Introduction

An important component of the view that German banks contribute to good economic performance in Germany concerns the role that banks are supposed to play in corporate governance. German banks are able to exercise proxy votes at the shareholders' meetings of AGs on behalf of shareholders who have deposited their shares with the banks for safekeeping. The significant control of equity voting rights that banks have as a consequence of their proxy voting power is seen as giving them the ability to place bank representatives on the supervisory boards of AGs. Since the supervisory board is the body which appoints and dismisses the management board of an AG, the combination of bank control of equity voting rights via proxy votes and supervisory board representation is claimed to be an efficient mechanism of ensuring that the managements of companies with widely-dispersed share ownership are monitored and faced with incentives to perform well. In particular, delegating the exercise of equity's control rights to banks in this manner is regarded as being superior to the hostile takeover mechanism, on which the UK and USA have to depend in order to monitor and control the managements of widely-held companies.

What role German banks actually play as delegated exercisers of equity's control rights is the subject of this and the following chapter. In this chapter the general background for the analysis of banks' corporate control function is set out. The problem of individual suppliers of equity finance not having incentives to monitor and control managerial behaviour is one which arises primarily for large firms. The second section discusses the ownership and control of large German firms.