International Review of Law and
Economics 25 (2005) 513–540
Functional Change and Bank Strategy in German
Corporate GovernanceDwight B. Crane a,1, Ulrike Schaede b,∗
a Harvard Business School, United States
b University of California, San Diego, Graduate School of International Relations and Pacific Studies,
La Jolla, CA 92093-0519, United States
AbstractThis paper analyses changes in the German corporate governance system in the 1990s, using afunctional perspective that separates the functions of
代写留学生论文governance from the institutions that performthese functions. Financial globalization, harmonized legislation within the European Union, anddomestic pressures have triggered a move away from the postwar German system of bank-basedgovernance, and towards more market-oriented processes. The paper shows that these forces haveresulted in heightening transparency, more active capital markets, and a greatly reduced role of banksin the governance process. However, Germany’s 2002 boycott of EU takeover legislation has created avoid 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.
© 2005 Elsevier Inc. All rights reserved.
Keywords: Corporate governance reform; Germany, EU takeover code harmonization; Functional perspective
1. Introduction
The corporate governance system of a country determines the set of institutions that areentrusted with the process of monitoring firms, by either inducing or forcing management∗ Corresponding author. Tel.: +1 858 534 2357.E-mail addresses: dcrane@hbs.edu (D.B. Crane), uschaede@ucsd.edu (U. Schaede).
1 Tel.: +1 617 495 6679.
0144-8188/$ – see front matter © 2005 Elsevier Inc. All rights reserved.
doi:10.1016/j.irle.2005.12.001516 D.B. Crane, U. Schaede / International Review of Law and
Economics 25 (2005) 513–540
2. System change in corporate governance
We propose that the change process is best analyzed based on a functional perspective,in which the specific functions of corporate governance are separated from the institutionsthat perform them. The underlying functions of corporate governance, such as protecting
the providers of capital, are stable over time and across geographic boundaries, but theinstitutional arrangements for performing these functions can vary considerably in differentenvironments or over time. Thus, an analysis of change should focus on assessing variations
in the processes through which the main functions of corporate governance are delivered.In this section, we introduce this model and operationalize it by determining expected areas
of change.
2.1. A functional perspective of governance
Effective corporate governance systems perform three key functions.4 The first is toprotect the interests of the providers of financial capital and other resources, and to resolveconflicts among those interests. This protection assures the efficient flow of goods and
services to business firms, in particular from creditors. A second function is to provide
ways to manage problems stemming from inadequate or incomplete information. Givenmanagers’ superior information about the firm’s condition and prospects, well-functioninggovernance systems must ensure information flow and manage problems that result fromasymmetric information, such a
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