This article was downloaded by: [University of Birmingham] On: 14 September 2013, At: 16:52 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK Journal of European Public Policy Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/rjpp20 The emerging European corporate governance model: Anglo-Saxon, Continental, or still the century of diversity? Lucian Cernat a a United Nations Conference for Trade and Development, Palais des Nations, 1210 Geneva, Switzerland Published online: 04 Jun 2010. To cite this article: Lucian Cernat (2004) The emerging European corporate governance model: Anglo-Saxon, Continental, or still the century of diversity?, Journal of European Public Policy, 11:1, 147-166, DOI: 10.1080/1350176042000164343 To link to this article: http://dx.doi.org/10.1080/1350176042000164343 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use of the Content. This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http:// www.tandfonline.com/page/terms-and-conditions
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This article was downloaded by: [University of Birmingham]On: 14 September 2013, At: 16:52Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: MortimerHouse, 37-41 Mortimer Street, London W1T 3JH, UK
Journal of European Public PolicyPublication details, including instructions for authors and subscription information:http://www.tandfonline.com/loi/rjpp20
The emerging European corporate governancemodel: Anglo-Saxon, Continental, or still the centuryof diversity?Lucian Cernat aa United Nations Conference for Trade and Development, Palais des Nations, 1210Geneva, SwitzerlandPublished online: 04 Jun 2010.
To cite this article: Lucian Cernat (2004) The emerging European corporate governance model: Anglo-Saxon, Continental,or still the century of diversity?, Journal of European Public Policy, 11:1, 147-166, DOI: 10.1080/1350176042000164343
To link to this article: http://dx.doi.org/10.1080/1350176042000164343
PLEASE SCROLL DOWN FOR ARTICLE
Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) containedin the publications on our platform. However, Taylor & Francis, our agents, and our licensors make norepresentations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose ofthe Content. Any opinions and views expressed in this publication are the opinions and views of the authors,and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be reliedupon and should be independently verified with primary sources of information. Taylor and Francis shallnot be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and otherliabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to orarising out of the use of the Content.
This article may be used for research, teaching, and private study purposes. Any substantial or systematicreproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in anyform to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions
Journal of European Public Policy 11:1 February 2004: 147–166
The emerging European corporategovernance model: Anglo-Saxon,Continental, or still the century ofdiversity?Lucian Cernat*
ABSTRACT During recent years the European Commission has been active increating a ‘level playing-field’ for European companies through the creation of aharmonized regulatory framework. The Europeanization of national corporategovernance models was seen as an important part in this endeavour. However, thelikely policy consequences are far from clear and the direction of corporategovernance convergence in Europe is still a matter of debate. One key question iswhether national governance models across Europe will converge as a result of theEuropean regulatory framework and, if so, what the shape of the Europeancorporate governance model will be. This article advances the view that, owing toEU decision-making procedures and the diversity of national corporate governancemodels across Europe, it is difficult to ensure that the European project ofgovernance convergence is underpinned by a dominant coalition promoting a well-articulated corporate governance model.
KEY WORDS Corporate governance; EU decision-making procedures; the Euro-pean Company Statute Directive; the European Works Council Directive;Europeanization; the 13th Takeover Directive.
1. INTRODUCTION
A significant body of recent comparative corporate governance literature hasbeen concerned with the question of whether there is a national corporategovernance system that performs best in terms of competitive advantage.1 Thisquestion arises in the wake of the globalization of the international economy,a surge in cross-border mergers and acquisitions, and various regulatoryattempts to reform existing national corporate governance systems. Theglobalization of the economy and the Europeanization process advanced in the1990s have renewed interest in the debate on the persistence of nationalspecificities with regard to corporate governance and their convergence towardsa harmonized model.2 The claim that one set of institutions should prevailover another is based on several underlying assumptions. An extensive rangeof studies have addressed these questions in recent years identifying national
variations across corporate governance arrangements and their impact onthe international economic competitiveness of different national capitalistinstitutional arrangements.3 This fact is exacerbated by globalization, which isexpected to spare only the most fit kind of capitalism. Thus, it has been arguedthat corporate governance represents not only a crucial difference amongvarieties of capitalism but also a major factor determining their economicperformance.
Despite this trend towards convergence, across Europe significant differencesremain in terms of ownership structure and market for corporate control.Wymeersch (1994) identifies two broad types of corporate governance inEurope: a company-based system and an enterprise-based system. This classifi-cation parallels the shareholder versus stakeholder distinction. While this dualapproach may exaggerate the difference among various European corporategovernance systems, it nevertheless seems well suited to reflect the significantregulatory and social aspects of corporate governance across Europe.
In the UK, for instance, hostile takeovers through raids on the stock marketplay an important role. In the European Union (EU), the UK is generallyviewed as the economy most similar to the US, and the reforms enacted bythe Thatcher, Major and Blair governments have brought the UK even closerto the American model. In contrast, Germany had virtually no hostile takeoversbefore the Vodafone deal. A similar systemic aversion to hostile takeovers canbe found in different degrees in other Continental European states (De Jong1989).
Empirically, the different experiences in Europe both in terms of types ofcapitalism and economic performance give full legitimacy to the researchquestion as to whether capitalist institutions (markets, hierarchies, networks,various state and private actors) can be related to various economic outcomes.Second, a crucial question in the European context is whether the EU has acoherent institutional project with regard to corporate governance and indus-trial relations. As economics itself finds it increasingly difficult to account forcross-national variations in institutional variety and economic performance, amore encompassing approach based on institutional political economy theoriesmay hold the key to our understanding of European integration.
To the extent that this is happening, the convergence process towards Anglo-Saxon ‘best practices’ is driven by two interrelated forces. First, a liberalizedfinancial market that is beyond any individual state or supranational institutionmakes it increasingly difficult to reconcile the Hausbank-style of Continentalblockholders with the shareholder approach of financial markets. Second, theEuropeanization project aims to promote harmonization towards several capi-tal-related features of the Anglo-Saxon system.
In contrast, with regard to labour-related issues, the same Europeanizationproject aims to produce a Continental-oriented model of corporate governance.Change in the national corporate governance regime would then have to beexplained as a consequence of a dynamic interaction between the specificpolitical selectivities of national and supranational institutional constraints and
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opportunities, adding to the effects of interdependence between nationalsystems competitively embedded in an encompassing common market.4
Thus, the interesting question regarding corporate convergence at Europeanlevel is, what are the major characteristics of the emerging Europeanizationproject? The options are either a hybrid model combining ‘best’ with ‘second-best’ practices from Anglo-Saxon and Continental corporate governancemodels, or convergence towards one of the two models. The following sectionsinvestigate these issues further. After a short description of the main two types ofcorporate governance influencing the emerging European model, three distinctEuropean legislative initiatives aimed at reshaping the corporate governancestructures across Europe are examined in order to identify the influence of EUdecision-making procedures on the degree and direction of convergence.
The remainder of the paper is organized as follows. Section 2 introducesthe main features of the Anglo-Saxon and Continental models of corporategovernance, the two models that shape current attempts at promoting aEuropean model of corporate governance. Section 3 analyses the consequencesof decision-making procedures in the EU on the direction of corporategovernance convergence at the EU level by focusing on three specific legislativeinitiatives: the European Works Council Directive, the European CompanyStatute Directive and the 13th Takeover Directive. The conclusions with regardto the convergence debate over the Europeanization of corporate governanceare presented in section 4.
2. MODELS OF CORPORATE GOVERNANCE
In the models of corporate governance literature one can organize the variety ofvariables and concepts used to describe the complexity of corporate governancemechanisms into two main categories: capital-related and labour-related. Thecapital-related aspects contain, among others, variables like ownership structure,corporate voting, the identity of owners, and the role of institutional owners.
The labour-related aspects refer mainly to the stakeholding position oflabour in corporate governance. Here one could mention employee involvementschemes, participatory management, co-determination, etc.5 Table 1 summar-izes the various aspects of corporate governance, according to the proposeddichotomy. Based on this organizing principle, the next section further exploresthe concepts mentioned above and other key aspects of each corporategovernance model.
2.1 The Anglo-Saxon model of corporate governance
In the Anglo-Saxon tradition, the corporate concept is based on a fiduciaryrelationship between shareholders and managers. Based on the concept ofmarket capitalism, the Anglo-Saxon system is founded on the belief that self-interest and decentralized markets can function in a self-regulating, balancedmanner. It comes as no surprise that these institutional settings are based on
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Table 1 Anglo-Saxon vs. Continental corporate governance: capital- and labour-relatedaspects
Aspects Anglo-Saxon Continental
Labour-related
Co-operation between Conflictual or minimal Extensive at national levelsocial partners contact
Labour organizations Fragmented and weak Strong, centralized unions
Labour market flexibility Poor internal flexibility; High internal flexibility; lowerhigh external flexibility external flexibility
Employee influence Limited Extensive through workscouncils and co-determination6
Capital-related
Ownership structure Widely dispersed Banks and otherownership; dividends corporations are majorprioritized shareholders; dividends
less prioritized
Role of banks Banks play a minimal role Important both in corporatein corporate ownership finance and control
Family-controlled firms General separation of Family ownership importantequity holding and only for small- and medium-management sized enterprises
Management boards One-tier board Two-tier boards; executiveand supervisoryresponsibility separate
Market for corporate Hostile takeovers are the Takeovers restrictedcontrol ‘correction mechanism’
for management failure
Role of stock exchange Strong role in corporate Reducedfinance
Source: Adapted from Rhodes and van Apeldoorn (1997: 174–5).
and reinforce profit-oriented behaviour and a struggle for material successby individual entrepreneurs and managers. This short-term, profit-orientedbehaviour and individualism are combined with a set of appropriate institutionsto enhance their effectiveness in the Anglo-Saxon model.7 In the continentaltradition, the company has an independent will, i.e. in theory what is goodfor the corporations might not be good for their shareholders. These differencespenetrate to company law particulars such as shareholder rights, the role ofstatutory capital and the responsibility of the board, to mention a few.
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Capital-related aspects
With regard to capital-related features of corporate governance, the Anglo-Saxon countries are known to offer well-developed mechanisms. Anglo-Saxoncorporate governance systems are characterized by dispersed equity holdingand a broad delegation to management of corporate responsibilities. In theUK and US, not only are there few large shareholders but the second, thirdand smaller shareholdings are not appreciably smaller than the largest. Thisgives rise to the possibility of effective control through coalitions but not byindividual shareholders (Becht and Mayer 2001; Blair 1995). Although owner-ship and control are separate, minority shareholders enjoy protection owing tothe not solely legal infrastructure, and to highly developed capital markets inthe market-oriented system.
Probably the most distinctive capital-related aspect in relation to the twosystems is the structure of corporate ownership. As seen in Table 2, in 1990in the US (the textbook example for the Anglo-Saxon capitalist model)individual shareholders accounted for 50 per cent of the total outstandingshares owned.8
This differs markedly from countries with Continental capitalism. The samesharp differences in ownership structure are present with respect to theother two major non-financial shareholders: banks and enterprises. From theownership structure it follows that the Anglo-Saxon corporate governancesystem is one where share ownership is widely dispersed and shareholderinfluence on management is weak. In this system a well-functioning stockmarket is vital for dissatisfied shareholders to be able to sell their shares. Inorder to work, the system needs to protect the individual shareholder by strictregulations on corporations regarding information disclosure and insidertrading.9
Still more striking than differences in average sizes of share blocks is thecomplete distribution of the largest shareholdings. Table 3 provides a moredetailed breakdown of ranges for the largest ultimate voting block in listedindustrial companies for various countries. It is noticeable that, whereas in theUSA over 50 per cent of companies have a largest shareholder who holds lessthan 5 per cent of the shares, in Austria and Germany there are virtually nosuch companies. In some Continental European countries there is a fairlyuniform distribution of the largest voting blocks (Germany, Netherlands), with
Table 2 Major non-financial shareholders of stocks (percentages), 1990
a clear tendency towards ownership concentration.10 In others, the ownershipdistribution is peaked. For instance, in Austria 54 per cent of the companiesin the sample have a large shareholder controlling between 50 and 75 per centof the voting rights. In contrast, in the UK and US there is a strong ‘marketbias’ towards dispersed control.
Labour-related aspects
With regard to the role played by labour in shaping US policy-making, mostauthors agree that the influence of trade unions is much less in the Anglo-Saxon model when compared with the European model.11 Organized labourin the US is characterized by a relatively high level of heterogeneity andfragmentation at national level. The Anglo-Saxon system also has a low anddeclining rate of unionization; see Pryor (1996). In contrast with Europeanand developmental capitalism, the labour market in Anglo-Saxon capitalismsuffers from poor internal flexibility owing to a fragmented training systemand poor skills (Rhodes and van Apeldoorn 1997: 174). These negative featuresare partially balanced by higher mobility (both across professional groups andgeographically) and by more flexible wages than those characterizing theEuropean model.
As can be seen in Figure 1, the Anglo-Saxon model of corporate governancedoes not allow for labour to participate in strategic management decisions. Onthe decision-making side, America’s best firms have delegated more decisionsto workers through employee involvement programmes and team decision-making than ever before. In the mid-1990s, over half of Americans reportedthat they worked in firms with employee involvement committees; and one-
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Figure 1 The Anglo-Saxon model of corporate decision-making
third of workers said that they were members of employee involvementcommittees of some sort (Freeman and Rogers 1999). However, this partici-pation is restricted to operation management and has no equivalent at strategicmanagement level.
Moreover, in the Anglo-Saxon world employee participation often has justa financial aspect. In contrast to many Continental countries, a majorcomponent of the US economic model is the growth of shared capitalism,including a diverse set of mechanisms for worker participation in productiondecisions and the financial stake of their firm and of capitalism more broadly.A large share of the US workforce receives compensation related to companyperformance in a variety of schemes. Dube and Freeman (2000) found thatapproximately 25 per cent of the US workforce had a stake in their firmthrough some form of ownership. This includes working in a firm with anemployee stock ownership plan (ESOP) or receiving a stock option throughan employee stock option plan that involves most of the workforce, or throughpurchase of stocks in a firm that offers discounts on purchases.
2.2 The Continental model of corporate governance
The situation in Continental Europe is rather different. The underlyingprinciple on which the Continental corporate governance system is based isembodied in the stakeholder theory of the firm.12 The Continental capitalistmodel considers not only the interests of shareholders but also input from therelevant stakeholders (see Figure 2). Often, the most important stakeholderswho take an active part in strategic decision-making at corporate level areemployees, through trade union representation and/or works councils.13
Unlike the Anglo-Saxon model, many Continental European countriesprovide for a two-tier board: the executive board of directors and the supervisoryboard. The supervisory board is formed according to different procedures
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Figure 2 The Continental model of corporate governance
across Europe, but in many cases employees have the right to appoint orrecommend several members to the supervisory board.
From the schematic relationships depicted in Figure 2 it can be seen that,unlike the Anglo-Saxon system, Continental corporate governance allows formultiple channels to deal with the shareholder-manager agency problem andensure insider supervision.
Capital-related aspects
Unlike the Anglo-Saxon system, the Continental model is based on theprominent role of banks and on extensive cross-ownership links in corporatefinance and control (see Table 2). It is common for banks in this model toown significant proportions of shares in their portfolios as a way of controllingtheir major clients’ economic activities. Bank representatives are also oftenfound on the boards of directors of the companies to which they offered largeloans. These organizational features and close banking–enterprise interactioncreate a more secure economic environment that allows firms to seek higherprofits in the long term, as opposed to the short-term view imposed by stockmarkets on Anglo-Saxon companies (Albert 1993; Smyser 1992). Furthermore,banks are allowed to conduct business in all branches of banking (universalbanking), while Anglo-Saxon countries strictly separate certain banking activi-ties (Albert 1993). Both features make banks more attractive than stockmarkets for companies in Continental Europe wishing to raise capital for newinvestment.
Not only banks but also other shareholders and interested parties have adirect or indirect influence on corporate management. Since the number offreely traded shares is limited and dividends are less prioritized than in theAnglo-Saxon system, shareholders do not face the classic Hirshmanian choice
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of ‘voice or exit’. Less fluid stock markets make exit more costly, andtherefore shareholders have a strong incentive to gain a powerful ‘voice’ in themanagement of the firm by acquiring a sufficiently large share stock to enablethem to monitor the managers and reduce the relative costs of this operation.14
The same reluctance towards stock markets renders takeovers (especially hostiletakeovers) more difficult in Continental capitalism.15
Labour-related aspects
The role of labour in the Continental corporate governance model is importantnot only at macro level but also at firm level through workers’ councils andthe principle of co-determination, although the latter is not found throughoutEurope as a whole. There are well-established and institutionalized business–labour forms of co-operation and information exchange, whether in supervisoryboards or at a more decentralized level in works councils.16 Naturally, theboard of directors bears the final responsibility for any decision taken and itseffect on company performance. However, the board enters into consultationwith workers and the supervisory board before any important decision is taken.Furthermore, certain Continental countries have links in place between thesupervisory board and the works council.17
With regard to many strategic corporate decisions, Continental-based com-panies often involve works councils at an early stage. In such cases, better co-ordination and agreement between works councils and trade unions canstrengthen the employees’ position in mergers, acquisitions and corporatereorganization. In the German corporate model (and to a large extent in theNetherlands and other Western European countries) works councils are engagedin consultation and participation in the corporate decision-making process,while trade unions are mostly concerned with working conditions and wagebargaining.18
However, co-determination may also create disadvantages. If workers becometoo influential they may pursue opportunistic objectives. It may also slowdown decision-making within firms by requiring lengthy procedures beforedecisions can be taken (Hopt 1994). Moreover, co-determination may reducethe flexibility of employment across firms and industries. Often employershave to consult the works council not only on the social consequences ofimportant economic decisions, but on the economic and financial consequencesas well, even though works councils have not been given a say in how thecompany profits should be distributed.19
Despite these institutionalized links between workers and management inthe Continental model, corporate governance and industrial relations are farfrom being a non-conflictual environment. The board of directors maintainsits dominant position and sometimes acts in isolation from stakeholders. Evenworker participation in corporate governance is at times characterized by alack of co-ordination between trade unions and works councils.20
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Figure 3 The Europeanization of corporate governance: efficiency and convergence
3. EUROPEAN DIVERSITY: IS THERE AN EMERGINGEUROPEAN CORPORATE GOVERNANCE MODEL?
The diverse forms of corporate governance found across Europe and the long-standing attempts to promote a pan-European corporate governance regimeare the object of two competing theories. The first – the convergencethesis – sees the landscape of efficient corporate governance as single-peaked.Depending on which features are taken to be more important, opinions aredivided as to whether the Anglo-Saxon or the Continental model is the fittestto survive regime competition. The second view considers the landscape ofefficient corporate governance as multi-peaked (as depicted in Figure 3) andadvances two rather different hypotheses. The first considers cross-fertilizationto be possible and therefore allows for natural convergence towards a hybridmodel, based on ‘best practices’ borrowed from each other (the dotted line inFigure 3). The second hypothesis argues that corporate governance is acomplex construct, based on a variety of systemic links among its elements.Consequently, the systemic view discards the feasibility of cross-fertilization onthe grounds of high transition costs. Any attempts at convergence, eitherthrough cross-fertilization or survival of the fittest, will incur systemic costsfor the existing model and therefore will be rejected.
Given these divergent views with regard to changes in corporate governance,the current process of the Europeanization of corporate governance raises severalquestions. These questions concern the extent to which policy convergence istaking place in the EU and, if so, the path and model where convergenceoccurs. Are we witnessing the harmonization of the various national corporategovernance models along the lines of the Anglo-Saxon system? Or is theEuropean model of corporate governance shaped more like the Continentalmodel? Second, if there is an emergent European capitalist model, is it likelyto be more or less efficient than at the starting point?
The following sections will discuss these points by briefly presenting EUattempts at harmonization of national systems of corporate governance. The
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main capital-related corporate governance issues dealt with at European levelare scattered among the thirteen EU company law directives put forward overthe years by the Commission. The subject matter of these capital-relateddirectives ranged from the formation and registration of public companies (1stDirective of 1968) to disclosure requirements (11th Directive of 1989), cross-border mergers or disclosure of voting power.21
In many instances these directives contained proposals to reform labour-related corporate governance aspects. For example, the 5th Directive concerningthe structure and management of public limited companies, first drafted in1972 and subsequently revised in 1983 and 1989, called for among otherthings worker participation in company decision-making through a two-tierboard and a works council or collective agreement. In parallel, the EuropeanCommunity promoted several proposals aimed at harmonization of labour-related aspects of corporate governance. Another earlier attempt to reformlabour-related corporate governance aspects was the Vredeling Directive (1980).This was followed by several attempts to introduce a European Works CouncilDirective and worker involvement provisions in the proposed EuropeanCompany Statute (Danis and Hoffman 1995).
Thus, from a cursory look at the specific actions taken towards theEuropeanization of corporate governance, it seems that the model of corporategovernance promoted at the European level is a mixture of Anglo-Saxon andContinental elements. Several aspects of corporate governance promoted at theEuropean level were inspired by the Continental model of corporate governanceand its various forms of employee information, consultation and participatoryarrangements.22
The main question relates to the likely impact of such a hybrid corporategovernance model. Rather than tackling the question directly, in the followingtext attention is paid to the decision-making process in order to understandthe underlying EU institutional factors that encourage the adoption of a hybridmodel of corporate governance. Based on the capital/labour distinction betweenaspects of corporate governance and the examination of the European WorksCouncil Directive, the European Company Statute Regulation and Directive,and the 13th Takeover Directive, several considerations will be taken intoaccount on the direction and pace of corporate governance change at EU level.
3.1 The EWC Directive
The European Works Council (EWC) Directive was enacted in 1994, withthe main objective of establishing appropriate mechanisms at EU level forinforming and consulting employees in Community undertakings (EuropeanCouncil 1994). However, despite the pioneering work contained in theVredeling Directive and various amendments proposed by the Economic andSocial Council and the trade unions, the EWC Directive does not contain anyreference to participation. Yet, the EWC was thought to provide labour witha major institutional device to counteract the potential adverse effects of global
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capital.23 Although many other factors influenced the non-inclusion of workerparticipation in the directive, its limited scope was significantly influenced bythe decision-making procedure used.
The EWC Directive found much support in the Maastricht Protocol onSocial Policy which was applicable to only eleven EU countries, owing to theopt-out granted to the UK. Stemming from the Protocol’s Article 2(2), thedecision-making procedure for the EWC Directive is the co-operation proce-dure, as mentioned in ex-Article 189c. Unanimity voting used to be theprevalent decision-making procedure prior to the Single European Act and theMaastricht Treaty. Subsequently, qualified majority voting (QMV) wasextended to most Common Market decisions. Moreover, under the ‘flexibility’provisions added by the Amsterdam Treaty, ‘multi-speed Europe’ had beenformalized when allowing for a group of EU members to establish ‘closerintegration’ (Nugent 1999: 166, 353).
Under this procedure, the European Parliament, although lacking vetopower from the co-decision procedure, is still a significant actor. If theEuropean Parliament rejects the Council’s common position, the Councilneeds unanimity to pass its original common position. The same unanimity isrequired if the European Parliament amends the Council’s common positionbut the amendments are rejected by the Commission. Therefore, the EuropeanParliament enjoys to a certain degree the role of a ‘conditional agenda-setter’,whenever it rejects or amends the Council’s common position.
Under Article 189c’s co-operation procedure, the Council votes by QMV.Under the consultation and co-operation procedures, the Commission doesnot have an unconditional agenda-setting power and the Council can adopt adifferent proposal unanimously. What follows depends on the preferences ofthe European Parliament with regard to the EWC common position. Basedon the political stance of the European Parliament, normally a commonposition reached by the Council under the QMV would be preferable to thestatus quo (no EWC) and therefore the European Parliament should vote onthe common position without any amendment because, if the EuropeanParliament decides to amend the Council’s position or reject it, the fallbackposition in the Council is unanimity. Or, given the divergence of opinionsbetween EU member states on the EWC, it is obvious that the Council’scommon position under unanimity, if any, would be less favourable for theEWC than under the QMV procedure. This new outcome makes the EuropeanParliament worse off than the position under QMV and therefore it shouldbe expected that the European Parliament would vote unconditionally for theCouncil’s initial common position. Therefore, the application of Article 189c’sco-operation procedure is more favourable for the adoption of corporategovernance rules which include Continental-style elements.
3.2 The European Company Statute Directive (ECSD)
The ECSD draft has been at a negotiating impasse at EU level for over thirtyyears. After long discussions and lobbying from various interest groups,24 on
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15 December 2000, as instructed by the Nice European Council, the Commit-tee of Permanent Representatives (COREPER) met to examine the texts ofthe directive on employee involvement within the European company andthe regulation on the statute for a European company. Following tenuousnegotiations, the Council significantly amended the Commission draft andchanged the legal basis for decision-making from Article 100a (requiring co-decision) to Article 308 Treaty of the European Communities (TEC). Article308 provides for unanimity in the Council and consultation of the EuropeanParliament. By changing the legal basis, the Council ensured that neither theCommission (the original drafter of the decision) nor the European Parliament’spotential amendments would put serious strain on the prevailing domesticinstitutions of the least integrationist member.
Unlike the case of the EWC, the use of Article 308’s decision-makingprocedure eliminated the European Parliament’s role as a ‘conditional agenda-setter’ and limited the political game to the European Commission’s attemptto promote European integration by skilfully designing package deals thatwould facilitate compromise and unanimity in the Council.
Had the decision-making procedure been based on QMV and co-decision,the results would have been slightly different. Under co-decision, the EuropeanParliament basically has a veto power over the Council’s agreed position. Asthe European Parliament is generally in favour of more worker involvement inthe case of the ECSD, the content of the ECSD would have been more similarto the pattern of corporate governance found in Continental Europe.
3.3 The 13th Takeover Directive
One of the regulations that aim to introduce more elements of the Anglo-Saxon model of corporate governance across Europe is the 13th Directiveconcerning takeover bids. The directive has as its main objective the harmoniza-tion of minority shareholders’ protection throughout the EU, through themandatory bid rule (MBR).25
On the most controversial part of the directive, the MBR, the 13th Directiveimposes minimum requirements and the result will most likely be a minimumlevel of corporate governance harmonization. Although defensive measures areforbidden unless approved at the shareholders’ meeting, they still exist incountries with large blockholders.26 Another expected effect of the proposeddirective will be to prevent the board of the target company from takingdefensive measures. Another controversial aspect of the directive was the MBRthreshold, owing to different set-ups which member states have in theirnational regulations. The Takeover Directive has, like many other cases ofcorporate governance harmonization, several contentious points. Nationalpreferences with regard to the MBR in the Council are difficult to harmonize,given the differences in ownership structure and blockholding across Europe.The decision-making procedure used was, as in most cases of the internalmarket, the co-decision procedure.
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An interesting fact is the European Parliament’s attempt to use the 13thDirective to upgrade the right of employee participation in the case of atakeover bid. Out of the fifteen amendments adopted by the EU after itssecond reading of the proposed 13th Directive, five concerned the introductionof worker participatory rights in the takeover process (European Council2000a). Furthermore, the European Parliament tried to strengthen the anti-takeover devices already permitted by the proposal, signalling its implicitpreference for a Continental model of corporate governance.
This strong preference for the Continental model places the EuropeanParliament closer to the status quo than the median voter. This creates asituation where the European Parliament can credibly use its veto power,allowed under the co-decision procedure. The result of this veto power is agradual adoption by the Council of European Parliament amendments (Euro-pean Council 2000b). Moreover, after the European Parliament’s first reading,several of its amendments had already been included by the Commission, notonly those related to more precise wording and definitions but also thoseextending to the workforce the principle of disclosure to shareholders andproviding workers with prompt information once a takeover bid is madepublic.
The historical development of the 13th Directive indicates that memberstates have been unable to reach an agreement on the directive whichimposes strict rules regarding takeovers. After almost two decades and manyamendments which diluted the initial European Community proposal, onemust conclude that most of the issues will be left to the member states anddealt with at national level.
To the extent that the 13th European Directive aims to offer betterprotection to minority shareholders, it contributes towards the Europeanizationof different national corporate governance structures along the lines of theAnglo-Saxon system. Should this harmonization happen, the private benefitsof control currently enjoyed by large blockholders would decrease. As La Portaet al. (1999) suggest, the persistence of family- and bank-controlled companiesin many European countries was due to lack of appropriate protection forminority shareholders and strong anti-takeover devices.27 Once stronger minor-ity shareholder protection is in place and takeovers are permitted, one wouldexpect a more dispersed ownership in Continental states, and subsequently anorientation towards the Anglo-Saxon model. All these effects are promoted by,and expected to result from, the implementation of the 13th Directive.
Although the stated aim of the proposed 13th Directive is to upgrade theContinental corporate governance model to the Anglo-Saxon level of protectionfor minority shareholders, the directive is unlikely to promote an overallconvergence towards the Anglo-Saxon model of corporate governance. Thesimple reason for this is that the minimum bid requirement is unlikely toproduce the intended effects of stimulating cross-border mergers and acquisi-tions thought to be the main vehicle of eliminating concentrated ownershipin Continental Europe. First, the introduction of the minimum bid require-
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ment will actually increase the price of a takeover and will act as an extra‘poison pill’, reducing a bidder’s incentive to make a bid. Second, andmore importantly, despite Article 8(1)(a) provisions forbidding any defensivemeasures once the bid has been made public (unless with prior approval fromthe shareholders), the directive allows target companies to seek friendlytakeovers (‘white knights’) as a defensive measure against hostile takeovers(Article 9(1)(a)).
4. CONCLUSIONS
Many argue that globalization and Europeanization will lead to a convergenceof national corporate governance varieties towards a harmonized model. Thispaper has identified two major constraints at EU level against this trend. First,differences in the two models of corporate governance that influence thedirection of Europeanization still exist and are rather difficult to reconcile.Second, decision-making at EU level is poorly equipped to advance a coherentmodel or a hybrid based on ‘best practices’. Therefore, at least in the shortterm, the future of corporate governance in Europe is likely to remain multiple-peaked with large differences in key aspects among EU members.
The evidence presented here suggests that regulatory deficiencies are likelyto have two kinds of effect. First, it is unlikely that Anglo-Saxon capital-relatedfeatures of European corporate governance will work well with Continentallabour-related aspects of corporate governance. Second, the incomplete levelof harmonization achieved after more than thirty years of attempts bythe European Commission towards Europeanization of national corporategovernance systems will add further strain on a pan-European hybrid modelof corporate governance.
Therefore, the European project can hardly advance and enhance theefficiency of European companies without addressing the internal fracture ofthe model. Although employee participation is promoted in the Europeanmodel of corporate governance, its interaction with shareholder capitalism isnot without friction. The current wave of mergers and acquisitions promotinga shareholder approach to corporate governance as well as the increasedimportance of arm’s length financing will put significant pressure on long-standing relationships with employees and participatory management. Giventhe EU regulatory framework described, there is a good chance that theEuropean model of corporate governance will be more problematic than theAnglo-Saxon and Continental models.
What can be inferred from the above analysis is that, given the diversity ofnational corporate governance models across Europe and the persistence ofvarious EU multiple decision-making procedures, it is difficult to ensure thatthe European project of governance convergence is underpinned by a dominantcoalition promoting an articulated corporate governance model.
However, one can categorize the various decision-making procedures inaccordance with their optimal impact on the adoption of a higher degree of
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Table 4 The corporate governance–EU decision-making matrix
harmonization. Table 4 offers a bi-dimensional matrix, grouping the votingprocedures offering the highest level of policy harmonization along the linesof corporate governance models (Anglo-Saxon and Continental) and issues(capital- and labour-related).
As presented in Table 4, and stripped to its essentials, the options facingthe Europeanization of corporate governance can be summed up in three basicpropositions. First, to promote a high degree of harmonization across countriestowards a best-practice hybrid model, co-decision and QMV should be usedfor both labour- and capital-related aspects of corporate governance. Second,if a high degree of harmonization towards the Anglo-Saxon system is theobjective, consultation and unanimity should be used for labour-related issuesand co-decision and QMV for capital-related aspects of corporate governance.Lastly, if the Continental model of corporate governance is the blueprint forthe emerging European model, co-decision and QMV should be used forlabour-related issues and consultation and unanimity for capital-related aspectsof corporate governance.
Address for correspondence: Lucian Cernat, United Nations Conference forTrade and Development, Palais des Nations, 1210 Geneva, Switzerland. email:[email protected]
NOTES
* The author would like to thank the participants of the EPRU Jean Monnet seminar‘Theorizing Multi-level Governance’ (University of Manchester) for their usefulcomments. The financial support of ACE-PHARE Project No. P97–9238-S forthis research is gratefully acknowledged. The views expressed herein are those ofthe author and do not necessarily reflect the views of the EU or the UnitedNations.
1 For general surveys of various facets of convergence, see Coffee (1998); Moerland(1995); Prowse (1995). For more specific studies, see for instance Berglof (1997);Shleifer and Vishny (1997).
2 With regard to the great diversity of national corporate governance across Europe,a good collection of country studies can be found in Isaksson and Skog (1994).
3 For an extensive review of this literature, see for instance Mayer (1997).4 One argument found in the literature surveyed states that national institutional
contexts have a significant impact on corporate governance regimes. It is alsoclaimed that different models of capitalism (understood as specific institutionalarrangements regulating the macro-societal space) are a determinant factor on thetype of corporate governance found at national level (Scott 1997).
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5 This difference is blurred to some extent by the transformation of labour intoowners. However, unless employee financial participation is significant, workeridentity does not become completely diluted into a shareholder identity.
6 The German co-determination system gives the employees of a company control-ling rights without them owning any of the shares of the company. Thus, in manycases 50 per cent of the supervisory board members are appointed in this way butthe capital side has the casting vote.
7 For a classical description of the main Anglo-Saxon best practices, see for instancethe Cadbury Report (1992).
8 The US and the UK governance systems are broadly similar (liberal market/competitive; shareholder dominant) but starkly different when compared to thecontinental European variants. With regard to hostile takeovers, for instance,Franks and Mayer (1996) report a total of eighty (successful and unsuccessful)hostile bids in the UK for 1985–86, and eighty-five (successful and unsuccessful)hostile bids in the US in 1984–86. In Continental Europe the figures are muchmore modest.
9 In addition, the Anglo-Saxon system has a well-established anti-trust law andauthorities to preclude the formation of anti-competitive cartels through mergersand acquisitions or cross-ownership.
10 However, it would be wrong merely to contrast Continental European with Anglo-American control. There is a marked variation within Europe, ranging from a‘private control bias’ in Germany to a modest market bias in the Netherlands andSpain.
11 The comparison is more difficult with the developmental state because of thelatter’s state authoritarianism combined with extensive corporate welfare schemesand workers’ active role at shop-floor level.
12 On the concept of stakeholder capitalism, the meaning of ‘stakeholding’ andvarious refinements of the concepts (stakeholder state, the stakeholder society,stakeholder company, stakeholder economy), see Kelly et al. (1997); Hutton(1999).
13 The dotted arrows and lines symbolize the national differences in these institutionalarrangements across Continental Europe. In France, for instance, the SupervisoryBoard does not exist.
14 Dittus and Prowse (1996: 24) bring evidence in support of this argument.Germany has the highest share concentration ratio (42 per cent) compared withthe US (25 per cent) and Japan (33 per cent).
15 Prowse (1995) reports that market capitalization corresponds to 51 per cent ofGDP in the US, 90 per cent in the UK, 71 per cent in Japan, and only 29 percent in Germany. Adjusted for crossholdings, the figures are 48 per cent in theUS, 81 per cent in the UK, 37 per cent in Japan, and 14 per cent in Germany.
16 The ‘Nordic model’ of workforce participation, which is based on nationalindustrial agreements, differs from the German model based on ‘rigid’ legislation(Streeck 1997: 19)
17 In Germany, for instance, works councils have the right to appoint up to half thenumber of representatives on the supervisory board. In the Netherlands, workscouncils can only recommend and oppose supervisory board membership.
18 One should distinguish between two aspects of employee participation: (i) opera-tional employee participation mechanisms (operational meetings, quality circles,self-guided teams, etc.) aimed at improving the work process and overall enterprisecompetitiveness (direct participation); (ii) employee participation in strategicmanagement decisions at corporate level, through workers’ representatives, aimedat ensuring that workers’ interests are taken into account in any major decision,including mergers and acquisitions.
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19 See Bolt and Peters (1997) on the Dutch co-determination system and the role ofworks councils.
20 In certain Continental countries, both unionized and non-unionized workersparticipate in works councils. Often there is competition between works councilsand trade unions for legitimacy in negotiations with the management over workingconditions and employment.
21 See the Large Holdings Directive (88/627/EEC). The Directive is also referred toas the ‘Transparency Directive’ or the ‘Anti-Raider Directive’.
22 Clear instances when the EU tried to harmonize national corporate governancesystems along Continental lines were the European Works Council Directive andthe directive with regard to worker involvement in a European company.
23 On the negative effects on labour of free movement of capital and multinationalcorporate (MNC) activity in Europe, see the Hoover case, when production wasshifted from Dijon to Glasgow, and Renault’s Vilvoorde incident. In both cases,EU legislation did little to avoid MNC relocation in search of cheap and moreflexible labour within Europe.
24 European interest groups manifested their preferences early in the drafting process.Since the Commission presented its first proposal for a European Company Statutein June 1970, the Union of Industrial and Employers’ Confederation of Europe(UNICE) has repeatedly expressed concern that the creation of a Europeancompany could present problems for European companies. The existence of anoptional legal form of this type would facilitate cross-border mergers and fosterindustrial co-operation in Europe, and is therefore an important element of theinternal market.
25 The mandatory bid rule (MBR) requires that anyone who secures a certain amountof voting rights to give him control over a company must offer to buy the rest ofthe shares. Through the MBR, minority shareholders should be protected byhaving the choice of selling their shares when a new person acquires control overthe company.
26 The most extreme case is the Netherlands where defensive mechanisms are stilllargely permitted.
27 Based on a survey of corporate ownership structures in twenty-seven countries, LaPorta et al. (1998) found that countries with poor shareholder protection havemore concentrated shareholding and vice versa.
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