Corporate Governance in three economies -

Germany, Japan, and the United States

by Robert M Conroy (2002)

Prepared By Srinivasan G MBA/0453/58

For Corporate Governance Individual Reading assignment 2022
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Introduction
The article provides deeper insights into comparison of corporate governance structure
between three developed economies – Germany, Japan and USA and compares them on
numerous parameters, primarily on the definition of stakeholders, supervisory board
relationship with the senior management. Even though some differences are assumed to
be cultural, one of the peculiar differences emerges from the role of banks as stakeholders.
While in USA, they are not in the picture, they are very much alive in German and Japanese
boards. One reason being the legal charter in US that they could not have any nationalized
banks, they were only chartered at a state level, equating to 17000 commercial banks in
1929, while Germany had around 200, Japan had only 85. This created a equity and bond
oriented market in the US and Bank oriented financing in Germany and Japan, giving an
indirect implication on the level of influence by various stakeholders in their structure.

Corporate governance – Germany

Germany had multiple forms of business units like sole proprietorship, partnerships,
cooperatives, and limited liability companies. They had 2 major types of Limited liability
partnership companies which are mentioned in the figure below

Fig.1 Difference between GmbH and AG

In GmbH transfer of ownership is very difficult as they do not issue shares, while in the AG
companies, transfer of ownership is comparatively easy as they issue shares.
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As they do not issue shares, a GmbH Company’s growth potential is often limited, which
can be evident from fig. 2. The average sales for a AG firm is slightly higher than their
GmbH counterpart, but because of the sheer volume of GmbH companies, their overall
sales are higher. Most large companies maintain AG structure, while a very few large
companies follow GmbH structure.

AG vs GmbH Avg Sales

3000

2500

2000

1500

1000

500

0
0.02 - 0.05 - 0.1 - 0.25 - 0.50 - 1.00 - 2.00 - 5.00 - 10.00 - 25.00 - 50.00 - 100.00 - 250.00
0.05 0.1 0.25 0.50 1.00 2.00 5.00 10.00 25.00 50.00 100.00 250.00 +

AG Avg Sales GmbH Avg Sales

Fig. 2 Comparison of AG vs GmbH Average Sales

• Management Board called Vorstand

• Supervisory board called aufsichtsrat
• Role of Supervisory board is to appoint vorstand,
approve Capex, Strategic acquisitions, closures
and dividends
• 2/3 shareholders, 1/3 Union workers/Employees
• Larger AG 50% shareholders

• <500 Employees, Simple Governance

Structure
• Larger GmbH have Vorstand and aufsichsrat
• Shareholders can limit worker involvement in
decision making
• Beneficial for Large firm in terms of control
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German banks have always operated as a combination of commercial, investment bank as

well as an investment trust to the companies. Even though they were initially planned as
financial institutions, they took monitoring position by attaining equity shares (Fig. 3). Even
though bank ownership declines, bank’s representation in board did not decline.

GERMANY
Households
13%
Nonfinancial Investors

Banks

19% Mutual Funds and Pensions

55% Insurance companies

2% Other investors
6%
Foreigners
2%
3%

Fig. 3 German Equity Market distribution

There were numerous cross holdings in German corporations, where one company had
equity holdings in the other company, but the most common owners of the German
companies were foreigners, with households and nonfinancial investors having significant
portion of the shares each. But with AGs having complex structured bearer shares, banks
ended up with much more representative power on the supervisory board through
proxies.
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Corporate Governance – Japan

Japanese had 3 major forms of business corporations – Commercial partnerships, limited
partnerships and limited companies. While the limited companies are very common, the
organized sector has only about 0.1% of the total number of companies (2,000/2,000,000).

Governance structure is centered around Board of Directors who decide administrative

affairs and supervise the management. Most of board of directors are insiders, which was
an anomaly when compared to other countries, but they did so to allow for the makeup of
shareholders. (Culturally significant)

Pre-war Japan was very similar to Germany, in the central role of banks in industrial
development and mutual crossholdings of corporate shares. Post-war banking system
emerged from American occupation. Small groups of banks formed Industrial groups to
invest and strengthen relationships in a niche sector.

To drive away the threat of foreign acquisitions, they increased cross holding by over 300%
(5.6% to 18.4%) in around 16 years. Capital restrictions forced companies to issue non-
tradable par value shares to current shareholders, again increasing the cross holdings to
26.3% in 10 years. But over the recent decades, banks and group firms have reduced their
cross holdings significantly.

JAPAN
Households

20% Nonfinancial Investors

27%
Banks

Mutual Funds and Pensions

1% Insurance companies

7% 21%
Other investors

6%
Foreigners

18%

Fig. 4 Japan Equity Market distribution

Due to these restrictions, majority of share holding are by stable investors like banks and
other firms. Hostile takeovers had never occurred due to these restrictions.
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Corporate Governance – United States of America

As companies are incorporated at state level in the USA, most of them prefer Delaware as
their state of incorporation, due to its attractive laws especially the usury laws for financial
institutions. Shareholders elect the Board of directors who in turn select the CEO. USA
shifted from the predominantly insider board to a predominantly outsider one, which were
results of numerous financial scandals in the 1970s. Usual board consists of 12 members,
some of them are current or past management members.

Role of Board

Create and Administer Analysing Preside

Legal
Monitor Senior business corporate Corporate Social
Compliance
management funding performance Responsibility

Fig. 5 Role of Board of Directors in US Governance

In the USA Market, most of the equity shares are controlled by households, followed by
mutual funds and pension schemes.

UNITES STATES
Households
13%
Nonfinancial Investors
4%
37% Banks
7%
Mutual Funds and Pensions

Insurance companies

Other investors
1%
0%
Foreigners
38%