Corporate goverance in context: assessing the sustainability of managerial systems in the global ecomony with evidence from Germany's insider model

Abstract

This thesis will assess the sustainability of managerial corporate governance systems in the context of the current economic globalisation wave. In order to do so corporate governance is studied as the function of decision-making undertaken by managers as corporate controllers, which is embedded in the national and supranational institutional context. The latter determine not only how much discretion managers have but also how they use it. Two main workable institutional equilibria are identified, reflecting two respective visions of the corporation that emerge from an overview of the most influential theories developed to study the nature of the firm. The first emphasises market transactions by promoting the externalisation of corporate functions and tends to align managerial decision-making to the interests of current shareholders, i. e. the maximisation of the firm's market value. The second contains a tendency towards the internalisation of corporate functions by the corporate organisation with enhanced managerial discretion being a crucial element for the sustainability of this sort of coordination. The crucial difference between these two institutional equilibria, i. e. the shareholder-oriented and the managerial, is that the former is less growth-oriented/dependent and emphasises the lack of commitment between stakeholders and "exit" from corporate relationships, whereas the latter is more growth-oriented/dependent and relies on stakeholder commitment and "voice". It is due to this difference that the managerial system is more susceptible to price competition which involves drastic cost-cuttings that affect stakeholder relationships and therefore more reliant on stable but relatively high macroeconomic growth rates and effective demand. A central hypothesis of this project is that this fundamental difference between the two systems is the decisive factor behind their ability to survive within the current context of economic globalisation. It is argued that globalisation, as a process where national institutional structures are gradually replaced by others determined by world market forces, not only promotes market based macro- and microeconomic coordination but has also (as a result) led to a global economic slowdown due to the inherent imperfections of the market mechanism. Simultaneously, the gradual removal of economic barriers has brought national corporate governance systems in competition with each other with increasing emphasis being placed on cost-reductions and short-term investments due to slower demand-growth. This has a negative impact on the workability of managerial systems and through a process of global isomorphism leads to the emergence of the shareholder-oriented system as the most likely winner not because it is better in terms of economic efficiency, but because it is more flexible. While these pressures are real, global corporate governance convergence is not guaranteed in the short and medium term due to different institutional dynamics that exist in each national system and which determine the scale and scope of adaptation. Empirical evidence from Germany confirms this since, although many basic institutions supporting German managerialism are being eroded, some path dependent ones remain stable and thus prevent the complete institutionalisation of shareholder supremacy. However, this creates systemic workability problems that can in the long term undermine even those institutional structures that are highly path dependent. The progress of further adaptation in the future depends on whether the costs of unworkability exceed adaptation costs.