Chapter 10: Corporate Governance 329appointment to the Vorstand is the responsibility of the supervisory tier (the Aufsichtsrat).
Employees, union members, and shareholders appoint members to the Aufsichtsrat.
Proponents of the German structure suggest that it helps prevent corporate wrongdoing and
rash decisions by “dictatorial CEOs.” However, critics maintain that it slows decision making
and often ties a CEO’s hands. The corporate governance practices in Germany make it diffi-
cult to restructure companies as quickly as can be done in the United States. Because of the
role of local government (through the board structure) and the power of banks in Germany’s
corporate governance structure, private shareholders rarely have major ownership positions
in German firms. Additionally, there is a significant amount of cross-shareholdings among
firms.^123 However, large institutional investors, such as pension funds (outside of banks and
insurance companies), are also relatively insignificant owners of corporate stock. Thus, at
least historically, German executives generally have not been dedicated to maximizing share-
holder wealth to the degree that is the case for top-level managers in the United States and
United Kingdom.^124
However, corporate governance practices used in Germany have been changing in
recent years. A manifestation of these changes is that a number of German firms are grav-
itating toward U.S. governance mechanisms. Recent research suggests that the traditional
system in Germany produced some agency costs because of a lack of external ownership
power. Interestingly, German firms with listings on U.S. stock exchanges have increas-
ingly adopted executive stock option compensation as a long-term incentive pay policy.^125
Also, as the Strategic Focus illustrates, activist shareholders are entering Germany and
Japan, although the strategy is more engagement with managers rather that confrontation
as can be found in the United States and the United Kingdom.
The concepts of obligation, family, and consensus affect attitudes toward corpo-
rate governance in Japan. As part of a company family, individuals are members of a
unit that envelops their lives; families command the attention and allegiance of parties
throughout corporations. In addition, Japanese firms are concerned with a broader set
of stakeholders than are firms in the United States, including employees, suppliers, and
customers.^126 Moreover, a keiretsu (a group of firms tied together by cross-shareholdings)
is more than an economic concept—it, too, is a family. Some believe, though, that exten-
sive cross-shareholdings impede the type of structural change that is needed to improve
the nation’s corporate governance practices. However, recent changes in the governance
code in Japan has been fostering better opportunities from improved corporate gov-
ernance.^127 Consensus, another important influence in Japanese corporate governance,
calls for the expenditure of significant amounts of energy to win the hearts and minds of
people whenever possible, as opposed to top-level managers issuing edicts.^128 Consensus
is highly valued, even when it results in a slow and cumbersome decision-making process.
As in Germany, banks in Japan have an important role in financing and monitoring
large public firms.^129 Because the main bank in the keiretsu owns the largest share of
stocks and holds the largest amount of debt, it has the closest relationship with a firm’s
top-level managers. The main bank provides financial advice to the firm and also closely
monitors managers. Thus, although it is changing, Japan has traditionally had a bank-
based financial and corporate governance structure, whereas the United States has a mar-
ket-based financial and governance structure.^130 Commercial banks in the United States
by regulation are not allowed to own shares of publicly traded firms.
Aside from lending money, a Japanese bank can hold up to 5 percent of a firm’s total
stock; a group of related financial institutions can hold up to 40 percent. In many cases,
main-bank relationships are part of a horizontal keiretsu. A keiretsu firm usually owns
less than 2 percent of any other member firm; however, each company typically has a stake
of that size in every firm in the keiretsu. As a result, 30 to 90 percent of a firm is owned
by other members of the keiretsu. Thus, a keiretsu is a system of relationship investments.