Abstract
One of the key features of the modern, publicly traded German AG is the separation of ownership and control70. In most circumstances of German publicly listed companies, management does not own shares in its corporation71. Furthermore, the board of supervisors in Germany is composed half by employees’ representatives and half by shareholders’ representatives72. These shareholders’ representatives are most often managers of other corporations or financial institutions73. Jensen and Meckling (1976) originated the argument of “agency cost” in which the separation of ownership and control could explain much corporate behavior that does not appear rational under the assumptions of perfect markets. More precisely, they argued that agency costs result from the potential conflict of interest between “agents” (managers) and “principals” (stockholders or owners). Agency costs arise whenever owner-managers sell off portions of their stock holdings to outside security holders who have no voice in management. The measure of these agency costs is the difference between the market value of the company when 100% is owned by management, and its value when less than 100% is owned-managed.
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Many publicly traded AGs in Germany are family majority owned, dominated and/or run. However, our sample discards companies where the majority shareholder is a family or person.
In recent years, some German publicly listed corporations have instituted stock option plans for its senior management. The German Corporate Law (“Aktiengesetz”), however, does not allow the issue of naked options. Therefore, in order to introduce a stock compensation plan, option rights have to be created by way of a capital increase: the shareholders’ meeting authorizes the management board to issue convertible bonds or warrant bonds.
This is in contrast to the board of directors in the U.S. which is typically composed of both top management of the corporation and outside directors.
See Becht and Böhmer (1997) for a discussion on ownership and control of corporations in Germany. Furthermore, Emunds (1996) describes this particular issue of German boards’ composition as “the managers to be controlled are at the same time the controllers of their controllers”, since managers of large German corporations have as members of their board of supervisors not only bankers from the large German money center banks but the latter are being supervised by managers of the large German corporations as significant shareholders of German banks.
See Hall and Liebman (1997) and Holderness, Kroszner, and Sheehan (1997) for a discussion on the evidence of equity incentives in management compensation. Both papers suggest that equity-based compensation in the USA has increased substantially in the last several years.
As one of the first German companies Daimler-Benz introduced in 1996 a compensation plan for its top management tied to the (long-term performance of the) stock price. 178 members of the board and directors were able to buy bonds convertible at a fixed price into shares if their price increased by at least 15%. Criticism and displeasure arose from shareholders because managers had acquired the equivalent of 889, 000 shares in 1996 through the appropriate number of options and converted approximately three quarters of them before year end into shares. It is suspected that most of them had been sold for cash in the open market. Shareholder activists and minority shareholders’ representatives criticized the timing of the exercise of the option meaning that the plans need to be structured in such a way so that shares can be sold at the earliest after two years and not already after six months. Otherwise the longer term motivation would not be achievable. Other larger companies such as Deutsche Bank, Henkel, Schwarz Pharma and Volkswagen have also introduced stock compensation plans recently. For a brief overview of the current stock compensation discussion of German management see Fischer, Gronwald, and Sommer (1997).
For a discussion on the managerial labor market see Fama (1980).
For an extensive discussion on the concept of shareholder value see Rappaport (1986) or Copeland, Koller, and Murrin (1994).
See Roll (1987) and Franke and Hax (1994) for an extensive discussion on the sources of values for acquisitions.
By non-speculative motives we mean motives not based on managerial motives of growth, size, power needs, executive compensation, etc. and ‘should’ lead to real net gains from the combination of the two firms.
See also Malatesta (1983).
Wenger and Hecker (1995) or Windolf and Beyer (1995) discuss the phenonena of a tightly closed network in corporate Germany of top managers and its top bankers.
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© 1999 Springer Fachmedien Wiesbaden
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Scheller, K.R. (1999). Issues of Corporate Governance. In: Performance of Corporate Acquisitions over the Medium Term in Germany. Deutscher Universitätsverlag, Wiesbaden. https://doi.org/10.1007/978-3-663-08842-4_3
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DOI: https://doi.org/10.1007/978-3-663-08842-4_3
Publisher Name: Deutscher Universitätsverlag, Wiesbaden
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