Varieties of institutional investors and national models of Capitalism: The transformation of corporate governance in France and Germany

Politics and Society

Volumn 34, Issue 3, 2006, Pages 399-430

  Goyer, Michel ^a  

^a UNIVERSITY OF WARWICK   (United Kingdom)

Author keywords

Comparative corporate governance; Institutional analysis; Institutional investors; Organization of work; Varieties of Capitalism

Indexed keywords

EID: 33746584301     PISSN: 00323292     EISSN: 15527514     Source Type: Journal    
DOI: 10.1177/0032329206290427     Document Type: Article

References (151)

1. A good overview of the causes and dynamics of recent corporate scandals in Europe and the United States is provided in John Coffee, "A Theory of Corporate Scandals: Why the USA and Europe Differ," Oxford Review of Economic Policy 21, no. 2 (Summer 2005): 198-211.
2. Excellent analyses of the political dimensions of the transformation of national systems of corporate governance are Peter Gourevitch and James Shinn, Political Power and Corporate Control: The New Global Politics of Corporate Governance (Princeton, N.J.: Princeton University Press, 2005);
3. and Mark Roe, "Political Preconditions to Separating Ownership from Corporate Control," Stanford Law Review 53, no. 3 (December 2000): 539-606.
4. For comprehensive overviews of the rise of shareholder value practices in France and Germany, see Richard Deeg, "The Comeback of Modell Deutschland?" German Politics 14, no. 3 (September 2005): 332-53;
5. Michel Goyer, "Corporate Governance, Employees, and Core Competencies in France and Germany," in Global Markets, Domestic. Institutions: Corporate Law and Governance in a New Era of Cross-Border Deals, ed. Curtis Milhaupt (New York: Columbia University Press, 2003);
6. and Martin Hoepner, "Corporate Governance in Transition: Ten Empirical Findings on Shareholder Value and Industrial Relations in Germany," Discussion Paper no. 01/5 (Cologne: Max Planck Institute, 2001).
7. For a theoretical overview of the issue of convergence in corporate governance, see Ruth Aguilera and Gregory Jackson, "The Cross-National Diversity of Corporate Governance: Dimensions and Determinants," Academy of Management Review 28, no. 3 (July 2003): 432-46.
8. John Campbell, Institutional Change and Globalization (Princeton, N.J.: Princeton University Press, 2004).
9. The case for divergence is best asserted in Suzanne Berger, "Introduction," in National Diversity and Global Capitalism, ed. Suzanne Berger and Ronald Dore (Ithaca, N.Y.: Cornell University Press, 1996);
10. and Peter Hall and David Soskice, "An Introduction to Varieties of Capitalism," in Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, ed. Peter Hall and David Soskice (New York: Oxford University Press, 2001).
11. See Campbell, Institutional Change and Globalization, 1-9;
12. and Douglass North, Understanding the Process of Economic Change (Princeton, N.J.: Princeton University Press, 2005).
13. Excellent analyses of patterns of adjustment in French firms are Bob Hancké, Large Firms and Industrial Adjustment: Industrial Renewal and Economic Restructuring in France (New York: Oxford University Press, 2002);
14. and Vivien Schmidt, From State to the Market? The Transformation of French Business under Mitterrand (New York: Cambridge University Press, 1996).
15. The key readings on the negotiated process of firm-level adjustment in Germany are Wolfgang Streeck, Social Institutions and Economic Performance (London: Sage, 1992);
16. and Kathleen Thelen, Unions of Parts: Labor Politics in Postwar Germany (Ithaca, N.Y.: Cornell University Press, 1991).
17. The classic statement on the Varieties of Capitalism theoretical perspective is Hall and Soskice, "An Introduction to Varieties of Capitalism," 1-71.
18. Hall and Soskice argue that two dominant clusters of interdependent institutions exist: liberal market economies and coordinated market economies. These two clusters constitute different ways to solve coordination problems faced by firms - market instruments being predominant in the former, while a greater range of institutions such as peak associations, network monitoring based on the exchange of private information, and relational contracting constitute the hallmarks of adjustment processes for the latter.
19. See Peter Hall and Daniel Gingerich, "Varieties of Capitalism and Institutional Complementarities in the Macroeconomy: An Empirical Analysis," Discussion Paper no. 04/5 (Cologne: Max Planck Institute, 2004);
20. and David Soskice, "Divergent Production Regimes: Coordinated and Uncoordinated Market Economies in the 1980s and 1990s," in Continuity and Change in Contemporary Capitalism, ed. Herbert Kitschelt, Peter Lange, Gary Marks, and John Stephens (New York: Cambridge University Press, 1999).
21. An excellent analysis of the problem of economic coordination in regard to the question of training is Pepper Culpepper, Creating Cooperation: How States Develop Human Capital in Europe (Ithaca, N.Y.: Cornell University Press, 2003).
22. Hall and Soskice, "An Introduction to Varieties of Capitalism," 36-44.
23. The broadest theoretical critiques of the Varieties of Capitalism perspective are Colin Crouch, Capitalist Diversity and Change (New York: Oxford University Press, 2005);
24. Chris Howell, "Varieties of Capitalism: And Then There Was One?" Comparative Politics 36, no. 1 (October 2003): 103-24;
25. and Glenn Morgan, "Institutional Complementarities, Path Dependency, and the Dynamics of Firm," in Changing Capitalisms? Internationalisation, Institutional Change, and Systems of Economic. Organization, ed. Glenn Morgan, Richard Whitley, and Eli Moen (New York: Oxford University Press, 2005).
26. The thesis of significant transformation via incremental processes of change is best provided in Wolfgang Streeck and Kathleen Thelen, "Introduction: Institutional Change in Advanced Political Economies," in Beyond Continuity: Institutional Change in Advanced Political Economies, ed. Wolfgang Streeck and Kathleen Thelen (New York: Oxford University Press, 2005).
27. This theoretical perspective of institutional change constitutes an explicit criticism of punctuated equilibrium models whereby prolonged periods of institutional stability are interrupted suddenly by critical exogenous shocks that result in a conflictual period of transition until a new pattern of institutional complementarity is established, thereby resulting in a new stable equilibrium.
28. See Ronald Gilson, "Globalizing Corporate Governance: Convergence of Form or Function," American Journal of Comparative Law 49, no. 2 (Spring 2003): 329-57;
29. and Kathleen Thelen, "How Institutions Evolve: Insights from Comparative Historical Analysis," in Comparative Historical Analysis in the Social Sciences, ed. James Mahoney and Dietrich Rueschemeyer (New York: Cambridge University Press, 2003).
30. See Marino Regini, "Between Deregulation and Social Pacts: The Responses of European Economies to Globalization," Politics and Society 28, no. 1 (March 2000): 5-33.
31. This argument is best developed in Peter Hall, "Central Bank Independence and Coordinated Wage Bargaining: Their Interaction in Germany," German Politics and Society, no. 31 (Spring 1994): 1-23;
32. and Peter Hall and Robert Franzese, "Mixed Signals: Central Bank Independence, Coordinated Wage Bargaining, and European Monetary Union," International Organization 52, no. 3 (Summer 1998): 505-35.
33. See Michael Loriaux, France after Hegemony: International Change and Financial Reform (Ithaca, N.Y.: Cornell University Press, 1991);
34. and John Zysman, Governments, Markets, and Growth (Ithaca, N.Y.: Cornell University Press, 1983), 99-169, for historical analyses of the French financial system.
35. The original thesis is Peter Hall and Kathleen Thelen, "Institutional Change and the Varieties of Capitalism" (paper presented to the APSA annual meeting, Washington, D.C., September 1-4, 2005).
36. A good example of this dichotomy between coordination and institutional change is the transfer of Japanese methods of production (just-in-time, teamwork) to France and Germany in the last twenty years. In France, the introduction of such methods served as an additional means of control for management at the same time as constituting a source of productivity. In Germany, the same event strengthened the position of the Meister and the central role of training in the production process. See Peter Doeringer, Edward Lorenz, and David Terkla, "The Adoption and Diffusion of High-Performance Management: Lessons from Japanese Multinationals in the West," Cambridge Journal of Economics 27, no. 2 (March 2003): 265-86;
37. and Mari Sako, "Training, Productivity and Quality Control in Japanese Multinational Companies," in The Japanese Firm, ed. Masahiko Aoki and Ronald Dore (New York: Oxford University Press, 1996).
38. See Robert Boyer, "Wage Austerity and/or an Education Push: The French Dilemma," Labour 9, special issue (1995): 19-65;
39. and Pepper Culpepper, "Individual Choice, Collective Action, and the Problem of Training Reform: Insights from France and Eastern Germany," in The German Skills Machine: Comparative Perspectives on Systems of Education and Training, ed. Pepper Culpepper and David Finegold (New York: Berghahn, 1998).
40. See Arndt Sorge, The Global and the Local: Understanding the Dialectics of Business Systems (New York: Oxford University Press, 2005), ch. 5;
41. and Richard Whitley, "The Institutional Structuring of Organizational Capabilities: The Role of Authority Sharing and Organizational Careers," Organization Studies 24, no. 5 (June 2003): 667-95.
42. Zysman, Governments, Markets, and Growth, 69-75.
43. See Jeremy Edwards and Klaus Fisher, Banks, Finance and Investment in Germany (New York: Cambridge University Press, 1994);
44. and Francois Morin, La Structure Financière du Capitalisme Français (Paris: Calmann-Levy, 1974).
45. Julian Franks and Colin Mayer, "Corporate Ownership and Control in the U.K., Germany, and France," Journal of Applied Corporate Finance 9, no. 4 (Winter 1997): 30-45.
46. See Loriaux, France after Hegemony;
47. and Jonathan Story, "Finanzplatz Deutschland: National or European Response to Internationalization?" German Politics 5, no. 3 (December 1996): 371-94.
48. Conference Board, "Equity Ownership and Investment Strategies of US and International Institutional Investors," Institutional Investment Report 4, nos. 2-3 (May 2002): 1-45.
49. François Morin and Eric Rigamonti, "Evolution et Structure de l'Actionnariat en France," Revue Française de Gestion 28, no. 141 (November-December 2002): 155-81.
50. Alfred Rappaport and Mark Sirower, "Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions," Harvard Business Review 77, no. 6 (November-December 1999): 147-58.
51. Hall and Soskice, "An Introduction to Varieties of Capitalism," 57.
52. Data on the distribution of activities of French and German firms between the home base and American subsidiaries are presented in Manuel Separio and Donald Dalton, "Globalization of Industrial R&D: An Examination of Foreign Direct Investments in R&D in the United States," Research Policy 28, nos. 2-3 (March 1999): 303-16.
53. John Coffee, "The Future as History: The Prospects for Global Convergence in Corporate Governance," Northwestern University Law Review 93, no. 3 (1999): 641-708.
54. Gourevitch and Shinn, Political Power and Corporate Control, 105.
55. It must be noted, however, that foreign ownership for large companies is substantially higher than for the rest of the German corporate sector. See Michel Goyer, "Institutional Investors in French and German Corporate Governance," working paper (Cambridge, Mass.: Center for European Studies at Harvard University, 2006), table 2.
56. See Goyer, "Institutional Investors in French and German Corporate Governance," table 4.
57. See, for example, Mark Roe, "Corporate Law's Limits," Journal of Legal Studies 31, no. 2 (June 2002): 233-71.
58. See Hancké, Large Firms and Industrial Adjustment, 57-87;
59. and Schmidt, From State to the Market? 393-416.
60. See Kathleen Thelen, Unions of Parts, 25-104.
61. Pensions & Investments, January 26, 2004, 16.
62. Robert Pozen, Mutual Fund Business (Cambridge, Mass.: MIT Press, 1998), 397-423.
63. Hedge funds, on the other hand, are traditionally set up as limited partnerships that are limited to a restricted number of wealthy individuals (500) with personal assets of at least $5 million who are willing to adopt highly risky short-term strategies and borrow on financial markets in exchange for high return potential. Hedge funds are managed on a DC scheme with investors uncertain to recover their investment since fund managers are typically given mandates to make an absolute return target regardless of the market environment. But in contrast to mutual funds schemes, hedge funds impose initial lock-up periods of at least one year as funds are not redeemable on demand. This difference aside, hedge and mutual funds constitute two forms of short-term, impatient capital. For an overview, see Stephen Brown and William Goetzmann, "Hedge Funds with Style," NBER working paper no. 8173 (Cambridge, Mass.: NBER, 2001).
64. Conference Board, "Turnover, Investment Strategies, and Ownership Patterns," Institutional Investment Report 2, no. 2 (August 1998): 1-51.
65. "Turnover, Investment Strategies, and Ownership Patterns," Institutional Investment Report 2, no. 2 (1998): 1-51. Ibid.
66. See Daniel Bandru, Stéphanie Lavigne, and François Morin, "Les Investisseurs Institutionnels Internationaux: Une Analyse du Comportement des Investisseurs Américains," Revue économie Financière, no. 61 (2001): 121-37.
67. Daniel Bandru, Stéphanie Lavigne, and François Morin, Revue Économie Financière Ibid., 125.
68. Daniel Bandru, Stéphanie Lavigne, and François Morin, Revue Économie Financière Ibid., 126.
69. For an overview of the investment strategies of hedge funds, see Carl Ackermann, Richard McEnally, and David Ravenscraft, "The Performance of Hedge Funds: Risk, Return, and Incentives," Journal of Finance 54, no. 3 (June 1999): 833-74.
70. See Tracy Woidtke, "Agents Watching Agents? Evidence from Pension Fund Ownership and Value," Journal of Financial Economics 63, no. 1 (January 2002): 99-131.
71. Robert Monks and Nell Minow, Corporate Governance (Cambridge, Mass.: Blackwell, 1995), 125.
72. An excellent review of the motivations of pension fund officials is provided in Roberta Romano, "Public Pension Fund Activism in Corporate Governance Reconsidered," Columbia Law Review 93, no. 4 (May 1993): 795-853.
73. See Edwin Elton, Martin Gruber, and Christopher Blake, "Incentives Fees and Mutual Funds," Journal of Finance 58, no. 2 (April 2003): 779-804.
74. Mutual fund managers whose fund's performance lags behind rivals at the midpoint of an assessment period are likely to shift the composition of their portfolio by investing in a greater number of riskier companies, thereby increasing the volatility of the fund but also the probability of increasing its performance. See Judith Chevalier and Glenn Ellison, "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy 105, no. 6 (December 1997): 1167-200.
75. Ian McDonald, "Fidelity Managers Gets Ranked," Wall Street Journal Europe, January 21, 2003.
76. Brown and Goetzmann, "Hedge Funds with Style," 2.
77. Monks and Minow, Corporate Governance, 163;
78. and Robert Pozen, "Institutional Investors: The Reluctant Activists," Harvard Business Review 72, no. 1 (January-February 1994): 140-49.
79. See Goyer, "Institutional Investors in French and German Corporate Governance," table 5.
80. Hedge funds do not have to reveal the composition of their portfolio, and materials distributed to investors are often available on a restricted basis and published at irregular intervals. Their low-profile and secretive nature is designed to minimize regulatory and tax oversights. As a result, it is often impossible to acquire credible data on the holdings of hedge funds. On the other hand, however, financial regulation in the European Union obliges share-holders to disclose equity stake above the 5 percent threshold. Thus, it becomes possible to track the investment targets of hedge funds when their equity stake exceeds this threshold. Data on the presence of hedge funds in France and Germany are provided in the next section.
81. I collected data from the two official governmental databases of the financial regulation authority of the two countries: http://www.amf-france.org and http://www.bawe.de.
82. Dafsaliens, Annuaire DAFSA (Paris: Editions Dafsa, annually);
83. and Rudiger Liedtke, Wem Gehort die Republik? (Frankfurt: Eichborn, annually).
84. A detailed and complete listing of acquisitions over the 5 percent threshold in France and Germany is provided in Goyer, "Institutional Investors in French and German Corporate Governance."
85. A similar divergence characterizes the investment of Anglo-Saxon institutional investors in the two countries outside the blue-chip company category. From September 1997 to May 2005, ninety-three German firms received a total of 130 instances of an investment over the 5 percent threshold by an Anglo-Saxon institutional investor. If we deduct the top eighty companies from this sample, this leaves us with sixty-five German firms recording eighty-two investments over the 5 percent threshold. For the same period, 211 French companies recorded 416 instances of an investment over the 5 percent threshold. The same figures, if we deduct the top eighty French companies from the sample, are 159 and 277.
86. Morningstar, Morningstar Funds 500 (Hoboken, N.J.: John Wiley, annually).
87. For a complete discussion of the link between price/earning ratio and managerial autonomy, see Goyer, "Institutional Investors in French and German Corporate Governance."
88. Nicolas Daniels, "Les Points Noirs du Gouvernement d'Entreprise a la Française," Figaro Economie, May 10, 2001;
89. and Davis Global Advisors, Leading Corporate Governance Indicators (Newton, Mass.: Davis Global Advisors, annual publication).
90. See also Goyer, "Corporate Governance, Employees, and Core Competencies in France and Germany," 191-98.
91. See Detley Karg, "For Sale: Germany, Inc.," Deutsche Welle, May 15, 2005;
92. and Richard Milne, "Tweedy May Review Its German links over VW Row," Financial Times, December 2, 2005.
93. See Gourevitch and Shinn, Political Power and Corporate Control, 205-28;
94. and Hoepner, "Corporate Governance in Transition," 27-28.
95. Hancké, Large Firms and Industrial Adjustment, 57-87;
96. and Schmidt, From State to the Market? 393-416.
97. See Michel Goyer, "The Transformation of Corporate Governance in France and Germany: The Role of Workplace Institutions," working paper no. 02/10 (Cologne: Max Planck Institute, 2002);
98. and Peter Hall, "The Politics of Adjustment in Germany," in Ökonomische Leistungsfähigkeit und Institutionelle Innovation, ed. F. Naschold, D. Soskice, B. Hancké, and Ü. Jurgens (Berlin: Edition Sigma, 1997).
99. See Streeck, Social Institutions and Economic Performance, 49-55.
100. Culpepper, "Individual Choice, Collective Action, and the Problem of Training Reform," 286.
101. Culpepper, "Individual Choice, Collective Action, and the Problem of Training Reform," Ibid., 301.
102. See Marc Maurice, François Sellier, and Jean-Jacques Silvestre, The Social Foundations of Industrial Power: A Comparison of France and Germany (Cambridge, Mass.: MIT Press, 1986), 65-73.
103. Marc Maurice, François Sellier, and Jean-Jacques Silvestre, The Social Foundations of Industrial Power: A Comparison of France and Germany Ibid., 77.
104. See Culpepper, "Individual Choice, Collective Action, and the Problem of Training Reform," 276-77;
105. and Walter Muller-Jentsch, "Germany: From Collective Voice to Co-management," in Works Councils: Consultation, Representation and Cooperation in Industrial Relations, ed. Joel Rogers and Wolfgang Streeck (Chicago: University of Chicago Press, 1995).
106. Michel Goyer, "The Transformation of Corporate Governance in France and Germany," 26;
107. and Wolfgang Streeck, "Successful Adjustment to Turbulent Markets: The Automobile Industry," in Industry and Politics in West Germany: Toward the Third Republic, ed. Peter Katzenstein (Ithaca, N.Y.: Cornell University Press, 1989), 129.
108. David Marsden, A Theory of Employment Systems (New York: Oxford University Press, 1999), 121-38.
109. David Marsden, A Theory of Employment Systems Ibid., 98.
110. A good analysis of the reorganization of the practices of work floor organization in France is Danièle Linhart, La Modernisation des Entreprises (Paris: La Découverte, 1994).
111. Culpepper, "Individual Choice, Collective Action, and the Problem of Training Reform," 278.
112. Goyer, "The Transformation of Corporate Governance in France and Germany," 25.
113. See Hancké, Large Firms and Industrial Adjustment, 57-82.
114. Richard Whitley, Divergent Capitalisms: The Social Structuring and Change of Business Systems (New York: Oxford University Press, 1999), 38-44.
115. See Linhart, La Modernisation des Entreprises, 57-64;
116. and Arndt Sorge, "Strategic Fit and the Societal Effect: Interpreting Cross-National Comparisons of Technology, Organization and Human Resources," Organization Studies 12, no. 2 (1991): 161-90.
117. See David Marsden, A Theory of Employment Systems, 103-4;
118. and Maurice, Sellier, and Silvestre, The Social Foundations of Industrial Power, 60-65.
119. See Maurice, Sellier, and Silvestre, The Social Foundations of Industrial Power, 59-120.
120. Michel Crozier, Le Phénomène Bureaucratique (Paris: Le Seuil, 1963);
121. and Geert Hofstede, Culture's Consequences: International Differences in Work Related Values (London: Sage, 1980).
122. See Linhart, La Modernisation des Entreprises, 23-47.
123. See Danièle Linhart, "The Shortcomings of an Organizational Revolution That Is out of Step," Economic and Industrial Democracy 14, no. 1 (February 1993): 49-64.
124. See Linhart, La Modernisation des Entreprises, 48-64;
125. and Sorge, The Global and the Local, 180-82.
126. The dual nature of this development-change in practices of workplace organization combined with stability in power relationships-testifies to the importance of the distinction between institutional framework and the mode of coordination that follows from these institutions. See Hall and Thelen, "Institutional Change and the Varieties of Capitalism," for an analysis of this crucial distinction.
127. See Whitley, "The Institutional Structuring of Organizational Capabilities," 669-79.
128. Marsden, A Theory of Employment Systems, 38.
129. Carl Kester, "Industrial Groups as Systems of Corporate Governance," Oxford Review of Economic Policy 8, no. 3 (Autumn 1992): 24-44.
130. Maurice, Sellier, and Silvestre, The Social Foundations of Industrial Power, 90-100.
131. Whitley, "The Institutional Structuring of Organizational Capabilities," 669-79.
132. See Streeck, "Successful Adjustment to Turbulent Markets," 131-32.
133. Maurice, Sellier, and Silvestre, The Social Foundations of Industrial Power, 79-84.
134. Marsden, A Theory of Employment Systems, 133.
135. See Maurice, Sellier, and Silvestre, The Social Foundations of Industrial Power, 69-73;
136. and Streeck, Social Institutions and Economic Performance, 36-40.
137. Maurice, Sellier, and Silvestre, The Social Foundations of Industrial Power, 79-84.
138. See Sorge, "Strategic Fit and the Societal Effect," 168-76.
139. See Whitley, "The Institutional Structuring of Organizational Capabilities," 669-79.
140. See Streeck, Social Institutions and Economic Performance, 36-40.
141. For a discussion of the problems engendered by the constant modification to the codes of training practices, see Gary Herrigel and Charles Sabel, "Craft Production in Crisis: Industrial Restructuring in Germany during the 1990s," in Culpepper and Finegold, The German Skills Machine.
142. For example, thirty-one new occupations were defined and ninety-seven were updated and modernized between 1996 and 1999. See Jill Rubery and Damian Grimshaw, The Organization of Employment: An International Perspective (London: Palgrave Macmillan, 2003), 130.
143. Culpepper, Creating Cooperation, 57.
144. For a full discussion of the macro effects of interaction between institutions in different spheres of the economy, see Hall and Franzese, "Mixed Signals";
145. and Hall and Soskice, "An Introduction to Varieties of Capitalism," 17-33.
146. See Campbell, Institutional Change and Globalization, for a subtle analysis of the problem of measuring and assessing institutional change.
147. For a discussion of the concept of latent institutions, see Kathleen Thelen and Sven Steinmo, "Institutionalism in Comparative Politics," in Structuring Politics: Historical Institutionalism in Comparative Analysis, ed. Sven Steinmo, Kathleen Thelen, and Frank Longstreth (New York: Cambridge University Press, 1992), 16-18.
148. See Zysman, Governments, Markets, and Growth, 99-169.
149. See Pepper Culpepper, "Institutional Change in Contemporary Capitalism," World Politics 57, no. 2 (January 2005): 173-99, for an analysis of the stability of ownership concentration in Germany.
150. See Hall and Thelen, "Institutional Change and the Varieties of Capitalism," 30-37.
151. The original thesis of this argument is Kathleen Thelen, How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan (New York: Cambridge University Press, 2004).