Stakeholder Democracy and Varieties of Capitalism - Corporate Governance and Business Ethics

In order to shed light on this issue, we will discuss some findings from the literature of comparative capitalism. In this literature, a conceptual distinction is made between coordinated market economies (CMEs) and liberal market economies (LMEs) (Hall and Soskice 2001). Germany is considered to be the paradigm case of a CME whereas the LME is found in the United Kingdom and the United States. Soskice mentions three important characteristics of a CME: (i) companies securing long-term relations with their owners; (ii) unions and employer associations playing an important role in the regulation of labor markets (in the case of Germany, we need to stress the role of works councils and the supervisory board with employee representatives); (iii) companies being closely integrated into training systems and cooperating with each other through powerful industry associations.

Two aspects of the latter-day discussion on the theory of comparative capitalisms are of particular importance to us. First, it is maintained within the literature that any form of stakeholder democracy is dependent upon a CME framework. The CME framework allows for “stakeholder capitalism” as opposed to the shareholder capitalism of the LME (Soskice 1997). Without that, no form of political CSR within companies is likely to prosper. Second, there is discussion on the future prospects of CME. This explains why so much attention is given to the German situation. On the one hand, many notice fundamental changes that are going on in the German system. On the other hand, it is believed that Germany is of fundamental importance for the survival of CME. Lane, for example, is motivated to focus on the German model by the argument that if the very cohesive German system can be shown to be in the process of fundamental change, then the other continental European business systems may be vulnerable, too. Lane’s work forms a good starting point for our discussion. Lane argues that a process of convergence, a one-sided adaptation of the CME model to that of the liberal market economy, is occurring. She bases her case on the force of the cultural and ideological diffusion of shareholder-oriented thinking and the presupposition of an inherent strain for system coherence. In order to build her case, Lane gives a description of the main features of the German financial system and form of corporate governance and contrasts these with the features of the liberal market economy. The German model is conditioned by a high degree of stability within the financial system, and the absence of a market of corporate control is also important. Until the mid 1990s, there was indeed a degree of stability. Due to an underdeveloped stock market, concentrated (family) ownership, and interlocking directorships, hostile takeovers were almost unknown. Banks had a special insider position of control which was based on their ability to cast proxy votes on behalf of the many small investors whose shares they administered (cf. ibid., p. 86). As a consequence, the decision-making in large Germans firms tended to be consensus oriented, with a low constraint to deliver very high returns to shareholders. Instead, the stability of the firm and market growth, together with adequate profits, has been management goals.

According to Lane, this picture has changed fundamentally. We have already mentioned above the liberalization of international capital markets. As a consequence of this liberalization, the actions of worldwide operating investment funds have put pressure on listed firms to restructure their operations in line with fund managers’ expectations about the improvement of shareholder value. In addition, increased international competition in product markets has made it important to attain sufficient size and market power, and this has exerted pressure for capital concentration through merger and acquisition. On occasion, this in turn has precipitated listing on stock markets. A third source of change, according to Lane, is the increased acceptance and diffusion of shareholder value and associated motivations, cognitions, and scenarios for action. The new generation of German managers, especially, has absorbed these through participation in new programs of management education, particularly the MBA. A further important change in the German financial system is the modernization of the German stock market itself which fuelled the expansion and influence of the stock market on firms. According to Lane, the market is shaping many managers’ expectations and interests, as external monitoring of listed companies has become prevalent. Even companies not exposed to shareholder pressures have adopted elements of the notion of “shareholder value” to legitimate restructuring and a greater performance orientation.

But Lane’s claim does not go undisputed. Deeg (2005), for example, thinks that the spread of shareholder value is actually limited and that it often only follows “the logic of similarity”. Shareholder value-thinking is adopted as a rhetoric that lends legitimacy to other goals being pursued by management. Deeg also refers to the KonTraG, an important piece of legislation on corporate governance in Germany, which “did not alter the internal relations among corporate stakeholders”. It upheld the key normative principles of co-determination and stakeholder capitalism, in part by leaving untouched the fiduciary responsibility of managers to the firm as a whole without giving primacy to any particular constituency. Several other authors support Deeg’s position that the changes in the German system of corporate governance do not necessarily lead to a convergence with the shareholder model and that one system can contain elements of both the CME and the LME model (Becker 2001; Deeg 2005; Gourevitch and Shinn 2005). The same is true for key institutions within the model such as the firm-level co-determination scheme found in Germany.

Hancké and Goyer, for instance, claim that firm-level co-determination is perfectly compatible with financial transparency under a shareholder value-oriented system (Hancké and Goyer 2005). We conclude that, as it stands, in the debate on the convergence of varieties of capitalism to one form of “super-capitalism” (Reich 2007), which would be the Anglo-American shareholder model, the jury is out.

Still, we can draw two important conclusions with respect to the development of a political conception of CSR which is based on deliberative democracy. First, at the level of the firm there are degrees of freedom within a national system of economic organization. Most systems of economic organization in continental Europe are hybrid forms of the ideal types of the CME and LME model. Germany, for instance, has developed a dual system in which the largest banks and listed corporations have adopted substantial elements of the LME model. But German corporate managers can still choose to maintain an insider and stakeholder-oriented approach, as long as the ownership of their firm remains concentrated (Deeg 2005). This means that the strategies of actors within an economy also affect the precise shape that their changing institutional environment will take. Hancké and Goyer have shown how actors can use institutional reforms in unforeseeable ways to adapt themselves to perceived challenges. As a consequence, the degree to which a national business system, including its corporate governance arrangement, is open to the interests of stakeholders depends also on the strategies of these stakeholders themselves and on the political institutions in a country (Gourevitch and Shinn 2005). In Germany, the historically-grown practice of worker co-determination has produced works councils which are strong enough to take co-responsibility for the competitiveness of the firms in which they work. This has reduced managerial incentives to act in a unilateral manner. A second important conclusion follows up on the first: any system of economic organization has its own specific history. The ecific form that stakeholder involvement will take is the outcome of a historically developed path. The kind of cooperation common in Germany, for example, is dependent on the specific institutional path chosen in that country. Hence, that specific form of cooperation is difficult to copy in different institutional settings. In relation to our purpose of reflecting on the possibilities of a political conception of CSR, this means that there is little sense in designing a theoretical model, regardless of the actual development of a national business system. The purpose and meaning of a political conception of CSR at the level of corporate governance must always be defined relative to the features of a specific national business system. It follows that it seems better to limit any attempt to work out the consequences of a political conception of CSR at the level of corporate governance to describing and advocating the principles involved.

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