Skip to content

Mark J. Roe, German Codetermination and German Securities Markets, 5 Colum. J. Eur. L. 199 (1999).

Abstract: Germany lacks good securities markets. Initial public offers are infrequent, securities trading is shallow, and even large public firms typically have big blockholders that make the big firms resemble 'semi-private' companies. These 'private' firm characteristics of German ownership are often attributed to poor legal protection of minority stockholders, to the lack of an equity-owning and entrepreneurial culture, and to permissive rules that allow big banks and bank blockholding in ways barred in the U.S. Here, I sketch out another explanation. German codetermination (by which employees control half of the seats on the German supervisory board) undermines diffuse ownership. First, stockholders may want the firm's governing institutions to have a blockholding 'balance of power,' a balance that, because half the supervisory board represents employees, diffusely owned firms may be unable to create. Second, managers and stockholders sapped the supervisory board of power (or, more accurately, stopped it from developing power). Board meetings are infrequent, information flow to the board is poor, and the board is often too big and unwieldy to be effective. Instead of boardroom governance, out-of-the-boardroom shareholder caucuses and meetings between managers and large shareholders substitute for effective boardroom action. But, because diffuse stockholders will at key points in a firm's future need a plausible board (due to a succession crisis, a production downfall, or a technological challenge), diffuse ownership for the German firm would deny the firm both boardroom and blockholder governance. Blockholder governance would be gone (if the block dissipated into a diffuse securities market) and board-level governance would be unavailable because the shareholders and managers had weakened the board beforehand. Stockholders would face a choice of charging up the board (and hence further empowering its employee-half) or of living with sub-standard (by current world criteria) boardroom governance. In the face of such choices, German firms (i.e., their managers and blockholders) retain their 'semi-private,' blockholding structure, and German securities markets do not develop.