1 The term “finance capitalism” was coined in the early twentieth century by the German Socialist, Rudolph Hilferding. Hilferding used the phrase to denote a German economy dominated by monopolistic enterprises with strong financial linkages to major banks (and often to each other), which verged on socialism in its concentration of industrial and financial organization and power. As conceived here, finance capitalism designates economic conditions that are increasingly competitive and a loosening of ties between financial and industrial capital, hence between investors and managers. Contemporary finance capitalism entails the expansion and deepening of markets through more extensive regulation of the corporate firm's financial and governance practices. In many ways, it is the antithesis of Hilferding's original conception.Google Scholar

2 Hall, Peter A. and Soskice, David, An Introduction to Varieties of Capitalism, in Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Peter A. Hall and David Soskice, eds., 2001).Google Scholar

3 Id.Google Scholar

4 Cf. Gerke, , Market Failure in Venture Capital Markets for New Medium and Small Enterprises, in Comparative Corporate Governance: The State of the Art and Current Research (Hopt, Klaus J., Hideki Kanda, Mark J. Roe, Eddy Wymeersch, and Stefan Prigge, eds., 1998) (quotation omitted). This definition of the term corporate governance goes well beyond the narrow confines of the shareholder-manager (principal-agent) relationship that preoccupies the vast majority of scholarship in law and economics. This definition more accurately describes the function of corporate governance and its relationship to the broader political economy.Google Scholar

5 Cioffi, John W., Governing Globalization? The State, Law, and Structural Change in Corporate Governance, 27 Journal of Law and Society 572-600 (2000).Google Scholar

6 See Hall, Peter A. and Soskice, David, supra note 1. For a classic expression of a political economic typology in the study of national financial systems, see John Zysman, Governments, Markets, and Growth (1983). An updated analysis of national corporate governance regimes from this typological perspective is presented in John W. Cioffi, supra note 4; John W. Cioffi and Stephen S. Cohen, The Advantages of Forwardness: The Interdependence of the State, Law, and Corporate Governance in an Age of Globalization, in Corporate Governance and Globalization (Stephen S. Cohen and Gavin Boyd, eds., 2000).Google Scholar

7 See NLRB v. Borg-Warner Corp., 356 U.S. 342 (1958); Fibreboard Paper Prods. Corp. v. NLRB, 379 U.S. 203 (1964); see also Ford Motor Co. v. NLRB, 441 U.S. 488, 498 (1979) (quoting Fibreboard); First National Maintenance Corp. v. NLRB, 452 U.S. 666 (1981).Google Scholar

8 The Glass-Steagall Act severed investment banking from commercial banking and traditional lending. The Investment Company Act of 1940 and the Employee Retirement Income Security Act of 1974 limited the size of the stakes investment firms and funds could hold as a percentage of their own capital and of outstanding corporate equity. Under these deliberately fragmented ownership conditions, shareholders could not solve the collective action problem of coordinating and compensating the monitoring of managers. See generally See Mark J. Roe, Codetermination and German Securities Markets, in Comparative Corporate Governance: The State of the Art and Current Research (Hopt, Klaus J., Hideki Kanda, Mark J. Roe, Eddy Wymeersch, and Stefan Prigge, eds., 1998); Mark J. Roe, Strong Managers, Weak Owners: The Political Roots of American Corporate Finance (1994); Mark J. Roe, Some Differences in Corporate Structure in Germany, Japan, and the United States, 102 Yale L J 1927 (1993); Mark J. Roe, A Political Theory of American Corporate Finance, 91 Columbia L Rev 10 (1991).Google Scholar

9 See, e.g., Roe, , A Political Theory of American Corporate Finance, supra note 7; John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 Columbia L Rev, 1277 (1991); cf. Adolf A. Berle & Gardiner C. Means, The Modern Corporation and Private Property (1932, rev. ed. 1991); Albert O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (1981, c1970).Google Scholar

10 Into the 1990s, even as the jobs of CEO and board chair were split with increasing frequency and larger numbers of non-managerial directors sat on boards, CEOs and senior managers largely dominated the very institutional body that was supposed to render them accountable to shareholders.Google Scholar

11 See Vagts, Detlev F., Reforming the “Modern” Corporation: Perspectives from the German, 80 Harv L Rev, 23 (1966); Mary O'Sullivan, Contests for Corporate Control: Corporate Governance and Economic Performance in the United States and Germany (2000); Roe, Strong Managers, Weak Owners, supra note 7; Roe, Some Differences in Corporate Structure in Germany, Japan, and the United States, supra note 7; Jonathan P. Charkham, Keeping Good Company: A Study of Corporate Governance in Five Countries (1994).Google Scholar

12 Thus, in addition to their own equity holdings, the banks wield disproportionate voting strength and substantial leverage when it comes to board nominations or influencing key strategic decisions. Charkham, Keeping Good Company, supra note 10: pp. 37-38; Vagts, Reforming the “Modern” Corporation, supra note 10: pp. 53–58. Even where German management attempts to maintain autonomy by diversifying sources of bank debt, banks have adopted a practice of designating a “lead bank” to monitor the corporation, vote their aggregate DSVRs, and maintain supervisory board representation. See Richard E. Deeg, Banks and the State in Germany: The Critical Role of Subnational Institutions in Economic Governance, Ph.D. Dissertation, Department of Political Science, Massachusetts Institute of Technology (Cambridge, MA, 1992): p. 208; Sigurt Vitols, Corporate Governance versus Economic Governance: Banks and Industrial Restructuring in the U.S. and Germany, Discussion Paper FS I 95-310: p. 6 (Berlin: Wissenschaftszentrum Berlin fur Sozialforschung, November 1995).Google Scholar

13 See, e.g., Peter J. Katzenstein, Policy and Politics in West Germany: The Growth of a Semisovereign State (1987): Chap. 3; Herbert Wiedemann, Codetermination by Workers in German Enterprises, 28 Am J Comp L, 79 (1980).Google Scholar

14 Supervisory board codetermination under the Codetermination Act of 1976, perhaps the most striking feature of German company law, requires most corporations with over 2,000 employees appoint equal number of shareholder and employee representatives to their supervisory boards. Wiedemann, Codetermination by Workers in German Enterprises, supra note 12, at 79. Firms with 500 to 2,000 employees must set aside only one-third of the board seats for employee representatives. Id.: p. 80. “Montan“ codetermination, the third (and original) variant, only applies to firms in the coal, mining, and steel sectors employing more than 1,000 workers, provides for full parity of shareholder and employee representation. The decline of the mining and steel sectors in Germany has reduced the importance of Montan codetermination. For an excellent recent review of board codetermination, see Stefan Prigge, A Survey of German Corporate Governance, in Comparative Corporate Governance: The State of the Art and Current Research (Hopt, Klaus J., Hideki Kanda, Mark J. Roe, Eddy Wymeersch, and Stefan Prigge, eds., 1998), at 943-1044.Google Scholar

15 Wiedemann, , Codetermination by Workers in German Enterprises, supra note 12: 80-82. The Works Constitution Act of 1972 provides for the election of works councils in facilities or plants of business organizations with five or more permanent employees, but many large firms voluntarily instituted enterprise (or Konzern) works councils covering an entire corporate group to ensure stable and cooperative labor relations. For general discussions of the political origins and impact of codetermination, see, e.g., Vagts, Reforming the “Modern” Corporation: Perspectives from the German, supra note 10: pp. 64–78; Wolfgang Streeck, Co-determination: The Fourth Decade, in International Perspectives on Organizational Democracy, Volume II (Bernhard Wilpert and Arndt Sorge, eds.,1984); Katzenstein, Policy and Politics in West Germany, supra note 12: Chapter 3; Walther Müller-Jentsch, Germany: From Collective Voice to Co-Management, in Works Councils: Consultation, Representation, and Cooperation in Industrial Relations (Joel Rogers & Wolfgang Streeck, eds., 1995). For the role of works councils in German labor relations, see Kathleen A. Thelen, Union of Parts: Labor Politics in Postwar Germany (1991); cf. Lowell Turner, Democracy at Work: Changing World Markets and the Future of Labor Unions (1991).Google Scholar

16 cf. Assmann, Heinz-Dieter, Microcorporatist Structures in German Law on Groups of Companies, in Regulating Corporate Groups in Europe (David Sugarman and Gunther Teubner, eds., 1990); Streeck, Co-determination: The Fourth Decade, supra note 14.Google Scholar

17 See Streeck, Wolfgang, Co-determination: The Fourth Decade, supra note 14; Streeck, The Uncertainty of Management in the Management of Uncertainty: Employers, Labour Relations and Industrial Adjustment in the 1980s, 1 Work, Employment and Society 281–308 (1987); Streeck, On the Institutional Conditions of Diversified Quality Production, in Beyond Keynesianism: The Socio-Economics of Production and Employment 21-61 (Egon Matzner and Wolfgang Streeck, eds., 1991); Sigurt Vitols, Varieties of Corporate Governance, in Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Hall, Peter A. and David Soskice, eds., 2001).Google Scholar

18 See Streeck, Wolfgang, German Capitalism - Does it exist? Can it survive?, in Political Economy of Modern Capitalism 33-54 (Wolfgang Streeck and Colin Crouch, eds., 1997).Google Scholar

19 By the early 1990s, these legal changes effectively protected incumbent managers from hostile takeovers and had largely eliminated the market for corporate control. There continued to be an extraordinarily vibrant market for companies—which reached its apogee during the 1990s boom and stock market bubble. However, the overwhelming majorities of mergers and acquisitions during the 1990s were friendly deals that often richly rewarded senior managers.Google Scholar

20 Cioffi, John W., Irresistible Forces and Political Obstacles: Securities Litigation Reform and the Structural Regulation of Corporate Governance (manuscript under review, 2006).Google Scholar

21 Id.Google Scholar

22 SEC Chairman Arthur Levitt, a Clinton appointee, sought to prohibit accounting firms from doing both auditing and consulting work for corporations that presented a conflict of interest and might compromise the integrity of audits. Accounting firms enlisted allies in Congress to fight the regulatory proposal, which was withdrawn after members of Congress threatened to cut the SEC's already inadequate budget. Likewise, the Financial Accounting Standards Board (FASB) and the SEC under Levitt failed in an attempt to require the expensing of stock options in corporate financial statements. Business lobbies, led by “new economy” technology firms dependent on options enlisted bipartisan congressional and executive branch support to quash to the initiative.Google Scholar

23 The 1992 proxy rule changes appear to have encouraged greater governance activism by institutional investors, but at the expense of transparency in governance. Institutional investors, with some notable exceptions, preferred to voice their concerns and criticisms to management in private communications that would not become public. These communications thus became occasions for managers to disclose significant information to the representative of institutional investors and analysts associated with investment banks and brokerages.Google Scholar

24 Regulation FD expressly rejected any private cause of action enabling enforcement by shareholder litigation and thus continued the anti-litigation trend of the 1990s. Regulation FD is a prescriptive rule without any effective enforcement mechanism other than a (rare) SEC enforcement action.Google Scholar

25 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 which became the most effective means of managerial rent-seeking ever devised.Google Scholar

26 Interviews, Washington, DC, March 2004. Interviewees inside and outside of government unanimously agreed that the World Com collapse broke Republican resistance to the Sarbanes bill.Google Scholar

27 The Sarbanes-Oxley Act also increased civil and criminal penalties for a host of securities law violations, and extended the statute of limitations for security fraud suits, but the most important provisions of the Act were directed at the accounting industry and the structure of the corporation.Google Scholar

28 Under SEC pressure, the New York Stock Exchange adopted listing rules that required audit committees comprised of independent directors in the late 1970s. The rules governing the NASDAQ market remained far more lenient. However, prior to Sarbanes-Oxley, federal regulatory authority over board structure, composition, and responsibilities was, at a minimum, subject to question. The Act's express and direct intervention into the internal structure and operation of corporate boards represents a break with two centuries of American federalism.Google Scholar

29 Pitt, President Bush's appointee to succeed Levitt as head the SEC, had been a prominent securities lawyer on behalf of major accounting firms in private practice and his efforts to minimize the significance of the corporate scandals and to limit legislative reforms were regarded as suspect and illegitimate by reformers and, increasingly, by the public at large. The struggle over accounting regulation and appointments to the PCAOB ultimately resulted in the resignations of Pitt and the first Chairman of the Accounting Oversight Board, former FBI and CIA Director William Webster who was found to have been a director of a corporation charged with financial improprieties.Google Scholar

30 Cioffi, , Irresistible Forces and Political Obstacles, supra note 19.Google Scholar

31 John W, Cioffi, Restructuring ‘Germany, Inc.’: The Corporate Governance Debate and the Politics of Company Law Reform, 24 Law & Policy 355-402 (2002).Google Scholar

32 Id.Google Scholar

33 Id.; Lütz, Susanne, The Revival of the Nation-State? Stock Exchange Regulation in an Era of Internationalized Financial Markets, Max Planck Institute for the Study of Societies, MPIFG Discussion Paper 96/9 (December 1996); Susanne Lütz, From Managed to Market Capitalism? German Finance in Transition, Max Planck Institute for the Study of Societies, MPIfG Discussion Paper 00/2 (May 2000).Google Scholar

34 The globalization of finance and financial markets also reinforced domestic political pressures for financial and corporate governance reform as Frankfurt sought to remain competitive in retaining and attracting domestic and international capital.Google Scholar

35 See Cioffi, , Restructuring ‘Germany, Inc.’, supra note 29; Susanne Lütz, The Revival of the Nation-State? Stock Exchange Regulation in an Era of Internationalized Financial Markets, Max Planck Institute for the Study of Societies, MPIFG Discussion Paper 96/9 (December 1996).Google Scholar

36 In this sense, German welfare state policy has helped facilitate reform and corporate restructuring. The SPD government accommodated organized labor by extending generous unemployment and early retirement pension benefits to ease the impact of restructuring on the workforce. This helped to shore up the support of its base constituencies and to deflect criticism of pro-finance and pro-shareholder policies. Germany has effectively socialized the risk and costs of restructuring, but at increasingly enormous costs in terms of pension outlays and structural unemployment. Wolfgang Streeck, From State Weakness as Strength to State Weakness as Weakness: Welfare Corporatism and the Private Use of the Public Interest, Max Planck Institute for the Study of Societies, MPIfG Working Paper 03/2, (March 2003).Google Scholar

37 Second Financial Market Promotion Act (Gesetz über den Wertpapierhandel und zur Änderung börsenrechtlicher und wertpapierrechtlicher Vorschriften, Zweites Finanzmarktförderungsgesetz) of 26 July 1994, Federal Law Gazette, Part I, p. 1749.Google Scholar

38 From late 1997 through 1998, another series of Financial Market Promotion Laws and other legislative changes markedly expanded the agency's role in regulating and policing German securities markets. The BAWe came to oversee the filing of prospectuses, the financial disclosure by public companies, insider trading, and the reporting of voting rights and ownership stakes. It now also supervises financial services providers, stock brokers, the stock exchanges, and cooperates with other national securities regulators. See Cioffi, Restructuring ‘Germany, Inc.’, supra note 29.Google Scholar

39 Law on Integrated Financial Services Supervision (Gesetz über die integrierte Finanzaufsicht (“FinDAG”)), April 22, 2002 (effective May 1, 2002).Google Scholar

40 See Cioffi, , Restructuring ‘Germany, Inc.’, supra note 29; Martin Höpner, European Corporate Governance Reform and the German Party Paradox, Max Planck Institute for the Study of Societies, Discussion Paper 03/4 (2003). For an excellent account and analysis of the ways in which the Schröder government sought to create a shareholding culture in Germany during the late 1990s, see J. Nicholas Ziegler, Corporate Governance and the Politics of Property Rights in Germany, 28 Politics and Society 195-221 (2000).Google Scholar

41 Indeed, Schröder's rise within the SPD and his victory in this policy debate indicates the decline of these traditional powers within German social democracy.Google Scholar

42 For an excellent account of this ideological aspect of German social democracy in historical perspective, see Höpner, European Corporate Governance Reform and the German Party Paradox, supra note 38.Google Scholar

43 Cioffi, , Restructuring ‘Germany, Inc.’, supra note 29; Höpner, European Corporate Governance Reform and the German Party Paradox, supra note 38.Google Scholar

44 For a detailed discussion of the SPD's pseudo-populist strategy to gain left-wing support for governance reform, see Cioffi, Restructuring ‘Germany, Inc.’, supra note 29.Google Scholar

45 Corporate Control and Transparency Act (Gesetz zur Kontrolle und Transparenz im Unternehmensbereich, “KonTraG”) of 27 April 1998, Federal Law Gazette, Part I, p. 786 (Gesetz vom 27.4.1998, BGBl. I, S. 786 vom 30.4.1998). For a political analysis of the KonTraG, see Cioffi, Restructuring ‘Germany, Inc.’, supra note 29.Google Scholar

46 If the bank's holdings in a listed firm exceed 5% of the corporation's stock, it can vote their own equity stakes or vote the proxy votes of the shares deposited by its brokerage customers—but not both. The rules on the voting of shares by banks in corporate decision making were designed to use the traditional bank-centered proxy voting system while allowing alternative mechanisms of proxy voting to emerge (e.g., shareholders’ associations). The KonTraG also required banks to disclose all board mandates held by their representatives, their ownership stakes in firms, and alternative ways for their share depositors to exercise their votes. Ulrich Seibert, “Control and Transparency in Business (KonTraG),” European Business Law Review, pp. 70–75 (1999); Cioffi, Restructuring ‘Germany, Inc.’, supra note 29.Google Scholar

47 The law contains additional auditing reforms to ensure the independence and reliability of auditors. An auditor may not audit a firm if it has earned more than 30% of its revenues from the client over the past five years and must change the signatory of the audit if the same person has signed the report more than six times in ten years. The KonTraG also raised the limitation on auditor liability from 500,000 DM to 8 million DM for listed corporations (2 million DM for unlisted companies). Cioffi, Restructuring ‘Germany, Inc.’, supra note 29.Google Scholar

48 See Nigel Holloway, The End of Germany AG, Forbes (June 11, 2001).Google Scholar

49 At the time Mannesmann was taken over, prior to the enactment of the July 2000 tax reform law, corporate Germany appeared unruffled. Interviews conducted by the author, as well as journalistic accounts, indicate that the fears of German managers grew when they considered the cumulative takeover vulnerability created by the KonTraG and tax reform in the absence of alternative, legally permissible anti-takeover defenses. For an excellent analysis of the Mannesmann takeover, see Martin Höpner and Gregory Jackson, An Emerging Market for Corporate Control? The Mannesmann Takeover and German Corporate Governance, Max-Planck-Institut für Gesellschaftsforschung, MPIfG Discussion Paper 01/4 (September 2001). In addition to the mounting fears of foreign threats to the control of German corporations, public and official sentiment began to turn against both the normative and distributional consequences of Anglo-American style takeovers as the large severance packages paid to the company's outgoing board members became public knowledge. The directors approving these payments, a well-established means of contracting around takeover defenses in the United States, were accused of criminal breach of trust by Düsseldorf prosecutors. For analyses of the Mannesmann prosecutions, see Max Philipp Rolshoven, The Last Word? The July 22, 2004 Acquittals in the Mannesmann Trial, 5 German Law Journal 935 (2004), at http://www.germanlawjournal.com/pdf/.Vol05No08/PDF_Vol_05_No _08_935-940_Private_Rolshoven.pdf; Peter Kolla, The Mannesmann Trial and the Role of the Courts, 5 German Law Journal 829 (2004), at http://www.germanlawjournal.com/pdf/.Vol05No07/ PDF_Vol_05_No_07_829-847_Private_Kolla.pdf.Google Scholar

50 For an extended discussion of the relation between the politics of German corporate governance and the failure of the EU Takeover Directive, see Cioffi, Restructuring ‘Germany, Inc.’, supra note 29; Yves Tiberghien, Competitive Supranationalism: Financial Globalization, EU Institutions, and the EU Takeover Directive, (manuscript under review, 2005).Google Scholar

51 See Braude, Jonathan, German Panel Offers Proposed Takeover Rules, The Daily Deal, May 17, 2000 (2000a), Germany Seems Ready to Accept Hostile Takeovers, The Daily Deal, May 23, 2000 (2000b); Jonathan Braude and and Victorya Hong, Takeover directive divides Germany, The Daily Deal, May 23, 2001; Barbier, Hans D., Germany's Intricate Web, Frankfurter Allgemeine Zeitung, July 9, 2001, available online at, http://www.faz.com; Hugh Williamson, Germany Acts to Limit Hostile Takeovers, Financial Times, July 11, 2001, at 10, available online at, http://www.ft.com; Robert W. Wood, “Germans in the News Again, 10 M&A Tax Report No. 2, at 8 (September 2001).Google Scholar

52 Securities Acquisition and Takeover Act (Wertpapierwerbs- und Übernahmegesetz) of December 20, 2001, BGBl. 1, 2001, 3822 (effective January 1, 2002); see also Ashurst Morris Crisp, (undated document) Act on the Regulation of Public Offers for the Acquisition of Securities and Corporate Take-Overs: German Take-over Code - adopted Bill, unofficial translation produced by Ashurst Morris Crisp, undated document available online at www.ashursts.com/pubs/approvedtakeover.htm . Rather than enshrining the primacy of shareholder interests in law, the Takeover Act obliges both the offeror and the target's management to disclose information concerning the offer to either the works council or directly to the employees, and it entitles organized labor to two representatives on the government's thirteen-member takeover “advisory board.”Google Scholar

53 Much of this account is based on an interview with Theodor Baums, July 9, 2003, Frankfurt. See also Baums Commission Report (Bericht der Regierungskommission Corporate Governance), July 10, 2001 (complete official German version available at www.otto-schmidt.de/corporate_governance.htm, English summary available at http://www.shearman.com/publications/cm_pubs.html); Government Commission of the German Corporate Governance Code (Cromme Commission), German Corporate Governance Code, adopted February 26, 2002, as amended May 21, 2003 (information and official German version and English translation available at http://www.corporate-governance-code.de/index-e.html).Google Scholar

54 See Transparency and Disclosure Act (TraPuG) (Gesetz zur weiteren Reform des Aktien- und Bilanzrechts, zu Transparenz und Publizität (Transparenz- und Publizitätsgesetz) of July 19, 2002, BGBl (Federal Gazette) I 2002, 2681.Google Scholar

55 See, e.g. Leyens, Patrick, German Company Law: Recent Developments and Future Challenges, 6 German Law Journal 1407 (2005), at http://www.germanlawjournal.com/pdf/Vol06No10/PDF_Vol_06_No_10_1407-1418_Developments_Leyens.pdf; Matthias Casper, German Capital Market Law – A Permanent Reform, 5 German Law Journal 367 (2004), available at http://www.germanlawjournal.com/pdf/.Vol05No04/PDF_Vol_05_No_04_367-373_Private_Casper.pdf.Google Scholar

56 Cioffi, , Restructuring ‘Germany, Inc.’, supra note 29; Irresistible Forces and Political Obstacles, supra note 19; Höpner, European Corporate Governance Reform and the German Party Paradox, supra note 38; John W. Cioffi and Martin Höpner, The Political Paradox of Finance Capitalism: Interests, Preferences, and Center-Left Politics in Corporate Governance Reform (manuscript under review, 2006).Google Scholar

57 Höpner, , European Corporate Governance Reform and the German Party Paradox, supra note 38; Cioffi and Höpner, The Political Paradox of Finance Capitalism, supra note 54; cf. Cioffi, Restructuring ‘Germany, Inc.’, supra note 29.Google Scholar

58 See, e.g., Vogel, Steven K., The Crisis of German and Japanese Capitalism: Stalled on the Road to the Liberal Market Model?, 34 Comp Pol Stud 1103-1133 (2001)Google Scholar

59 Commitment to European integration played an important role in promoting financial market and corporate governance reform, but support for EU legal harmonization and the Single Market Program did not extend to takeover and company law reform. As shown above, domestic politics governed the outcome of these policy debates.Google Scholar

60 The prospect of labor market, pension, and social welfare reforms in Germany under the SPD's “Agenda 2010” further reinforce the impression that the German social market economy is now at a critical juncture.Google Scholar

61 Cioffi, , Irresistible Forces and Political Obstacles, supra note 19.Google Scholar

62 Id.Google Scholar