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Banks on Board: German and American Corporate Governance, 1870–1914

Published online by Cambridge University Press:  14 April 2011

Jeffrey Fear  and
Christopher Kobrak
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Abstract

This examination of the foundations of German and American corporate governance highlights the role of money-centered banks, both as board members in large corporations and as intermediaries on the stock exchange. German banks, by acting as surrogate regulators, became institutional stabilizers, and German regulators encouraged banks to participate in corporate boards in order to overcome agency problems in firms and to control speculation. American investment banks, prior to 1914, often managed to overcome regulatory obstacles, which enabled them to wield more power over corporations than their legendary German counterparts. American banks had more opportunities to intervene in the event of panics, bankruptcies, foreign investment, and corporate consolidation. In contrast to Germany, the United States increasingly imposed regulations that circumscribed the supervisory role of banks as board members.

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Articles
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Business History Review , Volume 84 , Issue 4: Business History and Varieties of Capitalism , Winter 2010 , pp. 703 - 736
Copyright
Copyright © The President and Fellows of Harvard College 2010

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97 See the contemporary critique by Emery, Henry Crosby, “The Results of the German Exchange Act of 1896,” Political Science Quarterly 13 (1898): 286–320;CrossRefGoogle ScholarMeier, Johann Christian, Die Entstehung des Börsengesetzes vom 22. Juni 1896 (St. Katharinen, 1992);Google ScholarWeber, Max, Börsenwesen, Schriften und Reden 1893–1898, ed. Borchardt, Knut (Tübingen, 1999);Google ScholarFohlin, Caroline, “Regulation, Taxation and the Development of the German Universal Banking System, 1884–1913,” European Review of Economic History 6 (2002): 221–54;CrossRefGoogle ScholarGelman, Sergey and Burhop, Carsten, “Taxation, Regulation and the Information Effi ciency of the Berlin Stock Exchange, 1892–1913,” European Review of Economic History 12, no. 1 (2008): 39–66.CrossRefGoogle Scholar

98 Fohlin, “Does Civil Law Tradition and Universal Banking Crowd Out Securities Markets?” and Finance Capitalism, 222–76.

99 The following discussion and quotes are from Stünzner, Banken und Wertpapierbörse, 33–44.

100 Ibid., 37–39.

101 Stünzner, Banken und Wertpapierbörse, 38–44, argues that banks manipulated share prices frequently. Fohlin, “Does Civil Law Tradition and Universal Banking Crowd Out Securities Markets?” 631–33, fi nds little evidence for the effectiveness of price manipulation.

102 For an insightful discussion, see Elsas, Ralf and Krahnen, Jan Pieter, “Universal Banks and Relationships with Firms,” in The German Financial System, ed. Krahnen, Jan Pieter and Schmidt, Reinhard H. (Oxford, 2004), 197–232.CrossRefGoogle Scholar Also, Hirschman, Albert O., Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge, Mass., 1970).Google Scholar The case for exit is made by Jensen, Michael C., “The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems,” Journal of Finance 48, no. 3 (1993): 831–80.CrossRefGoogle Scholar

103 “He [John C. Bogle of Vanguard] Doesn't Let Money Managers Off the Hook,” New York Times, 12 Apr. 2009.Google Scholar