Skip to main content
Log in

Codetermination as a (Partial) Substitute for Mandatory Disclosure?

  • Articles
  • Published:
European Business Organization Law Review Aims and scope Submit manuscript

Abstract

Employee board representation can serve information dissemination purposes. This comment argues that in Germany, which (still) has a bank-oriented financial system, transparency may be better served by using codetermination (under which up to half of the supervisory board is composed of employees) as an information channel, rather than by importing the mandatory disclosure requirements that are typical of Anglo-Saxon jurisdictions. There are two reasons for this. One is that the evidence about the efficiency of mandatory disclosure requirements is mixed. The other is that mandatory disclosure is an intrinsic component of market-oriented financial systems such as the US financial system.

Transplanting a market-oriented component into a bank-oriented financial system brings the risk of inconsistencies, as it affects the complementarities that exist among the intrinsic components of a bank-oriented system. This comment thus concludes that before suggesting ways to transplant further mandatory disclosure requirements into the German financial system, or improve existing ones, one should consider how to use or improve the use of codetermination as an information dissemination channel.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  1. Compare recently P.G. Mahoney and J. Mei, Mandatory vs. Contractual Disclosure in Securities Markets: Evidence form the 1930s, Working Paper (2006), available at: http://www.ssrn.com (securities laws did not add measurably to the content and credibility of the NYSE’s existing disclosure requirements); M. Greenstone, P. Oyer, and A. Vissing-Jørgensen, ‘Mandated Disclosure, Stock Returns, and the 1964 Securities Act Amendments’, 121 Q. J. Econ. (2006) p. 399 (results suggest that mandatory disclosure causes managers to more narrowly focus on the maximization of shareholder value); A. Ferrell, The Case for Mandated Disclosure in Securities Regulation Around the World, Working Paper (2005), available at: http://www.law.harvard.edu (mandatory disclosure enhances competition and reduces agency costs).

  2. See G. Hertig, R. Kraakman, and E. Rock, ‘Issuers and Investor Protection’, in R. Kraakman, et al., The Anatomy of Corporate Law, A Comparative and Functional Approach (Oxford, Oxford University Press 2004) p. 197.

  3. G. Hertig and H. Kanda, ‘Creditor Protection’, in Kraakman, et al., op. cit. n. 2, at pp. 79–83.

  4. See H. Merkt, ‘Creditor Protection through Mandatory Disclosure’, in this issue, at s. 3.

  5. See F. Allen and D. Gale, Comparing Financial Systems (Cambridge, MIT Press 2000) pp. 19–21.

    Google Scholar 

  6. See also Allen and Gale, op. cit. n. 5, at pp. 21 and 470.

  7. See already P. Milgrom and J. Roberts, ‘Complementarities and Systems: Understanding Japanese Economic Organization’, 1 Estudios Economicos (1994) p. 3 et seq.

    Google Scholar 

  8. See R.H. Schmidt and M. Tyrell, ‘What Constitutes a Financial System in General and the German Financial System in Particular?’, in J.P. Krahnen and R.H. Schmidt, eds., The German Financial System (Oxford, Oxford University Press 2004) pp. 19, 53–7 and 62 (emphasizing the complementary nature of a bank-dominated financial sector, stakeholder-oriented corporate governance and risk management through lending-based inter-temporal risk sharing).

    Chapter  Google Scholar 

  9. See Merkt, loc. cit. n. 4, at s. 6.

  10. G. Hertig, ‘Using Basel II to Facilitate Access to Finance: The Disclosure of Internal Credit Ratings’, EBOR (forthcoming).

  11. For a comparison of internal (in bank-oriented systems) and external (in market-oriented systems) information distribution, see R.H. Schmidt and M. Tyrell, ‘Information Theory and the Role of Intermediaries’, in K.J. Hopt, E. Wymeersch, H. Kanda, and H. Baum, eds., Corporate Governance in Context, Corporations, States, and Markets in Europe, Japan, and the US (Oxford, Oxford University Press 2005) p. 479 et seq.

    Google Scholar 

  12. See, however, R. Elsas and J.P. Krahnen, ‘Universal Banks and Relationship with Firms’, in Krahnen and Schmidt, op. cit. n. 8, at pp. 197, 207 (studies on the ability of German banks to mitigate financial constraints of large listed firms yield mixed results).

  13. See, however, M.M. Blair and M.J. Roe, eds., Employees and Corporate Governance (Washington D.C., Brookings Institution Press 1999).

  14. See H. Hansmann and R. Kraakman, ‘The Basic Governance Structure’, in Kraakman, et al., op. cit. n. 2, at p. 62.

  15. Ibid.

  16. See J. Kennan and R. Wilson, ‘Bargaining with Incomplete Information’, 31 J. Econ. Lit. (1993) p. 45 et seq.

    Google Scholar 

  17. See M. Osterloh and B. Frey, Shareholders Should Welcome Employees as Directors, Working Paper (2005), available at: http://www.ssrn.com; A.J. Hilman and Th. Dalziel, ‘Boards of Directors and Firm Performance: Integrating Agency and Resource Dependence Perspectives’, 28 Academy Management Rev. (2003) p. 383 et seq.

  18. The fact that employee board participation is rare in the absence of legal compulsion may be caused by the same factors that require disclosure to be mandated to be effective, and is therefore not necessarily evidence that such an information distribution channel has costs that exceeds its benefits. Compare Hansmann and Kraakman, loc. cit. n. 14, at p. 64; C. Windbichler, ‘Cheers and Boos for Employee Involvement: Co-Determination as Corporate Governance Conundrum’, 6 EBOR (2005) p. 507 et seq.

  19. There is “quasi-parity” in the sense that while the supervisory board must comprise an equal number of shareholder and employee representatives, the chairman is elected by the shareholder bench and has the decisive vote when there is a tie.

  20. For a concise description of the evolution of employee participation in Germany, see K. Pistor, ‘Codetermination: A Sociopolitical Model with Governance Externalities’, in Blair and Roe, op. cit. n. 13, at pp. 165–175.

  21. See also O. Riekers and G. Spindler, ‘Corporate Governance: Legal Aspects’, in Krahnen and Schmidt, op. cit. n. 8, at pp. 350, 361.

  22. For a review, see M. Becht, P. Bolton, and A. Röell, ‘Corporate Governance and Control’, in G.M. Constantinides, M. Harris, and R.M. Stulz, Handbook of the Economics of Finance, Vol. 1A: Corporate Finance (Amsterdam, North-Holland 2002) at s. 7.6.2. See also T. Baums and B. Frick, ‘The Market Value of the Codetermined Firm’, in Blair and Roe, op. cit. n. 13, at p. 207 et seq. (finding that codetermination does not influence stock prices); F.A. Schmid and F. Seger, ‘Arbeitnehmermitbestimmung, Allokation von Entscheidungsrechten und Shareholder Value’, 5 Zeitschrift für Betriebswirtschaft (1998) at p. 453 et seq. (codetermination is costly for shareholders); S.N. Kaplan, ‘Top Executives, Turnover, and Firm Performance in Germany’, 10 J. Law Econ. Org. (1994) p. 142 et seq. (German firms are not comparatively slow in removing poorly performing managers); F.R. FitzRoy and K. Kraft, ‘Economic Effects of Codetermination’, 95 Scandinavian J. Econ. (1993) p. 365 et seq. (suggesting overall social gains from codetermination, but decreased firm-level profitability); G. Benelli, C. Loderer, and T. Lys, ‘Labor Participation in Corporate Policy Decision Making: West Germany’s Experience with Codetermination’, 60 J. Bus. (1987) p. 533 et seq. (codetermination has no significant effect); J. Svejnar, ‘Codetermination and Productivity: Evidence from the Federal Republic of Germany’, 63 Rev. Econ. Stat. (1981) p. 188 et seq. (codetermination has no significant effect).

    Google Scholar 

  23. For a discussion and specific examples, see Pistor, loc. cit. n. 20, at pp. 188–191; M.J. Roe, Political Determinants of Corporate Governance (Oxford, Oxford University Press 2003) at pp. 73–76; K.J. Hopt, ‘Labor Representation on Corporate Boards: Impacts and Problems for Corporate Governance and Economic Integration in Europe’, 14 Int. Rev. Law. Econ. (1994) pp. 203, 205–212.

  24. See G. Jackson, M. Höpner, and A. Kurdelbusch, Corporate Governance and Employees in Germany: Changing Linkages, Complementarities, and Tensions, Working Paper (2005), available at: http://www.ssrn.com.

  25. See C. Leuz and J. Wüstemann, ‘The Role of Accounting in the German Financial System’, in Krahnen and Schmidt, op. cit. n. 8, at pp. 450, 464.

Download references

Author information

Authors and Affiliations

Authors

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Hertig, G. Codetermination as a (Partial) Substitute for Mandatory Disclosure?. Eur Bus Org Law Rev 7, 123–130 (2006). https://doi.org/10.1017/S1566752906001236

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1017/S1566752906001236

Keywords

Navigation