The political paradox of finance capitalism: Interests, preferences, and center-left party politics in corporate governance reform

Politics and Society

Volumn 34, Issue 4, 2006, Pages 463-502

  Cioffi, John W ^a   Höpner, Martin ^b  

^a UNIVERSITY OF CALIFORNIA   (United States)

^b MAX PLANCK INSTITUTE FOR THE STUDY OF SOCIETIES   (Germany)

Author keywords

Center left parties; Corporate governance; Economic reform; Finance capitalism; Financial regulation

Indexed keywords

EID: 33750546690     PISSN: 00323292     EISSN: 15527514     Source Type: Journal    
DOI: 10.1177/0032329206293642     Document Type: Article

References (161)

1. The term "center-left," as used here, refers to coalitions that exclude the large party on the right of each of the respective party systems, and to non-radical, non-Marxist parties only. The left-of-center parties in the countries we observe have very different origins (compare, for example, the German SPD with the Italian post-communist PDS). In general, Marxist and radical left parties do not behave in accordance with the "party paradox" of corporate governance reform. The puzzle we describe and the explanation we offer do not apply to them.
2. Our use of the term "finance capitalism" refers to an economic order characterized by increasing competition, the expansion and deepening of financial markets, and more extensive regulation of the corporate firm's financial and governance practices consistent with the growth of market-driven finance. This conception of finance capitalism stands in sharp contrast to that developed by the German Socialist Rudolph Hilferding in the early twentieth century. Hilferding described a German economy dominated by monopolistic enterprises with strong financial linkages to major banks (and often to each other). In many ways, contemporary finance capitalism is the antithesis of Hilferding's original conception. See Martin Höpner, "Corporate Governance Reform and the German Party Paradox," Comparative Politics (forthcoming);
3. and John W. Cioffi, "Building Finance Capitalism: The Regulatory Politics of Corporate Governance Reform in the United States and Germany," in The State after Statism: New State Activities in the Age of Globalization and Liberalization, ed. Jonah Levy (Cambridge, Mass.: Harvard University Press, 2006), n. 2.
4. See Mark J. Roe, Political Determinants of Corporate Governance: Political Context, Corporate Impact (Oxford: Oxford University Press, 2003).
5. See, e.g., Henk Wouter de Jong, "The Governance Structure and Performance of Large European Corporations," Journal of Management and Governance 1 (1997): 5-27.
6. As Shleifer and Summers argued long ago, shareholder gains from hostile takeovers tend to result not from increased efficiency, but from the breach of implicit contracts with employees and subcontractors. Hostile takeovers are likely to breach the trust inside companies and do not so much create value as shift rents. Labor, one might conclude, should therefore oppose the promotion of markets for corporate control. Andrei Shleifer and Lawrence H. Summers, "Breach of Trust in Hostile Takeovers," in Corporate Takeovers: Causes and Consequences, ed. Alan J. Auerbach (Chicago: University of Chicago Press, 1988), 33-68.
7. For representative examples of the parties' literature, see, e.g., James E. Alt, "Political Parties, World Demand, and Unemployment. Domestic and International Sources of Economic Activity," American Political Science Review 79 (1985): 1016-40;
8. Michael R. Alvarez, Geoffrey Garrett, and Peter Lange, "Government Partisanship, Labor Organization, and Macroeconomic Performance," American Political Science Review 85 (1991): 539-56;
9. Douglas Hibbs, "Political Parties and Macroeconomic Policies," American Political Science Review 71 (1977): 467-87;
10. and Manfred G. Schmidt, "The Impact of Political Parties, Constitutional Structures and Veto Players in Public Policy," in Comparative Democratic Politics, ed. Hans Keman (London: Sage, 2002), 166-84.
11. For leading volumes on comparative political economy, see Peter A. Hall and David Soskice, eds., Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford: Oxford University Press, 2001);
12. and Wolfgang Streeck and Kozo Yamamura, eds., The Origins of Nonliberal Capitalism, Germany and Japan in Comparison (Ithaca, N.Y.: Cornell University Press, 2001).
13. Gøsta Esping-Anderson, Politics against Markets: The Social Democratic. Road to Power (Princeton, N.J.: Princeton University Press, 1985).
14. Peter A. Hall and David Soskice, "Introduction," in Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, ed. Peter A. Hall and David Soskice (Oxford: Oxford University Press, 2001)
15. Complementarity arises where the functionality of an institutional form is conditioned, at least in part, by the existence of other institutional forms. The actors who participate in and benefit from the beneficial interaction effects of complementary institutions did not necessarily intend to create them. For example, Aoki has characterized the interplay of Japanese lifetime employment and monitoring by banks as an "unintended fit." Our analysis suggests that the destabilization of such complemetarities may be equally unintended. Masahiko Aoki, "Unintended Fit: Organizational Evolution and Government Design of Institutions in Japan," in The Role of Government in East Asian Economic Development: Comparative Institutional Analysis, ed. Masahiko Aoki, Hyung-Ki Kim, and Masahiro Okuno-Fujiwara (Oxford: Clarendon, 1997), 233-53.
16. See, e.g., Roe, Political Determinants of Corporate Governance.
17. For classic general descriptions of these national post-war models, see Andrew Shonfield, Modern Capitalism: The Changing Balance of Public and Private Power (London: Oxford University Press, 1965), 239-97;
18. and John Zysman, Governments, Markets, and Growth (Ithaca, N.Y.: Cornell University Press, 1983).
19. Bob Hancké, Large Firms and Institutional Change: Industrial Renewal and Economic Restructuring in France (Oxford: Oxford University Press, 2001);
20. and Shonfield, Modern Capitalism, 71-87.
21. See Andrea Melis, "Corporate Governance in Italy," Corporate Governance: An International Review 8, no. 4 (2000): 347-55.
22. See Neil Fligstein, The Architecture of Markets: An Economic Sociology of Twenty-First-Century Capitalist Societies (Princeton, N.J.: Princeton University Press, 2001), 123-69.
23. See 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 D. Stephens (Cambridge: Cambridge University Press, 1999);
24. Peter A. Hall and David Soskice, "An Introduction to Varieties of Capitalism," in Hall and Soskice, Varieties of Capitalism;
25. and cf. Peter A. Hall, "The Political Economy of Europe in an Era of Interdependence," in Kitschelt et al., Continuity and Change in Contemporary Capitalism.
26. Compare Soskice, "Divergent Production Regimes," 107-10 (arguing that divergent comparative economic advantages of the LME and CME models give rise to different institutional and interest group configurations that maintain path dependence).
27. See generally, John Zysman, Political Strategies for Industrial Order: State, Market, and Industry in France (Berkeley: University of California Press, 1977);
28. and Zysman, Governments, Markets, and Growth, ch. 3. By the early 1980s, the state owned 100 percent of thirteen of the twenty largest industrial firms, owned most of the country's leading banks (including Suez, Paribas, Crédit Lyonnais, Société Générale, and BNP), and held controlling stakes, minority stakes, and substantial debt positions in numerous other firms.
29. See Mary O'Sullivan, "Change and Continuity in the French System of Corporate Governance," INSEAD Working Paper (Fontainebleau Cedex, France: European Institute of Business Administration, 2001), 4-8.
30. See James A. Fanto, "The Role of Corporate Law in French Corporate Governance," Cornell International Law Journal 31 (1998): 31, 48;
31. and James A. Fanto, "The Role of Corporate Law in the Adaptation of French Enterprises," Columbia Business Law Review, Special Symposium Issue (1998): 97-120.
32. Code des Sociétés, Ordonnance NE 67-833 du septembre 1967 (as amended), arts. 6, 7 (Fr.). For discussions of French securities law reforms, see Fanto, "The Role of Corporate Law in the Adaptation of French Enterprises," 111-12;
33. and James A. Fanto, "The Transformation of French Corporate Governance and United States Institutional Investors," in "Symposium: Comparative Models of Privatization: Paradigms and Politics," Brooklyn Journal of International Law 21 (1995): 41-44.
34. See, e.g., Leslie de Quillacq, "Where's the Breast-Beating?" Bredkingviews, June 25, 2002. http://www.breakingviews.com/examplecv.asp;
35. and Jon Henley, "Gigantic Sleaze Scandal Winds Up as Former Elf Oil Chiefs Are Jailed." The Guardian, November 13, 2003.
36. See also International Securities Regulation Reporter, "Insider Trading Scandals: Parisians React with a Smirk and a Yawn," International Securities Regulation Reporter, October 11, 1989, 6;
37. and Yves Meny, "Something Rotten in the Republic." Financial Times, January 28, 2001.
38. See Fanto, "The Transformation of French Corporate Governance," n. 115-17.
39. See Fanto, "The Role of Corporate Law in the Adaptation of French Enterprises," 106-7.
40. Jonah D. Levy, Tocqueville's Revenge: State, Society, and Economy in Contemporary France (Cambridge, Mass.: Harvard University Press, 1999).
41. For analyses of French corporate governance in the context of statist economic policy, see, e.g., O'Sullivan, "Change and Continuity in the French System of Corporate Governance";
42. Fanto, "The Transformation of French Corporate Governance";
43. Jonathan P. Charkham, Keeping Good Company: A Study of Corporate Governance in Five Countries (Oxford: Clarendon, 1994) 130-31;
44. and Oxford Analytica, Board Directors and Corporate Governance: Trends in the G7 Countries over the Next Ten Years (Oxford: Oxford Analytica, 1992), 96.
45. See Richard Deeg and Sophia Perez, "International Capital Mobility and Domestic Institutions: Corporate Finance and Governance in Four European Cases," Governance: An International Journal of Policy and Administration 13, no. 2 (2000): 119-54.
46. Richard Deeg and Sophia Perez, "International Capital Mobility and Domestic Institutions: Corporate Finance and Governance in Four European Cases," Governance: An International Journal of Policy and Administration 13, no. 2 (2000): 119-54. Ibid.
47. This did not mean that the French state withdrew into neo-liberalism. As Jonah Levy argues, the erosion of dirigiste policy was matched through the 1980s and 1990s by an expansion of welfare state programs and expenditures to cushion the blows of the market. See Levy, Tocqueville's Revenge;
48. Jonah D. Levy, "Activation through Thick and Thin: Progressive Strategies for Increasing Labor Force Participation" in Trans-Atlantic Policymaking in an Age of Austerity, ed. Martin Shapiro and Martin Levin (Washington, D.C.: Georgetown University Press, 2004).
49. For accounts of the complex, contentious, and ideological politics of French privatization and economic reform during the 1980s and 1990s, see Levy, Tocqueville's Revenge;
50. see also Deeg and Perez, "International Capital Mobility and Domestic Institutions."
51. For discussions of French privatization, see O'Sullivan, "Change and Continuity in the French System of Corporate Governance";
52. F. Morin, "The Transformation of the French Model of Shareholding and Management," Economy and Society (February 2000): 36-53;
53. Vivian Schmidt, From State to Market? The Transformation of French Business and Government (Cambridge: Cambridge University Press, 1996);
54. and A. Goldstein, "Privatizations and Corporate Governance in France." Banca Nazionale del Lavoro, Quarterly Review, no. 199 (December 1996): 455-88.
55. See Fanto, "The Role of Corporate Law in the Adaptation of French Enterprises," n. 53.
56. See Loi NE 88-70 du 22 janvier 1988 ("Law on Security and Disclosure in the Financial Markets");
57. and Loi NE 89531 du 2 aout 1989 ("Security and Disclosure Law").
58. See Leslie Goldman, "The Modernization of the French Securities Markets: Making the EEC Connection." Fordham Law Review 60 (1992): 238-40.
59. See Loi 96-597 du 2 juillet 1996; Goldman, "The Modernization of the French Securities Markets," 238;
60. and Fanto, "The Role of Corporate Law in the Adaptation of French Enterprises," 111.
61. See Goldman, "The Modernization of the French Securities Markets," 242-43. Following this strengthening of regulatory authority, the COB's enforcement powers arguably exceeded those of the SEC in some respects.
62. Senate, no. 124-1996-1997.
63. See Loi NE 97-277 du 25 mars 1997, § 13. The effects of the French law are especially unlikely to alter governance practice, given that government policy has not yet resolved the intense conflicts over pension reform.
64. See Loi relative aux nouvelles régulations économiques, of May 15, 2001, no. 2001-420.
65. See Loi de sécurité financière, dated August 1, 2003, in Official Journal of the French Republic, no. 177 (August 2, 2003): 13220.
66. Along with its assertion of expansive regulatory powers, the state also held onto "golden shares" with disproportionate voting (or veto) power that conferred control rights over some privatized companies - though this practice is now under attack in the European Court of Justice and is unlikely to withstand judicial scrutiny. Further, networks of government and financial elites reasserted themselves to retake control from the CEOs of France Telecom and Vivendi, whose disastrous forays into American-style corporate mergers and acquisitions nearly destroyed each company. See de Quillacq, "Where's the Breast-Beating?";
67. and Alan Cowell, "A Man Used to Moving in Elite Business Circles," New York Times, July 1, 2002 (French government instrumental in installing established member of elite as CEO of Vivendi after financial crisis).
68. Samer Iskandar, "Three Wiser Men: The French Government and the Business Community Can Learn Important Lessons from the Drawn-out Takeover Battle in the Banking Sector," Financial Times, August 30, 1999, 11.
69. Cf. Tess Read, "Down with Dirigisme," Worldlink, September/October 1999, http://backissues.worldlink.co.uk/articles/ 08091999111756/08.htm.
70. See Hugo Dixon, "Sauter Pour Mieux Reculer," Breaking Views, September 4, 2003, http://www.breakingviews.com.examplecv.asp.
71. OECD, Employment Protection and Labor Market Performance (Paris: Organization for Economic Cooperation and Development, 1999), 18.
72. See, e.g., Ugo Pagano and Sandro Trento, "Continuity and Change in Italian Corporate Governance: The Institutional Stability of One Variety of Capitalism," Università degli Studi di Siena Dipartimento di Economia Politica Working Paper no. 366 (Siena: Dipartimento di Economia Politica, 2002).
73. Marcello Bianchi, Magda Bianco, and Luca Enriques, "Pyramidal Groups and the Separation between Ownership and Control in Italy," in The Control of Corporate Europe, ed. Fabrizio Barca and Marco Becht (Oxford: Oxford University Press, 2001): 154-87;
74. and Mails, "Corporate Governance in Italy."
75. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny "Law and Finance," Journal of Political Economy 106 (1998): 1113-55;
76. and I. J. Alexander Dyck and Luigi Zingales, "Private Benefits of Control: An International Comparison," CEPR Discussion Paper no. 3177 (London: Centre for Economic Policy Research, 2001), http://ssrn.com/abstract= 301200, 16, 47.
77. OECD, Economic Surveys: Italy, July (Paris: Organization for Economic Cooperation and Development, 2003), 101.
78. This does not mean that economic coordination by banks was wholly absent. For example, Mediobanca, a merchant bank created in 1946, was at the center of the web of the Italian company network. However, Mediobanca derived its power and influence primarily through its role as the country's preeminent investment bank, rather than as a major creditor and long-term shareholder of leading corporations (e.g., Deutsche Bank in Germany).
79. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny "Corporate Ownership around the World," NBER Working Paper 6625 (Cambridge, Mass.: National Bureau for Economic Research, 1998), 52.
80. The Italian Communist Party had been excluded from national political power and the political-corporate networks that fueled corruption, and was almost unscathed by the scandals. The party's history of pioneering "Eurocommunism" left its post-Cold War successor party well placed to pursue effective market reforms.
81. For economic statistics, see OECD, Economic Outlook, June (Paris: Organization for Economic Cooperation and Development, 2001).
82. On a scale ranging from -100 to +100, Italian support for EMU was the largest in the whole EU (with a score of+55), compared to +31 in France and -7 in Germany. Data source: European Commission, reported in "A Survey on Italy," Economist Supplement, November 8, 1997 (data for the year 1997).
83. Privatization generated returns of nearly $100 billion between 1990 and 2000, and equaled 8.2 percent of Italy's GDP in the year 2000. Only Portugal and Greece generated proportionally higher privatization returns during the 1990s. See Pagano and Sandra, "Continuity and Change in Italian Corporate Governance," 25;
84. and Manfred Schneider, "Privatization in OECD Countries: Theoretical Reasons and Results Obtained" (University of Linz, 2003), 9.
85. Paul Betts and James Blitz, "At the Head of Italy's Table: The Financial Times Interview: Massimo D'Alema," Financial Times, London ed., December 22, 1997, 14.
86. Paul Betts and James Blitz, "At the Head of Italy's Table: The Financial Times Interview: Massimo D'Alema," Financial Times, 1997, 14. Ibid.
87. Paul Betts and James Blitz, "At the Head of Italy's Table: The Financial Times Interview: Massimo D'Alema," Financial Times, 1997, 14. Ibid.
88. See Alexander Aganin and Paolo Volpin, "History of Corporate Ownership in Italy," ECGI Finance Working Paper 17/2003 (Brussels: European Corporate Governance Institute, 2003), 24;
89. Richard Deeg, "Change from Within: German and Italian Finance in the 1990s," in Beyond Continuity: Institutional Change in Advanced Political Economics, ed. Wolfgang Streeck and Kathleen Thelen (Oxford: Oxford University Press, 2005);
90. and Pagano and Trento, "Continuity and Change in Italian Corporate Governance," 25.
91. Mario Draghi, "Coprorate Governance and Competitiveness," Review of Economic Conditions in Italy 3 (1998): 341-57;
92. and Bianchi, Bianco, and Enriques, "Pyramidal Groups and the Separation between Ownership and Control in Italy," 30-39.
93. "They're (Nearly) All Centrists Now," The Economist, July 5, 2001 (print edition, "Survey of Italy").
94. Robert Graham, "New Chairman Knows Iri from Inside: Differences within the Italian Coalition," Financial Times, London ed., August 8, 1994, 2.
95. These party dynamics also drove the Italian debate over the European Commission's failed draft Takeover Directive in 2001 and elucidate the ideological conflicts over Italian corporate governance regulation. The directive would have imposed uniform EU-wide regulation on corporate takeovers (both hostile and friendly) to encourage the development of a pan-European market for corporate control. The PDS and the Northern League voted for the directive. Berlusconi's Forza Italia, along with the Christian Democrats' successor parties, the Greens, the left-wing Refounded Communists, and the protectionist southern Italian National Alliance, voted against. For discussion of the political controversy over the EU Takeover Directive, see John W. Cioffi, "The Collapse of the European Union Directive on Corporate Takeovers: The EU, National Politics, and the Limits of Integration," BRIE Discussion Paper (Berkeley, Calif.: Berkeley Roundtable on the International Economy, 2001);
96. Helen Callaghan and Martin Höpner, "European Integration and the Clash of Capitalisms. Political Cleavages over Takeover Liberalization, " Comparative European Politics 3 (2005): 307-32.
97. "They're (Nearly) All Centrists Now."
98. Giuliana Amato, the independent first prime minister of the center-left Olive Tree coalition and yet another economist turned politician, criticizes Italians as "still loyal to the old system of a small group of shareholders close to management, and very aware of anyone who might come into the company.... Our culture of governance is still an elitist one, of closed companies and nearly closed shops." "They're (Nearly) All Centrists Now." Ibid.
99. OECD, Employment Protection and Labor Market Performance, 18.
100. See, e.g., Soskice, "Divergent Production Regimes";
101. and Hall and Soskice, "An Introduction to Varieties of Capitalism."
102. See Kenneth Dyson, "The State, Banks and Industry: The West German Case," in State, Finance and Industry: A Comparative Analysis of Post-war Trends in Six Advanced Industrial Economies, ed. Andrew Cox (Brighton, UK: Wheatsheaf, 1986), 118-41 (noting that the banks' intermediating relationships were especially important in the field of foreign trade).
103. See Shonfield, Modern Capitalism.
104. See Paul Windolf and Jürgen Beyer, "Co-operative Capitalism: Corporate Networks in Germany and Britain," British Journal of Sociology 47, no. 2 (1996): 205-31;
105. Jürgen Beyer and Martin Höpner, "Corporate Governance and the Disintegration of Organized Capitalism," West European Politics 26, no. 4 (2003): 179-98;
106. and Martin Höpner and Lothar Krempel, "The Politics of the German Company Network," Competition and Change 8 (2004): 339-56.
107. Cf. John W. Cioffi, "Restructuring 'Germany, Inc.': The Corporate Governance Debate and the Politics of Company Law Reform," Law & Policy 24, no. 4 (2002): 355-402;
108. and J. Nicholas Ziegler, "Corporate Governance and the Politics of Property Rights in Germany," Politics and Society 28, no. 2 (2000): 195-221, esp. 203.
109. However, privatization was a significant factor in the German case as well. See Ziegler, "Corporate Governance and the Politics of Property Rights in Germany"
110. (arguing that the privatization of East German state-owned enterprises and the public offering of Deutsche Telekom shares spurred the government's efforts to create a "shareholder culture" and to adopt shareholder-friendly policies). In fact, the German government recovered its annual highest returns from privatization in 1998 - which coincided with a major company law reform (see below) and a wave of regulatory expansion. See Beyer and Höpner, "Corporate Governance and the Disintegration of Organized Capitalism";
111. and Cioffi, "Restructuring 'Germany, Inc.' "
112. See Cioffi, "Restructuring 'Germany, Inc.'";
113. and Cioffi, "Building Finance Capitalism."
114. See Richard Deeg, "Institutional Change and the Uses and Limits of Path Dependency: The Case of German Finance," MPIfG Discussion Paper 01/6 (Köln: Max-Planck-Institut für Gesellschaftsforschung, 2001);
115. and Susanne Lutz, "From Managed to Market Capitalism? German Finance in Transition," MPIfG Discussion Paper 2000-02 (Köln: Max-Planck-Institut für Gesellschaftsforschung, 2000).
116. The BAWe represented Germany's appropriation of the "SEC model" of securities regulation through a strong centralized regulator with substantial rule-making and enforcement powers. See Cioffi, "Restructuring 'Germany, Inc.' "
117. See Höpner, "Corporate Governance Reform and the German Party Paradox."
118. E.g., Ingrid Scheibe-Lange and Arno Prangenberg "Mehr Mitbestimmung via US-Börsenaufsicht," Die Mitbestimmung 43, no. 11 (1997): 45-49.
119. Hans-Detlev Küller, "Das Shareholder-Value-Konzept aus Gewerkschaftssicht," Betriebswirtschaftliche Forschung und Praxis 49 (1997): 529.
120. There also may be situations, as in the takeover of Mannesmann by Vodafone, where both shareholders and labor (on the supervisory board and on works councils) prefer to split up the company, while the management board pursues its preference for running a large, powerful corporation. See Martin Höpner and Gregory Jackson, "An Emerging Market for Corporate Control? The Mannesmann Takeover and German Corporate Governance," MPIfG Discussion Paper 2001-4 (Köln: Max-Planck-Institut für Gesellschaftsforschung, 2001) (discussing Vodafone's hostile takeover of Mannesmann).
121. Corporate Control and Transparency Act (Gesetz zur Kontrolle und Transparenz im Unternehmensbereich, or KonTraG) of April 27, 1998, Federal Law Gazette, pt. I, 786 (Gesetz vom 27.4.1998, BGBl. I, S. 786 vom 30.4.1998).
122. See Cioffi, "Restructuring 'Germany, Inc."';
123. see also Ziegler, "Corporate Governance and the Politics of Property Rights in Germany," 205, 216.
124. Cioffi, "Restructuring 'Germany, Inc.' "
125. Edmund Stoiber, the unsuccessful CDU-CSU candidate for chancellor in the 2002 election, used this issue in his election campaign and pledged to reintroduce the tax as chancellor.
126. See Transparency and Disclosure Act (Gesetz zur weiteren Reform des Aktien- und Bilanzrechts, zu Transparenz und Publizität, also known as the Transparenz- und Publizitätsgesetz, or "TransPuG"), v. July 19,2002, BGBl. I S. 2681;
127. and Law on Company Integrity and on the Modernization of the Stock Corporations Act (Gesetz zur Unternehmensintegrität und Modernisierung des Aktiengesetzes, or UMAG), BT-Drs. 15/5693, June 15, 2005 (effective November 1, 2005). The TransPuG requires, inter alia, listed companies to comply or explain their non-compliance with the governmental Corporate Governance Commission's Code of Best Practices. The government also signaled its approval of the EU European Company Directive creating a (so far seldom used) pan-European corporate form. See Council Regulation (EC) No 2157/2001 of 8.10.2001 on the Statute for a European Company (SE), OJ L 294/1, 10. 11. 2001, Art. 38 b).
128. See also Marie Bolt, Stellungnahme des DGB zum Fragenkatalog der Regierungskommission, "Corporate Governance - Unternehmensführung - Unternehmenskontrolle - Modernisierung des Aktienrechts" (Berlin: Deutscher Gewerkschaftsbund, 2000);
129. Roland Köstler, "Grundsätze der Unternehmensführung und -kontrolle in der Diskussion," Die Mitbestimmung 46, no. 5 (2000): 34-35;
130. Roland Köstler and Matthias Müller, "Unternehmensfü hrung -Unternehmenskontrolle - Modernisierung des Aktienrechts," Arbeitshilfe no. 15 für Arbeitnehmervertreter in Aufsichtsräten (Düsseldorf: Hans-Böckler-Stiftung, 2001);
131. Heinz Putzhammer and Roland Köstler, "Eckpunkte für ein Übernahmegesetz," Die Mitbestimmung 46, no. 5 (2000): 22-23;
132. Hubertus Schmoldt, "Shareholder Value und Mitbestimmung," Die Mitbestimmung 48, no. 6 (2002): 10-16;
133. and Patrick Leyens, "German Company Law: Recent Developments and Future Challenges," German Law Journal 6, no. 10 (October 1, 2005): http://www.germanlawjournal.com/article.php?id=645.
134. The FDP, which was most likely to support the directive, had no representatives in the European Parliament.
135. See Beschlussempfehlung und Bericht des Finanzausschusses, Drucksache 14/7477, November 14, 2001.
136. See remarks of Nina Hauer (SPD Bundestag Member) in the debate on the takeover law, minutes of the Bundestag 14/201, November 15, 2001.
137. Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, or WpÜG), v. 20 December 2001 (BGBl. I.S. 3822).
138. Deeg, "Change from Within."
139. See Edward S. Adams and John H. Matheson, "A Statutory Model for Corporate Constituency Concerns," Emory Law Journal (Fall 2001): 1085;
140. Mark J. Roe, "Takeover Politics," in The Deal Decade: What Takeovers Mean for Corporate Governance, ed. Margaret Blair (Washington, D.C.: Brookings Institution, 1993): 321-53;
141. and John H. Matheson and Brent A. Olson, "Shareholder Rights and Legislative Wrongs: Toward Balanced Takeover Legislation," George Washington Law Review (August 1991): 1425.
142. First, the Private Securities Litigation Reform Act of 1995 (PSLRA), passed over President Bill Clinton's veto, raised the pleading requirements for securities fraud suits and largely abolished "aiding and abetting" liability under which law and accounting firms could be held liable for fraudulent statements and omissions by publicly traded companies. The second law, the Securities Law Uniform Standards Act of 1998 (SLUSA), preempted state securities fraud laws that could have been used by plaintiffs' attorneys to circumvent the new, more demanding restrictions on federal securities suits. At a time when conservatives in Congress lauded federalism, Republicans pushed though a bill that dramatically increased centralized federal control over securities regulation.
143. Though nominally reducing disclosure, the amendments were designed to protect shareholders. The SEC's proxy reforms abolished a rule prohibiting shareholders collectively owning more than 5 percent of a corporation's stock from communicating among themselves without filing an expensive and time-consuming proxy statement. The rule was adopted to protect minority shareholders from unfair takeover tactics, but it effectively discouraged institutional investors from collaborating to pursue more activist corporate governance strategies.
144. This blunt use of political clout by the accounting industry and its legislative allies ultimately weakened their political position once the size, seriousness, and number of the accounting scandals of 2001-2002 became public.
145. The disclosures include "off-balance sheet" transactions, codes of ethics (and their waiver by the board), the reconciliation of "pro forma" financial results with generally accepted accounting standards (US GAAP), non-audit services performed by the firm's auditor, and real-time disclosure of material financial information and developments.
146. There has been a pronounced trend toward the appointment of "outside" directors (i.e., individuals not part of management), beginning with a 1978 New York Stock Exchange listing rule requiring an audit committee of outside directors. See Korn/Ferry International, 20th Annual Board of Directors Study (New York: Korn/Ferry International, 1993), 3, 7, 13;
147. compare Investor Responsibility Research Center, Board Practices 1996: The Structure and Compensation of Board of Directors in S&P 500 Companies (Washington, D.C.: IRRC, 1996), 3-6;
148. and accord Charkham, Keeping Good Company 188-89 (in 1990, outside directors accounted for a majority on 86 percent of boards in the manufacturing sector and 91 percent of boards in all other sectors). However, managerial control over board nominations and elections casts doubt on the actual independence of directors and the practical import of this trend.
149. See John W. Cioffi, "Expansive Retrenchment: The Regulatory Politics of Corporate Governance Reform and the Foundations of Finance Capitalism in the United States and Germany," IES Conference Paper (Berkeley: Institute of European Studies, University of California, Berkeley, 2004), http://ies.berkeley.edu/research/#sas.
150. One senior Republican staffer said, "Congress didn't pass Sarbanes-Oxley, WorldCom did." Anonymous interview conducted by John W. Cioffi, Washington, D.C., March 2004.
151. The only issue managers fought fiercely was, perhaps revealingly but not surprisingly, the regulation and more stringent accounting treatment of stock options - the mechanism that was supposed to align the interests of managers and shareholders, but became the most effective meaning of managerial rent seeking and looting of the corporation ever devised.
152. The desire of Democratic Party politicians to cultivate the support of corporate managers constrained them from pressing for deeper reforms and, later, from supporting the SEC's attempt to give shareholders more power in board elections.
153. The strength of these pull factors varies to some extent with the degree and character of the entanglement between business and the center-right party. The number of years in office of the center-right might be a quantifiable proxy for this party-business relationship. This factor was particularly important in the Italian and, to a lesser degree, the French cases. A statistical test of this hypothesis, however, is beyond the scope of the current paper.
154. In fact, the pro-business orientation of the Republican Party appears to have intensified as the working-class character of the opposition Democratic Party has deteriorated.
155. See also John W. Cioffi, "Building Finance Capitalism";
156. and Jonah D. Levy, "Introduction: The State Also Rises," in Levy, The State after Statism.
157. See Peter Gourevitch and James Shinn, Political Power and Corporate Control: The New Global Politics of Corporate Governance (Princeton, N.J.: Princeton University Press, 2005);
158. and John W. Cioffi, "The State of the Corporation: State Power, Politics, Policymaking and Corporate Governance in the United States, Germany, and France," in Levin and Shapiro, Trans-Atlantic Policymaking in an Age of Austerity.
159. The amount of shareholdings among employees varies with savings preferences, with the organization of the pension system, and with the degree to which employees enjoy stock options. See Sigurt Vitols, "The Origins of Bank-Based and Market-Based Financial Systems: Germany, Japan, and the United States," in Streeck and Yamamura, The Origins of Nonliberal Capitalism, 171-99. These issues have become important within recent and ongoing debates over pension reform in Europe. We find that, to date, shareholders and institutional investors, such as pension funds, have not wielded significant influence over corporate governance reform. Shareholders remain too diffuse to confer substantial political influence. Institutional investors, such as pension funds and mutual funds, have divergent interests with respect to financial regulation, pension policies, and corporate governance reforms. In most industrialized countries, including Germany, France, and Italy, the predominance of established public pension systems deprives private pension funds of financial and political power.
160. The policy shift by center-left parties in favor of corporate governance reform, and the support of organized labor in particular, is similar to what Gourevitch and Shinn describe as a "transparency coalition": employees and unions shift their preferences in favor of the protection of shareholder rights to give them an informational advantage over management and as they become shareholders themselves. Gourevitch and Shinn, Political Power and Corporate Control;
161. and compare Roe, Political Determinants of Corporate Governance (arguing that employees and managers are more likely to forge intracorporate and political coalitions to curb transparency to protect themselves from shareholder and capital market pressures). German and American unions supported proshareholder demands for transparency and management accountability in keeping with their respective interests in union pension fund investments and codetermination. However, because shareholding remained undeveloped in our European cases and codetermination is far stronger in Germany than elsewhere, the "transparency coalition" thus does not explain cross-national corporate governance reform. Even where labor supported corporate governance reform, as in the United States and Germany, it was not a driving force for change. Hence, we look to shifting partisan strategies, non-labor interest group preferences, and economic populism.