Differences between the German and Japanese Economic Institutions - Case Study Example

Table of Contents Introduction 3 Corporate Governance in Japan and Germany 3 Economic Institutions of Germany 4 Economic Institutions of Japan 7 Conclusion and Recommendations 10 References 11 Baum, T. Buxbaum, R. M. & Hopt, K. J. (1994). Institutional investors and corporate governance. Berlin, Germany: Walter de Gruyter. 11 Bebenroth, R. & Tabuchi, S. (2004). “Corporate Governance in Japan: Government Regulations”.Osaka Keidai Ronshu, Vol. 54 (5): 429-438. 11 Campbell, D. & Woodley, S. (2004). Trends and developments in corporate governance, Issue 2003. The Netherlands: Kluwer Law International. 11 Das, S. C. (2009). Corporate Governance: Codes Systems. New Delhi: PHI Publishers. 12 Keat, R. (2007). “Ethics, markets and Macintyre”. Available at http://www.russellkeat.net/research/ethicsmarkets/keat_ethicsmarketsmacintyre.pdf (Accessed: December 3, 2010). 12 Lundberg, J. (February, 2009). “German and Anglo-American corporate governance”. Available at http://users.ox.ac.uk/~sedm3306/essays/german-system.pdf (Accessed: December 3, 2010). 13 Noel, A. (2004). Federalism and labour market policy: Comparing different governance and employment strategies. Queen’s University: IIGR. 13 Bibliography 14 Meerhaeghe, M. A. G. (1998). International economic institutions. London, UK: Springer. 14 Ringe, N. (2009). Who Decides, and How?:Preferences, Uncertainty, and Policy Choice in the European Parliament. UK: OUP. 14 Weiss, L. (2003). States in the global economy: bringing domestic institutions back in. UK:Cambridge University Press. 14 Introduction Coordinated market economies are featured by an informal market structure where the business relationships do not depend in any way upon institutional actors or regulated hierarchies. Organisations hosted by coordinated market economies have an easy access to “patient money” owing to the informal structure of the market (Keat, 2007). All that matters for these companies is to maintain goodwill in the market and they can have a cohort of skilled labour lining up at their doorstep. Thus, the business prospects in these nations could be considered to be quite high given an unregulated market structure, added with availability of good skills and corporate governance. Since these companies do not need to operate in a government controlled environment, they have an access to an educated and trained labour force (Noel, 2004, p. 3; Pavitt, 1999, p. 5). The economies of Germany and Japan are two major examples of coordinated market economies (CMEs) in the world. Unlike the situation in United States and United Kingdom, these nations do not implement high-end regulations in their bank structure primarily due to the informal structure of organisation. However, despite the integral business environment being the same, many-a-times it is difficult to conceive them as part of the same group due to the diverse nature of their economies. The present paper takes up the issue and tries to figure out the extent to which the German and Japanese economic institutions differ from each other. Corporate Governance in Japan and Germany Corporate governance in economic institutions located at Japan and Germany are almost similar to each other. Institutions in these nations are characterised by senior managers sitting at the head of the power unlike in case of liberal market economies, where the culture of corporate governance is seldom found. The shareholders are the ultimate owners of the organisations, although no corporate board structure is present in them. Though the strategies which these nations abide by have rendered them to a position much behind that of USA, the financial institutions of the former nations are believed to be fast picking up with those indigenous to the latter (Baums, Buxbaum & Hopt, 1994). Corporate governance in these nations is strengthened more due to the emphasis that company goodwill is being paid rather than in case of liberal market economies like the USA where people are more concerned about the final pay-off only (Jackson, 2005). Economic Institutions of Germany Germany had been a capitalist at its heart at the time of unification. It had been one of the most popular of all economies around the world with a greater exposure to the international market than that of Japan, a peer market economy. At the time (early 1990s), the current account balance of West Germany contributed a large fraction to the domestic GDP (Graf & Schneider, 2010). However, the situation prevailing in the nation came under question post 1990s when a few important economic institutions indigenous to the economy came under scrutiny owing to the extent of mismanagement prevailing in them (Das, 2009). German institutions are characterised by the following features – A two-tier structure with the management board below the supervisory board. Members of the management board monitor the enterprise’s activities while the chairman of the management board supervises the operations of the management board members. The supervisory board on the other hand, elects the members of the management board. In a similar way, the Chairman of the supervisory board sees through the activities of the members of the supervisory committee. The supervisory board members on the other hand, are chosen by the shareholders of the company during the general meeting (Herrera-Lim, n.d.). The supervisory board in German economic institutions include the employees as well, in proportion to the total number of people working in the company. In fact, the higher the number of employees in a company, greater will be the number of seats in the supervisory board. Moreover, according to a 1976 mandate, the corporate governance law prevalent in Germany also requires a certain fraction of the trade union to be represented in the supervisory board (Zeiglar, 2000). Thus, the economic institutions in Germany are more employee-friendly and provide them with good chances of framing company policies. The German economic institutions believe in the culture of maintaining long term relationships through allowing institutional forces to intervene into the system. Almost half of the company shares are bought by employers, banks, insurance companies as well as many other financial and non-financial institutions. In fact, the nation does not believe in the concept of returns to equity and hence value-addition to stocks. Instead they are found to give more importance to long term associations for the company’s future benefits (Das, 2009). In fact, the financial institutions are found to mainly own company shares. According to reports for the year 2000, banks directly owned more than 13 percent of total shares in German companies, along with the insurance companies that held 9 percent in all (Campbell & Woodley, 2004). Moreover, the banks also act as people’s representatives in these cases when the latter entitle them to cast votes during general elections for selecting a company’s supervisory board. Hence, there clearly lies a dominance of the financial companies in an economic institutional structure. Despite the apparent attractiveness of the corporate governance structure in Germany, companies have been alerted to maintain a more regulated environment to attract international investors in the economy. This change had been triggered primarily post the Enron case mishap in 2001 (Campbell & Woodley, 2004). The situation of economic institutions at Germany thus, is found to be quite dicey at present even though they are traditionally quite robust ones. They have had a well defined corporate governance structure with considerable importance being provided to the employees of the company as well. The corporate governance laws of Germany however underwent certain reforms during the 1990s which barred trading among insiders, framing of the Federal Securities Supervisory Office and Antitrust Act (Odenius, 2008). In addition, it also coerced the nation to adopt the International Accounting Standards according to the GAAP principles. Moreover, in 1998, the Law for Reinforcement of Control and Transparency was designed to emphasise the functions of the supervisory board over that of the management board (Odenius, 2008). These reforms also have made room for a greater transparency and promotion of shareholder rights. However, despite these changes there rarely exist evidences to suggest that the reforms have resulted to a positive transformation of the system of corporate governance in the nation. Moreover, it has also been alleged at times that the level of co-determination in Germany is not as advanced or effective as those in the European companies (Odenius, 2008). Economic Institutions of Japan Japan had traditionally believed in an interlocked chain of manufacturers and suppliers in addition to a life-long guarantee of employment to the labour force. However, these twin features which equal them with the terms of a coordinated market economy are found to be violated with time owing to globalisation pressures and demographic changes (Nottage, Wolff & Anderson, 2008). This very transformation has driven Japan to a position different to that of Germany even though both of them could be regarded as market economies. Today the nation stands out as the second largest economy in the world, though the climb of the economy has been possible only with a huge amount of consumption demand that the nation faces. In fact, this had been the national stimulus to recuperate from the economic recession that the nation has been undergoing at present (Central Intelligence Agency, 2010). The widening difference in the structure of corporate governance between Japan and Germany could be assessed well from studying the following features characteristic of the Japanese business environment. The model of corporate governance in economic institutions in Japan essentially follows an Anglo-American model. In this case, financing is typically short term in nature where future and present transactions rarely depend on each other. Unlike in the case of Germany however, the dependence of Japanese economic institutions upon banks is found to be low in terms of capital assistance. Though the German institutions figure out the maintenance of a good relation with their banks to be of prime importance, such is not the case for the Japanese institutions which gradually have given them a side-berth over time (Hopt, 1998). This is the reason why the institutions need to maintain a good stock of reserves internally so as to keep them financially protected throughout. In this case, household finance is the only avenue of financing that the companies depend upon. There exists another popular model of corporate governance among a few Japanese institutions – the Japanese-German model. In this case, the ideal method of corporate governance is typical to that of the ones being followed by German economic institutions. These companies depend upon their respective banks for financing themselves not only in the short term but in the long term as well. Banks also participate in the management of the company concerned as the latter comes to believe in the maintenance of long term associations with their benefactors. Statistics show that the Japanese companies have begun to depend more and more upon private capitalisation than that in case of German companies. According to a 1998 report, while the ratio of domestic credit in private sectors in Japan had been 0.86, it had been 0.78 in Germany (Rajan & Zingales, 1998). Japanese economic institutions are found to put lower and lower importance towards bank borrowing implying their receding dependence upon the latter. In fact, it is the banks of Japan which shift out of such schemes due to the immense risk associated with their operations. The costs of funds in Japan are too low due to the easy monetary policies being framed in the past by the Bank of Japan (Cargill & Yoshino, 2003). The cost of funds is an important consideration for the firms on the other hand; they aim at borrowing from institutions where they lend at the least cost. However, the banks generally target at advancing credit with a promise of extracting hefty returns out of the same. Moreover, banks in Japan have largely lost their faith in the credit worthiness of the Japanese economic institutions post the chain of recessions that the economy has been facing over the last few years (Okabe, 2004). However, there still remain instances when the banks are found to advance “forbearing lending” to companies for risky investments. Such a behaviour on part of the banks further led to the downfall of the companies, more since the banks did not even monitor the functions of the companies to which they advanced their help (Okabe, 2004). The new laws underlying the Japanese corporate governance protocol encompasses the following features – Revision of Antitrust laws to bring holding companies to power again. Facilitating the system of stock swapping. Following the ISA and GAAP Accomplish robust international relationships (Bebenroth & Tabuchi, 2004). The companies of Japan have, henceforth the introduction of new corporate governance laws, shifted to a corporate governance system focussed more towards the market and depending less and less upon the financial institutions. In addition, it is the government support that the national firms have beside them, which have assured the foreign investors towards the firms thus enhancing their bargaining power (Bebenroth & Tabuchi, 2004). Conclusion and Recommendations The present paper dealt with the problem of corporate governance that the economic institutions in Germany and Japan have to endure. Though both of them belong to the same domain of coordinated market economy, there lay differences in the innate ways in which they operate. Though both of them abide by the Anglo-American model of corporate governance, the frequency is found to be higher among the organisations of Japan than that of Germany. Germany, on the other hand prefers to stick back to the German-Japan model of corporate governance. In the latter, it is the banks and other financial institutions which are given primary importance for capital financing. Moreover, the banks are also found to participate during general meetings of the firms, which actually are proof of the fact that banks and financial institutions are being given a high importance in firms that follow this pattern of corporate governance. On the other hand, the companies which follow the former mode of corporate governance impose a higher weight upon household financing. They believe in taking as little help as possible from banks and other financial institutions, which is why they maintain a huge proportion of internal capital (Lundberg, 2009). However, both nations believe in paying their respective employees as much importance as possible in company proceedings. But even this factor is found to be gradually slipping off from Japanese culture in an era when the companies had been undergoing a hectic recessionary phase. Germany thus, is found to be abiding more to the features of a coordinated market economy structure than that of Japan. Another important reason why the German model is further deviating from that of the Japanese model is the former’s inclusion within the European Union, which requires it to follow some additional protocols. The paper though had been a wholesome one with ample research being conducted; it could have been enhanced had there been empirical evidence in support of the same. Empirical evidence in the present case implies the extent to which the banks had participated as institutional investors for the companies in the two nations. The nation that is associated with a steady or growing trend is believed to abide by the coordinated market economy system. References Baum, T. Buxbaum, R. M. & Hopt, K. J. (1994). Institutional investors and corporate governance. Berlin, Germany: Walter de Gruyter. Bebenroth, R. & Tabuchi, S. (2004). “Corporate Governance in Japan: Government Regulations”.Osaka Keidai Ronshu, Vol. 54 (5): 429-438. Campbell, D. & Woodley, S. (2004). Trends and developments in corporate governance, Issue 2003. The Netherlands: Kluwer Law International. Cargill, T. F. & Yoshino, N. (2003). Postal savings and fiscal investment in Japan: the PSS and the FILP. London: OUP. Central Intelligence Agency. (2010). East & South East Asia: Japan. Available at https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html (Accessed: December 1, 2010). Das, S. C. (2009). Corporate Governance: Codes Systems. New Delhi: PHI Publishers. Graf, B. & Schneider, S. (September 6, 2010). “Germany: Only modest decline in the current account surplus”. Deutsche Bank Research. Available at http://www.dbresearch.de/PROD/DBR_INTERNET_DE-PROD/PROD0000000000261984.pdf (Accessed: December 3, 2010). Herrera-Lim, R. (No Date). “The Case for Two-Tier Boards in the Modern Corporation”. Available at http://www.secp.gov.pk/rc/RoleOfDirectors/CaseTwo-TierBoards.pdf (Accessed: December 3, 2010). Hopt, K. J. (1998). Comparative corporate governance: the state of the art and emerging research. London: OUP. Jackson, G. (2005). “Stakeholders under Pressure: corporate governance and labour management in Germany and Japan”. Corporate Governance, Vol. 13(3): 419-428. Keat, R. (2007). “Ethics, markets and Macintyre”. Available at http://www.russellkeat.net/research/ethicsmarkets/keat_ethicsmarketsmacintyre.pdf (Accessed: December 3, 2010). Lundberg, J. (February, 2009). “German and Anglo-American corporate governance”. Available at http://users.ox.ac.uk/~sedm3306/essays/german-system.pdf (Accessed: December 3, 2010). Noel, A. (2004). Federalism and labour market policy: Comparing different governance and employment strategies. Queen’s University: IIGR. Nottage, L. Wolff, L. & Anderson, K. (2008). Corporate governance in the 21st century: Japan's gradual transformation. London: Edward Elgar. Odenius, J. (2008). “Germany’s Corporate Governance Reforms: Has the System Become Flexible Enough?”. International Monetary Fund Working Paper /08/179. Available at http://www.imf.org/external/pubs/ft/wp/2008/wp08179.pdf (Accessed: December 2, 2010). Okabe, M. (February, 2004). “The Financial System and Corporate Governance in Japan”. Available at http://coe21-policy.sfc.keio.ac.jp/ja/wp/WP17.pdf (Accessed: December 1, 2010). Pavitt, K. (1999). “What We Know about the Strategic Management of Technology”. Available at http://www.asci.org.in/journals/v21/What_We_Know_about_the_Strategic_Management_of_Technology%20.pdf (Accessed: December 2, 2010). Rajan, R. G. & Zingales, L. (1998). “Financial Dependence and Growth”. The American Economic Review, Vol. 88(3): 559-586. Zeiglar, J. (2000). “Corporate Governance and the Politics of Property Rights in Germany”. Available at http://www.irle.berkeley.edu/culture/papers/Zeigler.pdf (Accessed: December 3, 2010). Bibliography Meerhaeghe, M. A. G. (1998). International economic institutions. London, UK: Springer. Ringe, N. (2009). Who Decides, and How?:Preferences, Uncertainty, and Policy Choice in the European Parliament. UK: OUP. Weiss, L. (2003). States in the global economy: bringing domestic institutions back in. UK:Cambridge University Press. Read More