Corporate governance under stress : an institutional perspective on the transformation of corporate governance in France and Germany

Abstract

This work contributes to the study of comparative political economy by examining the impact of financial deregulation on corporate governance in the two main continental European economies, France and Germany. It investigates the process of transformation of the systems of corporate governance of these two countries toward a greater shareholder value orientation. It analyses the divergent responses of large companies in these two countries to the same set of changes in the international economy. Despite similarities in terms of ownership concentration, inactive securities markets, financial opacity, and closed market for hostile takeovers, large firms reacted differently to the new external environment - with dramatically diverging consequences for employees. In France, the majority of large companies have substantially changed their business strategy through a focus on a single business activity. German firms, in contrast, have responded to the new environment with greater financial transparency. The evolution of corporate governance in the two countries does not entail convergence - but different patterns of change with substantial differentiation in some areas, less in others. The argument presented deals with the dynamics of economic adjustment. Why do changes in the structure of corporate governance move in different directions in France and Germany? The power of management, especially relative to labor, given by existing industrial structures, accounts to a substantial extent for the different patterns by which shareholder value practices have been introduced in the two countries.

(cont.) The institutional framework conditions both what managers are likely to want to do (some forms of reorganization will be more attractive where workplace organization and worker power takes the form it does in France and others more attractive where the workforce has continuing power as in Germany) and what they can do. The power of German workers induces management to compromise on measures on which both can agree (greater transparency, continuing cross-subsidies). The power of French management allows them to pursue strategies strongly in their interest. In short, all capitalist economies are adjusting to pressures for change in corporate governance but the dynamic of adjustment is deeply affected by the relative power of management and labor.