Functional Change and Bank Strategy in German Corporate Governance

This paper analyses changes in the German corporate governance system in the 1990s, using a functional perspective that separates the functions of governance from the institutions that perform these functions. Financial globalization, harmonized legislation within the European Union, and domestic pressures have triggered a move away from the postwar German system of bank-based governance, and towards more market-oriented processes. The paper shows that these forces have resulted in heightening transparency, more active capital markets, and a greatly reduced role of banks in the governance process. However, Germany's 2002 boycott of EU takeover legislation has created a void in the current governance system: because bank intervention and the market for corporate control are substitutes, a reduced role of a banks and protective takeover legislation mean that one important governance function is currently underserved.