for directors and Žrms are permitted to buy back their shares. As to major companies, since the mid-1990s several major agship companies in the German economy have proclaimed shareholder value to be their central goal (Vitols et al. 1997). This new orientation is identiŽed with, and linked to, top management personalities such as Schrempp (CEO of DaimlerChrysler Germany) and von Pierer (CEO of Siemens), so that shareholder value in Germany stands for the programmes of radical corporate change11 which have been introduced by these active, celebrity chief executives. SpeciŽc measures taken by individual companies to foster shareholder value orientation include (SGZ Bank 1997): • share buy-back: about sixty companies have now obtained the necessary authorization from shareholders which allows shares buy-back; but, so far, only the pharmaceutical companies Bayer and Schering have put this into practice; • quarterly reporting: this has been introduced by twenty out of the DAX 30 companies; • adoption of international accounting standards: these have now been adopted by ten out of the DAX 30 companies; • the introduction of new management control systems with proŽtability goals speciŽed by division or activity and sometimes expressed in terms of return on capital or assets; • increased emphasis on investor relations activities. 12 Table 4 presents an overview of measures taken by individual companies to foster shareholder value orientation. It shows that some champions of shareholder value, such as DaimlerChrysler and Hoechst, have made substantial changes and set aggressive targets. If we consider the whole group of DAX 30 companies, the advance of shareholder value is uneven. Only one-third have set an explicit proŽtability target while 60 per cent have introduced stock options for managers. To sum up, on the evidence and argument so far, the increased emphasis on shareholder value represents something more than just lip service to a new Anglo-Saxon management fad. But the extent and nature of the change is uncertain. The key question is whether shareholder value does or will change any of the political economic fundamentals of the German system. If we wish to answer this question we must look beyond the evidence on government regulation and corporate adoption of shareholder value and pose a much larger institutional Ulrich Jürgens et al.: Shareholder value in an adverse environment 69 Table 4 Shareholder value related measures by the DAX 30 companies and selected examples ProŽtability goal All DAX 33.3% 30 companies in % (1997) Daimler Return on capital 12% Chrysler (by 1999); RONA: Return on net assets: 15.5% Hoechst (Revenue increase of 20%) Siemens Return on equity 15% (by 2000) Veba (Revenue increase of 7.6% by 2002) International Employee Stock Quarterly accounting share options for reporting standard ownership managers programme 43.3% 33.3% 60.0% 66.7% US GAAP X X Yes IAS X X Yes – X X Yes IAS X – Yes Source: Annual reports of all DAX 30 companies (1997) and various newspaper articles; own calculation question about whether the pillars of the German corporate governance system are crumbling. In the rest of this section, we address this larger question and start by considering the changing role of banks. There is no doubt that the role of German banks has been changing rapidly since the mid–1990s driven by a whole series of internal and external changes. Their role has been changed by the increasing importance of stock-market new issues in company Žnance as well as by the creation of the Neue Markt. The major banks and insurance companies have also strategically (re)deŽned share ownership as an asset management and investment fund business. This constitutes a major shift from ‘patient capital’ to shareholder value orientation in the German banking sector. Both shifts are reinforced by the increasing importance of pension funds of domestic origin and, more especially, foreign origin. These developments will now be discussed in more detail, beginning with the Neue Markt. Until recently, only a very small number of large German companies were quoted on the stock exchange and they rarely used new equity issues as a means of company Žnance. The introduction of the Neue Markt indicates a signiŽcant change in several respects. The Deutsche Börse AG created the Frankfurt-based Neue Markt in 1997 with the aim of allowing new and developing companies to make Initial Public Offerings (IPO) and supporting the ow of venture capital. It was an immediate success. By June 1999, there were 120 companies listed on the Neue Markt, and new companies were joining daily (DG Bank Research 1999: 4). It is, of course, much smaller than the long-established main market; in 1999, the overall 70 Economy and Society market capitalization of the Neue Markt amounted to 6.7 per cent of the capitalization of the DAX 30 who are quoted on the main market. But, in terms of share price appreciation, the Neue Markt has outperformed the DAX by more than 400 per cent in its Žrst two years of existence. And, currently, the Neue Markt is the leading European growth bourse: its trading volume makes up about 80 per cent and its market capitalization about 50 per cent of all European growth bourses (Harnischfeger 1999a: x). The unexpected dynamic development of the Neue Markt has often been cited as a sign of major change in Germany. Thus, the Financial Times saw it as an indication of ‘a new business culture . . . which has little in common with the traditional consensus driven company, typical of the Mittelstand or medium sized business sector. The “Neue Markt” . . . reects the changing face of German capitalism’ (Harnischfeger 1999a: x). Through the Neue Markt, and other changes, the banks have been partly bypassed. As the OECD observed, the Neue Markt brought several important changes to Germany. First, other Žnancial intermediaries, as well as banks, have been active in introducing Žrms to the exchange. It has often been argued in the past that, although the large banks dominated the business of initial public offerings, they had no real incentive to promote stock-market listings because IPOs could reduce their traditional lending activities. A second feature has been to accompany each newly listed Žrm with a ‘market maker’, thereby attempting to improve market liquidity. Improving liquidity is also important from the viewpoint of ensuring exit possibilities for initial risk investors in the company (OECD 1998: 119). The major German banks did not foresee the dynamic development of the Neue Markt and have missed much of the small- and medium-sized IPO business. Much the same is true for businesses related to the unprecedented international wave of mergers and acquisitions since the mid-1990s. The banks are however now seeking to re-enter some of these activities. In recent banking sector restructuring, investment banking has been a major focus in banking strategy. At the same time, banks (and insurance companies) have begun to loosen the system of cross-shareholding and interlocking directorates that were central to the conduct of ‘patient shareholders’. The number of such directorates has been declining for more than ten years: between 1986 and 1993, private banks reduced the number of seats held on the supervisory boards of the 100 largest German companies from 114 to ninety-nine (Deutsch 1997: 22). The chief Žnancial officer of Deutsche Bank declared publicly that his bank had for some years not Žlled all the supervisory board positions which it was offered by other companies and would, in future, provide even fewer directors. Instead, he recommended the practice of foreign pension funds managers who meet with company management boards on a one-to-one basis. 13 The banks have started to behave like pension and investment funds. Deutsche Bank, Dresdner Bank and Münchner Rückversicherung have recently begun to spin off their ownership stakes in other German companies into separately managed holdings. And the banks are quite explicit that these holdings shall be run on the basis of a shareholder value orientation. Thus, at the end of 1998, Deutsche Bank established a subsidiary, ‘DB-Investor’ to Ulrich Jürgens et al.: Shareholder value in an adverse environment 71 manage the industrial assets owned by the bank. The CEO of Deutsche Bank Breuer states that ‘with the new structure, we can control our industrial shareholdings in a more active and much more proŽtable way. This is good news for our shareholders’ (Deutsche Bank press release 1998, our translation).14 Meanwhile, DWS (the investment fund of Deutsche Bank, founded in 1956 and Europe’s largest investment company) had already become one of the most outspoken protagonists of shareholder value orientation in Germany. Its former chief manager Strenger had pronounced its independent shareholder value oriented position on many occasions. Independent asset management companies were also launched by the other major German banks and by the big insurance companies such as Allianz which launched Allianz Asset Management GmbH in 1998. The other signiŽcant development is the emergence of German-owned private pension funds which are growing rapidly from a very small base. German public pensions are funded through a pay-as-you-go system (Jackson and Vitols 1999).15 Private pensions in Germany represent a supplement to this longestablished statutory regime whose Žnances appear to be endangered by the demographic changes and by the increasing life expectancies of people. Private pension funds are relatively new because they were only formally recognized in 1998 under the 3rd Financial Markets Promotion Law.16 SpeciŽc pension funds outside the public pensions system had existed previously in various forms but they were of minor importance. In terms of Žnancial weight the signiŽcance of private and semi-public pensions in Germany is minor (see Baums and Fraune 1995: 97). The fund value equated to only 6 per cent of GDP in Germany in 1996 whereas in the US they equate to 57.5 per cent of GDP and in the UK 93.2 per cent of GDP (Nürk 1998: 181). Payments into pension funds are not tax deductible in Germany, as they generally are in the Anglo-Saxon countries. Nevertheless, these funds are growing rapidly. What we are seeing is the emergence of a new kind of institutional investor with an explicit shareholder value motivation as German-owned and run pension funds join the American funds who invest American savings in German companies. By 1999 there were thirty-four investment funds offering private pensions in Germany and twenty-Žve of these were owned and run by German Žnancial institutions. The position of pension funds as institutional investors is becoming stronger and the funds are mainly interested in the DAX 30 Žrms which are guided by shareholder value principles. They are joined by US pension funds which are increasingly engaged in buying shares and putting pressure on company management to act on behalf of shareholder interests (The Conference Board 1999). The increasing inuence of these funds is controversial and their future role is uncertain. Some observers from the Žnancial community already see pension funds as ‘a sea change in German old-age provision’.17 By way of contrast, Nürk Žnds that ‘Pension funds and other forms of funding via external institutions . . . play only a minor role in the Žnancing of old-age provision’ (Nürk 1998: 181). Much depends on political decisions which have not yet been taken. The German labour minister recently proposed a funded system of capital formation 72 Economy and Society complementary to the pay-as-you-go system. If this idea Žnds approval the German pension funds will deŽnitely have a large growth potential. While the Žnancial system is changing very rapidly, as new actors, motivations and behaviours assert themselves, it is much more difficult to Žnd signs of erosion within the system of co-determination. Indeed, the system of codetermination is seldom attacked openly by company management.18 On the contrary, quite a few top managers praise the system warmly when confronted by institutional investors. A cynic might observe that German managers have ulterior motives for praising a system which serves as a protection for incumbent management against hostile takeovers which is, of course, partly why AngloSaxon management has reservations about co-determination. Hostile takeovers are indeed a rare phenomenon in the German context. One of the peculiarities of the German case is management commitment to shareholder value without the threat of takeover or dismemberment for corporations which disappoint the market. A recent research report by J. P. Morgan identiŽed 222 hostile bids in Europe since 1990. But, only four of these bids involved German companies, and the only successful hostile bid was Krupp’s $1.0 billion acquisition of Hoesch in 1991 (Gibbs 1999: 7). Most of the hostile European bids during this period involved British Žrms who made no fewer than 148 hostile bids. These Žgures are more remarkable if we remember that German companies have been active participants in the recent European merger and acquisition wave. The low number of hostile takeovers in Germany seems to indicate that co-determination has indeed served as a ‘poison pill’ for potential predators whether foreign owned or German. On the whole it seems that co-determination still stands strong and criticism of co-determination is almost taboo.19 However, a variety of tendencies that are working to hollow out the principle cannot be overlooked: • Relocation of manufacturing operations to overseas sites and the shift to a service economy are undermining the strongholds of union power in the companies. • The discussions about a European corporate charter and about ‘best practice corporate governance’ carried out at the OECD, IMF and World Bank level serve to problematize German arrangements. These developments are recognized in the research programme on ‘codetermination and new company cultures’ (Bertelsmann Stiftung; Hans-BöcklerStiftung 1998) which nevertheless broadly defends the status quo. In this programme a Commission on Co-determination was constituted as a steering board which included high-ranking representatives from employer federations, unions, government and academia. The Commission’s executive report unanimously endorsed co-determination in its existing form. It recognized that codetermination could be only one element of corporate governance for companies engaged in competitive markets who have to take into account the interests and needs of all stakeholders. More signiŽcantly it concluded that ‘Co-determination today is no longer questioned especially by the employer side’ (Bertelsmann Stiftung; Hans-Böckler-Stiftung 1998: 7, our translation). And, after reviewing Ulrich Jürgens et al.: Shareholder value in an adverse environment 73 the recent debate about best practice and corporate governance, the report concluded that ‘New regulation of co-determination to improve the functionality of the supervisory board will not be necessary’ (ibid.: 17, our translation). However, if the report endorsed existing institutions, it also drew attention to the way in which co-determination is being structurally eroded by economic restructuring and the trend towards a service economy, just as the capital market makes new demands. One index of structural change is the size of the ‘codetermination-free zone’ at both the company level (supervisory board) and the plant level (works councils): this co-determination-free zone has grown from 51 per cent to 61 per cent of the employees in the private sector during the mid1990s. At the same time there are new pressures for value on the companies and workers inside the co-determination system. Thus, the report concludes: The expansion and internationalization of capital markets forces the codetermined German companies to orient themselves towards increasingly demanding, short-term oriented, less loyal investors who are less prepared to compromise and who are used to signal their preferences with regard to companies’ strategies and company proŽtability primarily via the capital market. (ibid.: 12, our translation) In the nature of things it is more difficult to generalize with conŽdence about the orientation of managers than it is about the role of the banks or the coverage of co-determination. But this is an interesting and important topic not least because it brings out the continuing importance of product markets and managerial initiative which, in the German case, appear to have been more important initiators of change than capital markets and shareholders. In the Žrst half of the 1990s, German companies went through a period of profound changes. To get over a short, sharp recession and meet product-market challenges, lean production and business process re-engineering were implemented widely. Many companies segmented their operations into business units or decentralized parts of the company to proŽt centres. Companies also changed from functional to product- and process-oriented types of organization and outsourced ‘non-core’ activities. This restructuring was often linked to company strategies of developing new businesses with higher growth potential. As Vitols (1999) argues, the challenge was product-market change and not capital-market pressure and the strategic response of changes in orientation and company restructuring were initiated by company management acting on its own initiative not under pressure from institutional investors. Thus, we have the paradoxical situation that shareholder value orientation in Germany was initiated to a great extent by company management in the industrial sector. The modiŽed company structures and strategies required new controlling and management incentive systems which used the language and techniques of management for shareholder value and suited the agenda of the capital market. The executive boards could no longer directly manage individual business units. Careers could no longer be made within the functional chimneys of giant companies. New criteria for resource allocation and management promotion were 74 Economy and Society needed: this is where shareholder value came in as the answer to an industrial problem. It is in this context that we Žnd the rapid spread of innovations such as the Žxing of Žnancial targets for evaluating management performance, new controlling and accounting systems, and stock options as management incentives. As Table 4 shows, one third of the DAX 30 companies now publish Žnancial targets which often go along with the declaration that under-performing company units will be sold off. Many of these targets are speciŽed in terms of return on capital or assets, as recommended by the American consultants and academics who sell shareholder value and as required by the new kind of valueoriented investor. Thus, for instance, DaimlerChrysler in March 1999 introduced a value orientated controlling system (DaimlerChrysler 1999). The new system set a Return on Net Assets (RONA) of 15.5 per cent before tax for the twenty-three to twenty-four business units of DaimlerChrysler and all 5,000 top managers of the company have recently been trained on the subject. Another example is Metallgesellschaft, a heavy industry combine. Metallgesellschaft announced that its forty-four business units had, as a matter of policy, to achieve a leading position in their line of business and a 14 per cent return on capital employed (Harnischfeger 1999d: 14). More recently Siemens has also introduced a valueoriented measure called GWB (Geschäftswertbeitrag – contribution to business value). Each business unit has to calculate if its earnings are higher than capital costs. The total capital costs for Siemens AG are 8 per cent (after tax) and there are different capital costs for individual business units which trade in different markets. The net result is that ‘each of the 16 operating divisions is measured by its earnings on net capital employed’ (Harnischfeger 1999b: xiv). Another signiŽcant development is stock options or shares for management which, as Table 4 shows, have now been introduced in more than half of the DAX 30 companies. The rationale for stock-options stakes is that they encourage managers to ‘think like owners’ (Donkin 1999: 9). But, so far, they are a matter of limited experiment and different in each company. Generally, they are not very widely spread and offered only to top management in large German companies, especially those which are oriented towards the shareholder value principle; some high tech companies on the Neue Markt also use them. Stock options in Germany are generally only a supplement to normal salaries. 20 To summarize the changes in the orientation of company management: as we have noted, top German managers are starting to implement shareholder value principles in their companies. ProŽtability goals, controlling systems, stock options, core business strategies and stock-market listing of company divisions are manifestations of new shareholder-oriented activities whose origins paradoxically go back to industrial recession in the early 1990s. If institutional investors try to further the changes made by top management, their pressure is sometimes resisted. Thus, the CEO of a pharmaceutical company has recently openly criticized the growing inuence of investment funds: ‘I suggest taking a stronger line against some capital market actors who want to force companies to adopt their rules of playing the game’ (Weishaupt 1999: 19, our translation). Ulrich Jürgens et al.: Shareholder value in an adverse environment 75 Summary and outlook This article has reviewed the empirical evidence and signs of movement towards a shareholder value economy in the German political economy. Our cautious conclusion is that, at this point in time, there are changes but the impact is marginal. Even in comparison with other countries in continental Europe, Germany seems to be moving very slowly in the direction of a shareholder value economy. At the current stage in Germany, the most visible manifestations of change in the direction of shareholder value are the internal changes initiated by company management who are introducing shareholder value oriented management control and incentive systems. However, the recent changes affect primarily a handful of large companies, like DaimlerChrysler or Siemens, and, as we have seen, the economic base for a shareholder value economy in Germany is very narrow. Of course these are agship companies whose internal changes may ow through the many linkages they have with the rest of the economy. However, so far these seem to be isolated cases in companies where new practices are only being established and a point of no return has not been reached yet. Another recent phenomenon, within broader changes in the Žnancial markets, is the growing dynamic of changes in the role of the banks. The loosening up of the traditional cross-holding/interlocking directorate structures is a signiŽcant development. But it seems to be part of gradual processes and so far no ‘big bang’ is in sight. The same is true for the growing inuence of institutional investors with value motivations. Their inuence can be observed in the case of individual companies, but overall it is less than in other countries, even on the European continent. We must expect that savings for retirement through private pension funds will become more important in Germany because of problems with the existing pensions system. But, so far, Germany is unlike the Anglo-Saxon countries where the interests and behaviour of private households drive shareholder value orientation. In conclusion, we cannot agree with the claims made by Ulrich Steger, a former executive board member of Volkswagen, who believes that a paradigm shift has already occurred in Germany because ‘The investors have won the power struggle against the managers’ (Balzer and Jensen 1999: 130). But the very fact that such a claim is being made shows that substantial change is underway in Germany. Notes 1 In Germany, non-Žnancial companies held 42 per cent of the shares of other companies in 1995. Their share is less than in France where non-Žnancial companies hold 58 per cent but much more than in the USA where non-Žnancial companies hold 15 per cent and the UK where they hold 4 per cent (Deutsche Bundesbank 1997: 29). 2 Baums and Fraune investigated voting rights of banks at annual general shareholder meetings in twenty-four of the top 100 listed Žrms where ownership was dispersed among more than 50 per cent of shareholders. In general, it is difficult to obtain empirical information about proxy voting because banks regard it as conŽdential (Dohmen 1998: 14). 76 Economy and Society 3 The legal basis for the relationship between the managing board, the supervisory board and the shareholders’ meeting is deŽned by the law of co-determination (MitbestG 1976), the Montan-Mitbestimmungsgesetz (Montan-MitbestG 1951), the Betriebsverfassungsgesetz (BetrVG 1952, 1972) and the joint-stock company law (AktG 1965). 4 The situation is somewhat different with regard to research on the impact of works councils on company performance. Earlier research by Addison et al. (1993) and Addison et al. (1996) came to contradictory results: the 1993 study concluded that co-determination has no statistically signiŽcant inuence on net earnings, while the 1996 study found a statistically signiŽcant negative inuence on proŽtability. More recent research produces more consistent results. According to Jirjahn (1997) and Jirjahn and Klodt (1999), the existence of a works council has a positive inuence on productivity and a negative inuence on proŽtability. This Žnding could be explained by the inuence of works councils on the distribution of proŽts. Other studies have found that works councils have a signiŽcant positive inuence on wage levels (see Dilger 1999). 5 According to German law on joint stock companies, supervisory boards can deŽne and specify a list of assent requiring decisions (§111 Abs. 4 AktG). By this means, the supervisory board can inuence strategic decisions in functional areas such as Žnance, personnel, investment, etc. 6 Therefore ‘stylized’ interpretations about the general and invariant merits of the codetermination system can be quite misleading. This judgement applies to the OECD’s misleading interpretation and verdict: a stylised version of the German model is that it relies on continuous monitoring of managers by other stakeholders, who have a long-term relationship with the Žrm and engage permanently in important aspects of decision-making and, in case of dissatisfaction, take action to correct management decisions through internal channels. (OECD 1995: 85). 7 The German term ‘Technik’ which Lawrence uses has no real equivalent in English though it has recently entered British consciousness as a result of VAG advertising campaigns for the Audi brand. 8 Demand and supply for risk capital was further promoted by the creation of the Neue Markt. 9 Bundesaufsichtsamt für den Wertpapierhandel; BAWe: http://www.bawe.de 10 Gesetz zur Kontrolle und Transparenz im Unternehmensbereich (KonTraG). 11 This linkage between restructuring and shareholder value has negative associations to shareholder value. In consequence, the term shareholder value is being avoided by some of the protagonists. The CEO of VEBA announced in an interview: ‘I don’t use the expression shareholder value any longer. The connotation is too negative. For me the debate is about value-oriented company policy’ (Schumacher 1996: 27, our translation). 12 Investor relations departments in German companies were quite rare before the 1990s (Burgmaier 1999: 74). In 1989, only nine of the 30 DAX companies and only Žve of the seventy MDAX companies had investor relations (IR) departments. By 1998 no fewer than twenty-six companies of the DAX had IR departments and Žfty-one of the MDAX. Of seventy-Žve companies of the Neue Markt forty-six had IR departments in 1998. 13 Speech by Dr Thomas R. Fischer, Deutsche Bank chief Žnancial officer, at the ‘First Humboldt-Forum on Economics and Management of Corporate Governance’ at the Humboldt University, Berlin, 4-5 June 1999. 14 In terms of market capitalization DB-investor ranks among the top Žfteen DAX companies. Industrial assets make up 45 per cent of the total market value of the Deutsche Bank AG (Press release, Deutsche Bank, 16 December 1998, our translation). 15 Employer and employee each contribute 8.85 per cent of gross earnings up to a maximum of DM 6,500. In addition to these earnings-related contributions, the budget Ulrich Jürgens et al.: Shareholder value in an adverse environment 77 of the federal government provides a subsidy that amounts to roughly 18 per cent of expenditures. 16 These funds are called ‘Altersvorsorge Sondervermögen’. 17 This is the opinion of Manfred Laux, chief of the German Investment Society (Deutsche Investment Gesellschaft, DVI), reported in the Wall Street Journal, 20 April 1998, which can be found at: http://www.bvi.de/as/11-rechtsuntern.html 18 However, Eberwein and Tholen (1990), in their study of manager mentality, found that a majority of company CEOs were less than enthusiastic about co-determination. Only 9 per cent of managers regarded co-determination as a support for implementing important decisions and 27 per cent saw it as a disruption in their company. However, 34 per cent accepted co-determination ‘as a necessary element of a pluralistic society’ (Eberwein and Tholen 1990: 259, our translation). 19 The OECD, for example, in its recommendations does not adopt a position of opposition in principle to the two-tier system. Thus, the OECD concludes that ‘Although the structure of corporate boards for publicly traded corporations differs among OECD nations – for example, by including both single- and two-tier boards – board independence can be promoted in any type of board system’ (1998: 22). 20 By international standards top German managers earn relatively little. The average CEO of a DAX 30 company earned ‘only’ 1.7 million DM in 1997 (Balzer and Sommer 1998: 212). Standardized international compensation is becoming an issue due to the growing number of global mergers of German companies. 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