German Corporate Governance: A Brief History

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Börsch-Supan and Wilke (2004) contend that corporate governance practices in Germany started “against the background of a pay-as-you-go pension system.” The authors posit that the system was highly politicized; thus, growth was limited for an extensive period. All along, companies in the country depended on loans as the primary source of equity, and consequently, banks had a profound influence on the company’s decision-making processes and corporate governance in what came to be referred to as the “insider system” (Börsch-Supan and Wilke, 2004). During the 90s, the entry of other players in main German markets pressured the conventional German approach to corporate governance. The model, as it existed, could not provide German companies with the competitiveness required in critical markets. Ultimately, the country had to redevelop its capital markets and strengthen corporate governance (Odenius, 2008). In this period, despite the reunification, companies experienced low revenues (Walter, 1998).  Through the 90s, there was a push to improve internal governance in German companies, especially regarding the supervisory and accountability functions. Thus, the government enacted the Transparency and Disclosure Act (TransPuG) and the Corporate Sector Supervision and Transparency Act (KonTraG) in an attempt to expand corporate responsibilities (Davies et al., 2013). Before the changes, corporate governance in Germany was considered voluntary; in the sense that today, most companies consider corporate governance a requisite to conducting business following an expanded investor base. (OrderCustomerPaper from us)

Statement of the Problem

Ideally, all organizations are required to give their contributors, investors and shareholders a share of their profits. Whether the company is for-profit or a not for a profit-making organization, managers are entitled to provide shareholders with dividends or the agreed form of return on investment. This mandate is governed under corporate governance, which Friedman (1962) argued was the only responsible for a business – that is, “to use its resources and engage in activities designed to increase its profits.” Along with other scholars, Friedman alludes to the idea that in business, maximizing shareholder value should be the primary objective – meaning, businesses should focus on profit and activities that make it possible for the company to make such profits. Being that finances run a company, it should be the manager’s objective to ensure that the company has sufficient equity to enhance and achieve shareholder’s objectives – shareholders being persons who are willing to invest in a company for a return either monetary or otherwise. However, for the context of shareholder maximization, monetary returns spur investments since it is unlikely for most organizations to have shareholders as mere contributors without any form of financial gain. In today’s corporate structure, investors provide the capital needed to achieve its objectives and to hire talent. In turn, the investors who in this case are the shareholders expect a financial return for their investment. This arrangement follows the fact that today’s companies are unlikely to grow without a strong financial background; hence companies separate human resources from finances.(HireEssayWriter for a similar paper)

Justification

The concept of maximizing shareholder value is deeply rooted in the American business environment. For the better part of three decades, corporations operating in the USA have employed this as a metric of success. It simplifies the meaning and purpose of corporate governance. Research has shown that this concept has had numerous consequences on the understanding and exercise of corporate governance. One of the main effects of the approach is that it affects other company stakeholders (those who are not shareholders). For example, businesses can engage in various unethical and harmful practices such as lousy business prices, neglecting customers, income inequality, and employment outsourcing, among others. It is, therefore, essential to understanding the effects of maximizing shareholder value on corporate governance. The comparison between the U.S. and Germany helps to focus the study. The topic was chosen because maximizing shareholder value has long been linked with the ‘greed’ and ‘ruthlessness’ of American Capitalism. The study aims to help in outlining the effects of maximizing shareholder value and compare the Anglo-American system to that used in Germany.

Research Questions

  1. What is maximizing shareholder value?
  2. When was the concept of maximizing shareholder value adopted widely in the USA?
  3. What are the positive effects of maximizing shareholder value on corporate governance?
  4. What are the adverse effects of maximizing shareholder value on corporate governance?
  5. How is the corporate governance in the U.S. compared to that in Germany?
  6. How is this changing in the U.S. today?

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