______     ____                    J,S05           S~O
Potlcy Rm"arch
A1¶JR KING PAPERS
Financlat Po'lcy and Systems    l
Country Economics Department
The World Bank
May 1992
WPS 900
The Relationship
between German Banks
and Large German Firms
Christian Harm
Large German banks provide all kinds of financial services to
large industrial companies and participate in an effective system
of corporate governance. But contrary to widely-held views,
they do not own German industry.
PolicyResearch Wozkin,,Papendisseminatethefindings of work in pIgress and encourage the exchangeof ideas among Bank staffand
allotherainterested in developmentissues.Thesepapers. distributedby theReseaTch Advisory Staff,cary thenamesoftheauthors,reflect
only thetrviewsand shouldbe ued and cited accordingly. o e findings, interprsetions, and conclusions are the outhors'own. They should
not be strfibuted to fth World Bank, its Board of Directors, its rnanagement;, or any of its miernber countrics.



Polley Romearch
Financial Policy and Systems
WPS 900
This paper- a product of the Financial Policy and Systems Division, Country Economics Department-
is part of a larger effort in the department to study the role and functions of financial institutions. Copies
of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please
contact Wilai Pitayatonakamn, room N9-003, extension 37644 (May 1992, 32 pages).
German banks are often criticized, or praised,        This stresses the role of the supervisory
depending on a person's viewpoint, for owning     board as a negotiating forum for' all interested
German industry and for playing an active part in    parties. It leaves little room for the interpretation
corporate control.                                that the bankers are exclusively in contro.9.
Harm argues that this misrepresents German        Fourth, bank ownership of industry is not
banking. First, the number of German firns a      pervasive, but is in fact limited to a few special
bank can own or control, although significant, is    cases. Ownership of significant stakes has
limited.                                          further decreased during the last decade.
Some very large firns are predominantly           Fifth, proxy voting is more important thar,
private.ly owned, or are not chartered as joint-  stock ownership as a potential means of control.
stock companies that could potentiaUy be listed   Harm notes that it is generally agreed in Ger-
on an exchange. Most small firms, and even        many that banks provide a useful service to smal
some large firms, do not even have a supervisory    shareholders. Although more than half of the
board - which is the most important forum         largest 100 finns are not affected by proxy
through which bankers can represent their         voting, the continued attractiveness of corporate
interests in a firm.                              equities for the general public suggests that the
control issues associated with proxy voting will
Second, although most of the largest 100      become increasingly important.
firms have a bank member on their supervisory
board, this does not imply effective bank control.    Harm argues that the German s-stem of
Many companies have two bankers from differ-      corporate govemance represents an efficient
ent institutions on their board.                  attempt to minimize socially wasteful behavior.
The negotiated consensus achieved in the
Third, the role of the banker in the supervi-  boardroom provides better incentives to manage-
sory board has to be viewed in the light of the   ment to maximize firm value and social welfare
rigorous standards of corporate govemance         than the factionalized U.S. system.
imposed on German public firms. The
Codetermination Law of 1976 mandates that
labor be represented on the supervisory board of
the largest firms as well as all joint-stock compa-
ries.
The Policy Research Working PaperSeriesdisseminates thcfEdingsofworkunder way in therank. Anobjectiveofthe series
is to get these findings out quickly, even if presentationls are less than fully polished. 'Me findings, interpretations, and
conclusions in these papers do not necessarily represent of ficial Bank policy.
Produced by the Policy Research Dissentination Center



OUTINE
1. Introduction       ......        ....................... .. .........     1
2. The thin line between monitoring and control:
from Information gathering to decision-taking  .............................   2
2.1. Debt clms as satisficing instrunents .... ........................   2
2.2. Information from clients' accowunts and balance sheet data  ..............   3
23. Dired and indirect consulting activities ...........................   4
2.4.   Banks' involvement in the Boards of client firms: a US - German
comparison ....................................................... 6
3. German banks and stock markets - features of a universal
banking systen .................................................    9
3.1. Equity holdings of German banks ........ . .   ............................  .   9
3.1.1. Extent and structure of ownership  ...... .. .. ..  ..... ... .. .   9
3.1.2. Critique and policy response  ...............     ............           11
3.2. Acting voting agents for equity investors ................. .....  13
3.2.1. Voting proxies in shareholder meetings of client firms ...........  13
3.2.2. Voting proxies on their own shareholder meetings  .............  15
3.3. The role of bankers on client firms' Boards of Directors  ...............  16
3.4. Confficts of interest . .......................................  19
3.4.1. Firns' value maximizing behavkir and the conflicts of
interest among differenit groups of stakeholders ..............  20
3.4.2. The conflict of iitterest within a un:versal bank  ... ..... ....... 22
3.5. From collateral to creditworthiness lending  .................. . .....  24
3.6. The housebai-k 9s an equity underwriter ant; the question of under-
capitalization of German industry ............................   25
4. Summary and Final Analysis ...................                           ..... . .   26



1. Introduction
The task set out for this reserch is to give the reader a comprehensive overview of
the institutional structure of the German baning system in its role to finance large German
firms. To some extent, this paper is a response to a sfill prevaLling myth in the Anglo-Saxon
literature: that German banks own or control German :ndustry.
The size structure and the structure with respect to legal incorporation lza e already
been shown by Harm [18J to limit the scale and scope of ownership and control oy German
banks. The discussion of the governance bodies as defined by law will show that the extent
of control that comes with a Board seat is more limited and different in nature than for
example in the USA. We will see that the role of banks in corporate control - although
partially rooted in history - is also due to the legal environment. but most importantly can
carry economic efficiency properties due to the closeness of the concepts of monitoing and
control.
Chapter two will be more analytical, showing the difficulty to exactly separate the two
issues of monitoring as a pure information gathering activity, and control as decision-taking,
with consulting activities bridging the two concepts. We intend to show that the two issues
are difficult to separate, comparing the monitoring functions of banks to that of internal
auditing departnents, external auditors, and Boards of directors. The comparison of Board
structures in Gennany and the USA is to provide more insights as to why bankers would be
more likely to hold Board mandates in Germany, but not in the United States.
Chapter ree will discuss the relationship of the large German banks with large
industry. Factual information, as far as pubDlicly available, will be provided on the extent of
bank ownership of large firms, the extent of the banks' use of proxy votes, and the extent of
Board mandates held by bankers. This wi'l be analyzed in Obe context of what had been said
in chapter two about control associated wiih debt claims. The analysis will not be able to
conclude that German banks abuse their power to the detr:ment of any other stakeholder in
the firm, and it is not even clear whether the bank has strong incentives to do so.
1



2. The thn linfe between monitoring and control:
from Information gathering to decsion-taking
The system of planined economies has presumably failed, because the centalized
institutions cannot overcome the information problem. They have insufficient means of
assessing the demand for existing products, or of deciding the direction of R&D investments
to meet the demand for product innovation. If we have learnt anything from recent history,
then it is that the decentralized planning system, where information is exchanged via the
price system, is infinitely more efficier. in meeting the demands of the economic units in a
society. Yet, the banking system, when viewea as a unit, has a task not unlike that of a
centra! planner. A bank that operates nationwide has to decide on the profitability of
investments across virtually all industries. We would like to show here how the German
banks handle the information problem.
2.1. Debt claims as s4tisfi-ing instruments
Before we descend to the reality of information gathering, a few general remarks on
the demand for information seem appropriate. Recently, the theory of transaction cost
economics has also made its way into the theory of finance.' As regards the choice between
debt and equity investments, transactions costs economics argues that debt claims are
satisficing instruments in the sense of Herbert Simon's [41] concept of bounded rationality:
they yield a satisfactory return to the investor, thereby also limiting his demand for
information.
The choice between debt and equity investments is contingent on the information
processing capabilities of the investor. The well informed investor will choose equity, and
invest substantially in information gathering to participate in the decision-maldng process,
while the uninformed investor chooses debt, as he has no means to process the information
on the investment project efficiently enough to meaningfully influence (or take) management
decisioi -.-  Viewed in this light, it is no coincidence that the banking systems around the
world, v  :h all face the problems of information gathering in a centrlized institution,
invest the& funds as debt claims - satisficing instruments - to limit the amount of information
necessary for efficient investment decisions.3 This is likely to be the single most important
feature of a rather centralized system of investment institutions like a banking system. The
following sections are me-nt to explain how German banks institutionalize meeting their
demand for information on their clients and what their means of control are.
'Williamson [45]
2See Hax [(1i] and Harm [2Q1 for this interpretation of the evolution of the structure of
financial claims.
3This was a core argument against the implementation of an Islamic banking system
(Harm [19]).
2



2.2. Information from clients' accounts and balance sheet data
Processing accounting data of the clieftt firms is the bread and butter of the banldng
business in every country, and the German banking system is not different in that respect.
Accounting data are the typical means by which a centralistic institution tries to orvercome the
information processing problem referred to aoove. As it is impossibit for a cenuralized
agency to gather and process data on the individual decisions facing the decentmlized units
one tries to develop summary statistics that make the most different individual cases
comparable. As every bank client has to submit a balance sheet, and displays a certain
behavior towards the bank with the handling of lines of credit, these items are the natural
sources of bank information.
Balance sheet data inherently have a more long-term information content than the
handling of clients' aecounts, as they ultimately provide meaningful information on a single
client only in comparison across -!ears. Balance sheet data can only provide information in
long-term trends, while information from clients' accounts is more rudimentary, but also
m,h more timely, and can trigger immediate action.
The accounting data available to the banks are pooled within the banks, a&kd structured
with respect to industry, size and legal form of incorporation. First, the information is
processed in regional and national headquarters to provide the decision-makers there with
summary statistics on the multitude of clients nandled by the branches. Then, the pooled
statistics flow back to the branches for the assessment of individual clients in a cross-section
of related firms.
Recently, Meyer [31] has come up with a detailed study on the different modes of
analyzing accounting data in various banks oi groups of banks. His findings are especially
interesting when we examine the roles of the different kinds of banks with respect to their
market niches as described above. We have already stated,4 how the legally independent
Sparkassen and cooperative banks have created systems of internal capital markets to help
each other. This is no different in the case of analyzing accounting data.
Savings banks and credit cooperatives have centralized their respective systems to
process accounting data from the client firms so that each member bank processes its data on
a particular client according to a standard format. The study by Meyer [31] also revealed
that the savings banks take a leading role in the banking industry with their state of the art of
data analysis, and that also the information processing system of the credit cooperatives is
extremely refined compared to other banks. We want to offer three potential explanations
for this phenomenon.
First and probably foremost stands the fact that small banks have few meaps to
diversify. They are virtually by definition limited to a particular region, and are thus more
vulnerable to regional shocks than large banks. As regions also have typical industries, this
4See Harm [t8]
3



results also in an unhedgeable position with respect to industry. Furthermore, we have
shown in Harm [18] that small banks are also more exposed to small firms. All these factors
lead to a significantly larger bank specific risk stemming just from the fate of being small.
This disadvantage compared to the larger banks can obvio;zsly lead to a larger demand for
information to assess the individual risk, as it is covered to a lesser extent through portfolio
diversification.
Secondly, the large banks also translate the pooled information of accounting data into
exposure policies with respect to branches or other charactexnstics so that the use of the
pooled d%ta for cross-sectional comparison with an individual firm may not be viewed as
important, and the data needed for exposure policies need not be as detailed as if they were
used for credit analysis. The absence of systemic exposure guidelines in the case of the
Sparkassen and cooperative banks coupled with the more client oriented information
gathering mechanisms may actually turn out to be an advantage for the small banks.
No firm can unambigously be assigned to any one industry, and a limit on industry
exposure can effectively hinder a branch of a large bank from making a loan to a
creditworthy client - a typical example of resource misallocation due to the limits of
information processing in a centralized institution. It is likely that the Sparkassen and
cooperative banks make good on their diversification disadvantage by not being exposed to
industry limits and instead spending more energy on gathering information on individual
risks.
Viewing bank size and the structure of the different banking groups' clienteles as
external variables, the a'uove analysis suggests that large and small banks have structured the
gathering and use of information optimally depending on their situation. Whether the size of
the average client also determines the size of the lending bank is subject to speculation. Why
should the branch manager of a small branch in a big bank be in a better or worse position to
lend efficiently to small businesses? He might be at a disadvantage, if exposure limits lead to
higher misallocations of resources in the case oI lending to small firms as opposed to large
firms, but that is still an unsettled issue.
One last reason, probably the most speculative, of explaining the observed differences
in information gathering policy is that the smaller banks have a clientele of firms that are
often owner-managed, with less potential influence of the banker on the owner-manager as in
the case of an employed manager, who may be more prone to accept the banker's authority,
especially if the banker is a member of his firm's Board.
2.3. Direct and indirect consulting activities
Accounting data have above been identified as the most basic pieces of information
that a bank can base its financing decisions on. As a bank needs to economize on the costs
of information acquisition and has to cover the entire spectrum of firms in the real sectc, the
general level of analysis cannot go beyond summary statistics. .However, there are a number
of instances, where the bank has to go beyond that level of analysis in order to assess the
4



clients' creditworthiness. In these instances, the distinction between information acquisition
and information provision (consulting) begins to blur.'
Unlike an equity investor., a bank is not interested in the impact of a manager's
marginal decision on the firm's profitability, but it nevertheless is interested in the irmpact on
the firm's probability of barJcuptcy. Ihe more likely bankruptcy becomes, the larger the
incettives of a bank to influence management. This may happen when balance sheet data
poin,t at a iaegadive trend, but in Harm  118] we also discussd the importance of consulting
and advisory services above in the case of business start-ups, because the probability of
failure is larger for new enterprises.
Consulting is a word used with varying definitions, and we use it here in the broadest
sense. Any salesman of a product is typically more of an expert regarding his product than
his client. In case he would not only sell the product, but -also recommend the optimal use of
it, he would in this sense perform a consulting activity, as he not only sells a product, but
also information.
P:'kel (4] discussed a long list of consulting activities of banks, and financial advisory
services are naturally on top of the list, as they are directly related to the banks' product.
Consulting is never only providing information, but it is necessarily preceded by acquiring
information on the respective problem in order to yield an analysis that helps the
management of the firm. Thus, when a bank should decide that a particular client demands
more investigation for example in his financial planning, ihey may actually provide a
consulting service to him after they find out about the state of financial planning in the
respective firm.
Bickel (4] argued that such kinds of consulting services provided by banks are
especially prominent in their relationships with small firms, because the bank has many
services to offer particularly to small firms. Bank staff typically has a business oriented
training, while the managers of small firms typically started their business or got to their
position in the firm, because they were experts in their product's market.6 This is also an
experience that was mentioned by virtually every banker that was interviewed in the course
of this project: the critical phase in any business is when it grows to a size that the manager
becomes more and more involved in administration, representation, and planning, and gets
more disattached from the product. In this situation, the bank can assist its clients,
ultimately for its own good.
5In this context, a quote by Alfred Herrhausen [22,p. 103]: "The control institutions of the
corporations became consulting institutions, because the important feature of a control institution
is not to uncover mistakes made in the past, but to prevent mistakes from being made." (Free
translation) This corresponds to the changing role of internal auditing departments as voiced by
Puchta [40,p.65].
6Bickel [4,p.202]
5



Typically, the next important activity after financial advisory services (translating
investment plans into financial plans) is the scrutiny of a firm's infonnation system, as this is
part of the bank's know-how. Another obvious area is the financial part of mergers and
acquisitions. When the bank's own expertise reaches its limits, the usual step is to call in an
auditing or consultiung firm, always provide J the managemes. agrees to such measures.7 Thne
move o; banks to have their own consultini, firms is a very recent move in Germany, and has
litde to do with the historic perfumrance of the German banking system, but I was also
surprised to leam that orne large bank had oily two years ago institutionalized meeting the
demand for consulting and advisory services by creating a separate division only for that
t,ak.8
The answer lies in the traditional procedure to employ outside agents for the
consulting and analyzing activity. Every banker interviewed was ready to admit that in the
bank there was certainly no expertise on the individual product markets, and with all that has
been said above, this cannot be efficient, as it would be analogous to a planned economy.
Also today, product related topics are not part of bank consulting, but we meant to have
shown in this section that more detailed analyses of client firms, triggered by signals from
accounting data, often end up to be indistinguishable from copsulting activities. Again, this
feature is especially important in the lending activities of German banks to firms in the
Mittelstand.
2.4. Banks' involvement in the Boards of client frums: a US - German comparison
'While consulting and advisory activities are a control device of intermediate intensity,
as they show features of both information acquisition as well as information provision to
improve the quality of decisions, banks can also send members to the Boards of client firms
with the result of greater possibilities to actively influence the decision-making process in the
firm's management. This is the ever lively debate on the power of German banks.9 We do
not intend to diminish the potential power that German bankers hold in large firms through
the companies' Supervisory Boards (Aufsichtsrate), but a number of qualifiers are necessary
to assess the true dimension of the scope of influence by the banks.
The first qualifier to be inserted has already been provided in Harm [18]. It was
shown there that the share of AG's in the domestic revenues accounted for approximately
21%. The AG is the only corporate form that is legally required to have an Aufsichtsrat
71t should be clear that in a situation of financial distress, which triggered the bank's demand
for more information in the first place, the bank has a lot of leverage to force such a measure
on the manager of the firm.
'One employee there stressed the notion that it was a move by his bank away from collateral
and towards creditworthiness lending. That this happened only two years ago shows something
about the nature of the banking industry.
9See for example Greiffenberg [16], Herrhausen [22], Huffschmid [24], Der Spiegel [10,12],
and Industriemagazin [26].
6



(Board of Directors). For the GmbH and the Personengesellschaften with less than 2000
emp'oyees, the formation of an institution to represent shareholder interests with respect to
management is optional, and is called "Beirat". The Beirat is an informal institution, whose
charter is defined in the company's statutes. Firms with more than 2000 emplyees have to
have a Board for labour representation.
It is therefore important to differentiate between shareholder representation in the AG
and other corporate forms, mostly GmbH's. Gaugler and Heimburger [141 conducted a
survey which showed that bankers are not often present in the Beirite of the firms in the
Mittelstand so that our attention here is focussing on the Boards of the AG's and other large
firms that are required to have a Board.
Moreover, it is very important to distingLish between the German Aufsichtsrat and the
American Board of Directors. Although the two institution serve the same purpose, they
nevertheless have significantly different strur.*ures. A comparison of the two structures has
been provided by a detailed investigation by Bleicher, Leberl and Paul t5].10 Probably the
most important difference they pointed at is that German corporations -*--overned by two
legally separate bodies, the Vorstand, which is responsible for the day-to-day management,
and the Aufsichtsrat, which is responsible for the supeivision of the Vorstand. In the US,
there exists a distinction of inside and outside Board members, which are nevertheless part of
the same body.
The important difference is that the authority of the Aufsichtsrat is limited, while the
outside Board members have the same authority as the inside Board members. This leads to
the effec-t that, however influential a German Board member may have been in pushing a
decision, he is usually not legally liable for a managerial decision. An American outside
Board member, however, is liable for management decisions to the extent that the "Duty of
Care" principle can be applied against him.
That the German Aufsichtsrat is absolved from the consequences of actual manage-
ment is an impoitant consideration when examining the role of German bankers in their
client firms' Boards. Prowse [37], in an empirical study on the impact of close relations
between Japanese banks and their clients argued that the threat of "equitable subordination"
was a major deterrent for banks in the US trying to assume a more active role in the
managements of ailing clients. He was arguing that the absence of such a legal threat in
Japan fostered Japanese banks' close relationships with their clients. We are making the
same case here for Germany.
The separation of management and Board is most certainly due to a belief that a
management should not be in a position to control itself, which has always been a concern in
the American system, resulting in several changes" for more autl-ority of outside members
"After this quoted as BLP.
"BLP [S,p. 128-139]
7



initiated by, for example, the SEC or the NYSE. Proposals with similar content have been
made by the American Law Institute, and there was even a legislative attempt in the form oI
the corporate dtmocracy act of 1930, which, however, was not successful.
Another argument in favor of the separati&n of the two institutions again has to do
with the issue of information processing and decision-mr-Jing at the top of large hierarchies.
While management operates decision-making in its environment every working day, the
Aufsichtsrat meets rather infrequently, yielding a naturai information disadvantage for the
Board members.
', J put comparatively minor issues outside its reach of control is a protection of
management against overly ambitious Board members to step o-'ir their limits of
competence. This is also a feature that appears in management contracts of smaller corpora-
tions. They not only protect the owner from abuse by management, but also management
from unnerving interference in day-to-day business by the owner. We would like to argue
here that the combination of the necessarily limited information of an Aufsichtsrat member
and the limitc to his authority make the task of the Aufsichtsrat as defined in the
Aktiengesetz inere suitable to the experience of a banker.
Another important difference between the German and American system of corporate
govemance is the philosophy behind the motivation to create an institution of a Board in the
first place. While in the US the function of the Board as a representative of shareholders
dominates, the German Aufsichtsrat is a more general forum for various groups of
stakeholders to influencze management.
This philosophy is most apparent with the passing of the "Mitbestimmungsgesetz' in
1976, which gave labor representatives of the firm up to almost half of the seats in the
Aufsichtsrat. Although this may have been triggered by the then common practice of
bankers - also outside stakeholders in the firm - to oe represented, it shows that the
Aufsichtsrat is much more viewed as a democratic negotiating forum in Germany than in the
United States. Much of the outrage of American practitioners at the idea of bankers being
represented in their Boards is likely to come from their reality of an American Board of
Directors. We would dare the hypothesis that bankers' representations on client firms'
Boards would iiot have happened to the extent it did in Germany, if there was an American
style corporate governance system.
At the end of this chapter, we would like to have conveyed the insight that the control
met :.nnisms to be discussed hereafter are not per se alien to the tasks performed in a bank.
A Board mandate is almost a logical extension of consulting services, and is to a significant
extent used as such. From decision support to decision maldng is only a small step.
8



3. German banks and stock markets - feature of a univenal
bsnklng system
In Germany's universal l>nking system, banks are allowed to assume all functions
that in the USA would only be associated with investment banks: underwriting of equity
issues, stock brokerage, mnd portfolio management. These activities themselves shall not be
the focus tf this chapter, although they set the stage for the issues to be discussed here: the
role of banks in administering stock owners rights in the Board" nd the annual shareholders'
meetings. The three ways of the banks to assume a role in corporate governance institutions
are to hold significant amounts of shares in the corporation, to act as voting 4ent for small
investors in the annual shareholder meetings, or to have a member of the bank hold a seat on
the Board directly. In this chapter we shall provide factual information on the extent of bank
control over industry by any of the three means, as well as an analysis of the effic-iency or
dhawbacks of this arrangeirent.
3.1. Equity holdings of German banks
3.1.1. Extent and structure of ownership
"German banks own German industry". For a lot of p;actitioners as well as
academics, this is a statement that does not deserve further refiLection. However, in Harm
(19] we have already provided statistics showing that actual ownership of real sector firms
cannot be too significant, because the AG as the only publicly listable corporate charter
accounts for only slightly more thin 20% of domestically taxable revenues. Most corporate
shares of banks are confined to the AG. Yet, a concern would be whether banks control a
major portion of the nation's largest firms, thereby shaping domestic industrial policy not
only directly in the large corporations, but also indirectly when the decisions of the large
firms trickle down to affect dependent smaller businesses.
The first task in this chapter is then to assess the extent of banks' stock ownership in
the largest firms. Appendix I shows the distribution of ownership among diffcrent groups of
owners in the 1argest 100 firms. The table was compiled from various tables in the
Monopolkommission's [34,35] 1979 and 1989 reports. The first report was not aimed at
giving a complete account of ownersh l) in the largest firms so that the table has a number of
missing ends, but the data improved a lot until the most recent report, providing a general
picture of the structure of ownership in Germany's large industry.
Until recently surprisingly few companies are majority owned by small investors - the
majority of shares seemed to be in the hands of the larger institutional investors, which
individually or collectively held the absolute majority in the respective firms. More
importantly, the stock ownership of banks is not as pervasive as it is often perceived, and
was reduced furthermore during the last decade.
Moreover, the tables compiled by the Monopolkommission revealed that there is no
ownership link between the companies in which the banks had a stake, and the companies
where other firms of the group of the largest 100 firms had a stake. Not a single firm in
9



which a bank had a significant stake, hau a significant stake in any other of the largest 100
firms so that the influence of banks in terms of ownership is truly confined to the
corporations listed. Immenga [25,p.33] showed that in 1975 there were eight cases where
next to the bank there was another bank or another company from the top 100 listed as a
major shareholder, reducing the potential power of one single bank as a shareholder. This is
even more pronounced today, where no single bank has a majority stake in one of the top
100 firms.
One does have to note, however, that most individual stakes in the listed companies
with bank ownership are held by the three largest German banks, showing that there is a
concentration of ownership in the hands of tk largest three banks. Instead of the statement
that "German banks own German industry", we would suggest here that a more appropriate
statement is "the three largest German banks held significant shares in 13 of the largest 100
firms".
Table 1: Number of equity holdings of 10 largest private banks in non-banks
Mham- size               1976        1m
1. All firms             129          86
10% - 25%               43          41
25% - 50%               67          37
greater 50%             19           8
2. Publicly listed
firms                   77          51
10% - 25%               17          20
25% - 50%               49          28
greater 50%             11           3
source: Herrhausen (221
Also when we consider the holdings of equity including the next smaller group of
firms, the issue of bank ownership is not as pervasive as is commonly assumed. Table 1
from Herrhausen [22] was compiled by the Federal Association of German Banks in response
to the sixth report of the Monopolkommission, and includes the holdings of the ten largest
private commercial banks, i.e. excluding sa,ings institutions or cooperative banks.
The 10 banks included in the survey also reported their reasons for 18 new
acquisitions of shares in the 10 year period. In six of the cases the banks reported that the
motivation was simply a portfolio investment. All of these investments were in the range of
10



between 10% and 25%. More important for this section, there were five cases where the
reason was given as placement of equity, in four of these cases those were non-listed firms.
In another five cases, the reason was given as supporting the equity base of undercapitalized
firms in the Mittelstand, and again four of these firms were not listed on any stock exchange.
These eight cases of non-listed firms point at something that can be regarded as a
central message that this chapter wants to deliver: banks can do only rather little about the
undercapitalization of German industry, as the true bottleneck seems to be the willingness of
entrepreneurs and managers to charter as an AG and get listed. In these eight cases, banks
were urged to find non-market means to increase the equity base of client firms by either
taking the equity on their own books, or by trying to place a non-marketable share. In only
one of the eighteen cases did a bank report that an equity stake was acquired to strengthen a
loan, suggesting that the firm was in trouble, and the bank w&ited to increase its control in
the firm.
In short, in the great majority of the (few) cases reported over the 10 year period the
motivation for purchasing shares was rooted in either the unattractiveness of becoming a
listed stock issuing firm, or simple portfolio considerations, although the latter is an
argument that may well hide other intentions, as a stake larger than 10% in a firm is likely
to be incompatible with the conventional wisdom of portfolio diversification. Nevertheless,
the survey suggests that there is little or no connection between a bank's share purchasing
pol. ,y and lending activity."2 In addition, the survey shows that banks did reduce their
holdings signifi antly over the 10 year period, although it is not apparent, whether this was
due to political pressure or economic considerations.
3.1.2. Critique and policy response
The equity holdings of German banks have been a matter of continued criticism in the
country. Even though the above data suggest that stock ownership is not very extersive,
there is a question whether banks should be allowed to hold shares in industry at all. The
arguments against the status quo are most often linked to antitrust reasons. The fear is that
bank ownership in various competing firms can lead to monopolistic price collusion to the
detriment of the consumer. Factually, however, the Gessler commission as well as the
monopolies commission have found that bank ownership permitting such behavior is only
observed in the brewing industry, and albeit the theoretical possibility of a cartelization of
that industry was not actually observed.
Nevertheless, the monopolies commission recommended to limit bank ownership to
5% of the equity capital of a firm, just because of the theoretical possibility of undesirable
cartelization, and the fact that one cannot rule out future bank behavior in this direction to
stabilize the value of their shares.'3 The Gessler commission issued an analysis with similar
"lis was also a conclusion drawn by the Gessler commission (see KrMimmel (30], p.51).
13See Monopolkommission [32,p.296], also Greiffenberg [16,p.90J
11



conclusions (Kr0mmel [30,p.52]), but with softer policy recommendations, asking for a limit
of only 25% plus one share, granting a bank a minority veto. Possibly in response to this
request, the banks have actually cut down most substantially on their holdings of more than
50% (see table 1), which is characteristic of the relationship of German banks with the
government. Banks try to prevent limiting legislation by conforming to some extent with the
intent of a pending legislation.
Likewise, the Gessler commission found no evidence that stock ownership influences
the client to prefer the respective bank to secure large scale loans or underwrite equity
issues. The conclusion was rather that the clients where the banks had substantial stakes had
sufficient negotiating power to look for the best service value in the market. One banker that
was interviewed in the course of this research mentioned that the largest corporations in the
country had started already in the 1960s to create a market for short-term funds among
themselves, showing for one thing that banks had to improve their services in response to
competition from non-banks. Secondly, this behavior of the largest firms would have hardly
been possible, had banks had a significant influence over their clients to curtail such behavior
in their own favor.
The last major complaint with respect to banks' equity holdings is that their position
makes them virtual insiders, for one thing being able to secure insider gains from their stock
holdings, and also being able to sell off stock in a firm that they receive negative information
about. Nevertheless, the Gessier commission argued that such behavior was highly visible if
carried out on a large scale, and would surely ruin the respective bank's reputation in the
long run. To the contrary, the Gessler commission found that the experience had shown that
banks wikh significant equity holdings were actually more willing to support an ailing firm.
This last point deserves some further mention. The closer a firm gets into a crisis
situation, the more does the bank face an agency problem with respect to management. In
this author's previous work [20], it was argued that with more "realistic" assumptions about
the economic agents, the solution to an agency problem would include contracts specifying
some form of discretionary authority for the principal in some states of nature, meaning that
the traditional agency solution of a rule-based contract may be insufficient to overcome the
agency problem.
What this means in the present context is that an optimal debt contract does not only
specify rules such as covenants, but also authority provisions, which are the residual rights
held by an equity investor. One of the means to achieve such a contingent transfer of rights
is that the bank demands to hold equity in the first place so that there is a theoretical
possibility that an optimal long-tenr. financing arrangement between a firm and its bank
involves the combined use of debt as well as equity instrurnents.14 This would enable the
140ne can also make the converse argument that if the law precludes bank holdings of equity,
banks are by necessity in a situation that they have to secure timely exit as they do not have the
last resort of directly influencing - or dismissing - managements, which may be the only
response to an intensified agency conflict. Such reasoning is supported by the empirical evidence
12



bank to exercise influence especially in times when managements are exposed to counterpro-
ductive incentives. Of course, it is empirically virtually not possible to prove that this kind
of financing arrangement is optimal in a given real-world situation so that we have to be
content at this point to make a case for its theoretical viability.
This view of optimal financial arrangements also answyers the criticism that banks are
not to hold equity, because depositors are almost by definition risk-averse, and would prefer
the banks to hold safer debt contracts rather than risider equity contracts on its balance sheet.
If we view risk as entfrely statistical, this is of course true, but in a model with behavioral
risk, the presence of equity in combin-ation with debt contracts actually reduces the risk
exposure to the resective client and hence serves the needs of the depositors rather than
contradict them.
Finally, there is the point of view that the banks' equity holdings serve as hostages to
limit the firm's management's ability to make decisions detrimental to the housebank. The
exchange of hostages provides a negotiated (market) solution to the problem of specific assets
as studied in Transactions Costs Economics.'5 To the bank, the loan contract is a specific
asset, as the bank depends on management's decisions. Instead of writing state-contingent
contracts, it is a theoretically feasible solution to the bank's problem to "hold managements
hostage' by holding equity.
3.2. Acting as voting agents for equity investors
3.2.1. Voting proxies in shareholder meetings of client fwnns
Even with comparatively modest holdings of equity in a client firm, German banks
are in a unique position to influence the outcome of the firms' shareholders meetings by
exercising the proxy votes of the shareholders, who have assigned their bank to handle the
administration of their shares in one way or another. Immenga [25,p. 102] estimates that
banks owned only between 5% and 7.5% of the value of all circulating stocks, but that they
administered between 50% and 55% of all circulating stock, leaving them with representing
around 60% of all circulating stock between 1963 and 1976. This, however, does not mean
that banks had the authority to vote for all shareholders who had their shares in an account
with the respective bank, as the bank has to request the authority from the shareholder at
least every 15 month, and the shareholder is free to ask his bank to vote for his share
deviating from the bank's suggestions.16
of the combination of Glass-Steagall and "arms-length-banking" in the United States.
"Williamson [47]
'6lmmenga [25] cites estimates from the banking sector, stating that only about 2% or 3%
of all shareholders use their right to ask for specific voting behavior so that the rest is up to the
banks' discretion.
13



Although the representation of up to 60% of total stock value in the economy would
theoretically allow for the possibility that banks represent a majority in just about every
company's share-holder meetings, this is not true in reality, as most of the value of stock is
accounted for by the 10 largest firms, 8 of which are majority owned by the general public.
Table 2 was compiled by Immenga [25,n. 1041 for the data of 1975, and replicated from
Appendix II for the data of 1988, and shows those firms, in which banks could conceivably
wield influence either through direct ownership, or by proxy vote.
Table 2: Possibilities of banks influencing the top 100 rwms via ownership or proxy
votes
Rank 1-10 11-25 26-50 51-100 Total
A. Firms controlled by small investors
Firms with bank          1975  1    0      6     14      21
ownership >25 %          1988  1    2    2       4       9
Firms w/o known          1975  3    2      1     0       6
large investor           1988  0    0      0     3       3
Firms, where small inv-    1975  5    0    0      2       7
estors hold > 50%        1988  7    7    6        7      27
B. Firms controlled by large investors
Firms with large inves-    1975   1    3    3     2       9
tors holding 50% - 75%   1988   1    3    3       15     22
Firms with large inves-    1975  0    10    15    32      57
tor holding 75% or more   1988   1    3    14    21      39
source: Immenga (1975) [25,p. 104]; Table lb (1988)
.    ..   ..  .   .  .   .   .  ..    .  .   .   .   .   .  ...   . 
It becomes clear that banks cannot have voting power in the second set of firms,
which outnumber the first set of firms. This means that also the voting proxies do not
fundamentally alter the conclusion that banks do not own - or control - German industry.
There is, however, an interesting trend observable in Table 2, namely a move towards
decentralization. There are less firms with 75% majority investors, less firms with
significant bank stakes, less firms with one or a few non-bank investors holding the majority
of shares, but more firms with an atomistic ownership structure. Hence, voting proxies are
becoming more important for banks these days.
14



The discussion on proxy votinig has left the stage of questioning the wisdom whether
there should be or should not be an institution collecting and homogenizing shareholders
votes."7 Such an institution is needed to overcome the externality that leads to what
Demsetz [9] calls "rational voter apathy". One can view this structure as an
institutionalization of a collective bargaining process between shareholders and managements
not unlike the formation of trade unions to represent labor in its negotiations with
managements. After all, the increasing wealth of the general public in the modern
industrialized society should lead to an atomization of capital owners resembling the (natural)
atomization of labor, leaving the providers of both factors of production in a similar
negotiation position with managements, which ic. nothing but a recognition of the managerial
society"8 that we live in.
The question is rather whether such a function should be performed by banks, or
whether another set of institutions could be envisioned to carry out the same task.
Obviously, the banks in a universal banking system are in a natural position to assume this
role due to their securities markets dealings as well as the knowledge of their clients. K8rber
[29] and Herrhausen (22] argued that banks do not feel that they have an innate right to vote
for shareholders, but that the present system survives for lack of better alternatives.
To be sure, there is a theoretical alternative emerging in the United States these days,
where institutions called proxy solicitors exist that analyze firms for institutional investors
and recommend voting options based on this analysis. As soon as the institutional investors
represent a critical mass of shares, small shareholders are convinced to join the voting
recommendation. The problem with this approach is that the institutional investor has to pay
for the services of the analyzing company. Once there is no institutional investor having a
sufficient interest in having the analysis done, the same externality prevails that leads to
"rational voter apathy".
This is arguably the reason why the described system would fail in Germany. If
banks gain any benefics from controlling shareholder majorities, they will gladly issue the
service to analyze the respective corporation free of charge, which is what is happening now
so that there is no room for a potential entrant in such a market. It would require some form
of (potentially controversial) legislation, to introduce the American system of shareholders'
vote pooling to the German market. In short, although banks are not the only candidates to
administer voting proxies, it would be hard to envision any other set of institutions taking the
place of the banks short of excluding banks from the task by law, which is inconceivable
given .that it is not even establishod that bainks' wv&ig prAxies constitute a pr6blem.
'7See Korber [29] for an extensive argument for this case.
"As discussed by Bearle and Means [3] and Dahrendorf [8].
15



3.2.2. Voting proxies on bank shareholder meetings
The exercise of proxy votes by banks on their own shareholder meetings seems to
contradict any intuition of democratic ideals one might have, and one needs to take a closer
look at the mechanisms of control over a bank. It is not quite clear at first sight how such a
structure can prevent management infringing shareholder rights. Obviously, what has been
said above about proxy votes in general is also true in the case of banks: Shateholders vote
on an agenda suggested by the Board, and the voting process itself has more symbolic than
democratic value. However, bank managements would have the theoretical opportunity in
this setup, to place only "loyalists" on the Board, thereby sidestepping the control process.
It seems that shareholders' Boards are not the most important control institution for a
bank, but it is the bank supervisors. However, especially the largest stock banks are rarely -
if ever -physically audited by bank supervisors. German bank supervisors rely first of all on
the information to be submitted in accordance with the KWG. Even if the bank supervisors
do not audit the bank themselves, irregularities can be uncovered in tax audits or by the
auditor preparing the annual report. The most important feature of the banking supervision
is that it has the power to veto new and throw out old bank managers. Any major
irregularities of a banks' management would surely lead to the termination of the manager's
assignment.
However, it is not clear whether a modest but unnecessary increase in salaries,
fringes, or other administrative expenses benefitting managements with no apparent economic
gain to the bank would constitute an irregularity in the sense of the KWG, and in this regard
shareholders of the large banks are disenfranchised.
The relationship between banks and their supervisory agencies must be seen as a
reputational equilibrium as defined in the literature by Klein and Leffler [281, or Barzel [2].
Instead of a contractual relationship involving constant monitoring and negotiations, a
reputational equilibrium enforces compliance of implicit contractual terms via the price
mechanism, granting a monopolistic rent stream to the party with the potential to exploit the
other. Salaries, fringes, and tax shelters are the carrot, and the sanctioning power of the
KWG is the stick enforcing compliance with the objectives of KWG. In times of prosperity,
this solution can be superior to any active contract enforcement, but we may be lucky that
Post-War Germany has not experienced a major economic and banking crisis.
3.3. The ro,e of bankers on ciieit rnms Boards -of Directors
Part of the reason why voting proxies are seen as a solution rather than a problem is
that the issues voted on as well as the voting recommendations are defined after continuing
and elaborate discussions between the "Aufsichtsrat" (after all the institution supervising and
controlling management) and management. In that sense, shareholder meetings are more of a
public relations event than anything else, a point noted also by Korber [29].
This effect is especially strong if there is a banker in the Board, possibly even the
head of the Board, as then the voting recommendations issued by the bank administering the
16



voting proxies is likely to be identical to the proposals by the Board. Hence, the true power
lies not in the banks' equity shares or voting proxies, but most importantly in the banker
holding a seat on the Board.
Saying this, we have to remind the reader again about the two salient features
distinguishing the American and the German Board structure, namely that every Board
member is a true outsider as there are no managers on the Board, and that the Board serves
as a negotiating forum for capital and labor according to the "Mitbestimmungsgesetz". This
is again important to stress, as for one thing an outside Board limits the Board members'
authority to interfere in the day-to-day management process, but strengthens his position to
make personnel decisions at the top management level.
At the sarne time, the inherent conflict of interest between capital and labor asks for a
broader consensus among Board members, which lets the conflict of interest between bankers
and shareholders or managements seem rather small. This is to argue that the German
legislative system does not leave a banker on a Board as an odd phenomenon, but rather a
symbol of the general idea of the German Board: a consensus shaping mechanism for the
various stakeholders in the firm. Table 3 shows the extent of Board membership by bankers
as well as the distribution of the memberships among different groups of banks. The
numbers show that Board representation is a much more common means to influence firms
than equity holdings or voting proxies, which should not be surprising given that it is also
more effective than the other two means.
Given the large number of AG's with bankers on their Boards compared with the
number of firms with significant bank equity holdings, it is clear that the majority of AG's
have a banker on the Board without the bank owning significant amounts of shares in the
respective firms. This tendency is even more pronounced when we consider that bankers
hold significant numbers of Board seats in GmbH's and other corporate forms, in which it is
more difficult and unlikely that they have an equity stake. This falls also into the theoretical
framework of optimal debt contracts with authority provisions and shows that equity
ownership is not mandatory to achieve that goal, which supports Herrhausen's [22] claim that
the bulk of banks' equity investments is made solely for the purpose of achieving capital
gains.
The importance of Board membership by bankers becomes even more apparent when
we consider only the 100 largest corporations in Germany. The 1976/77 report of the
- .. . nopolies-comminssion (33] showed that bankrcs. were rpesented in 75 of the 84 firmrn
having an Aufsichtsrat.19 In 31 cases they committed the president of the Board, and out of
these 31 cases, 18 cases were accounted for by Deutsche Bank alone. The concentration
among the largest firms should not come as a surprise, however, as the costs of monitoring
via Board membership :an be considered roughly independent of firm size so that a bank
would maximize returns from monitoring by selecting the largest firms first.
19Companies chartered as KG, OHG, or sole proprietorship are not required to have a Board
according to the "Mitbestimmungsgesetz" regardless of their size.
17



Table 3: Board member distribution among bank groups in 1974
Bank group        (1)   (2)   (3)  (4)   (5)  (6)   (7)   (8)  (9)
Savings bank      14      4     6    29    23    7       7    66   119
Giro Centers      10    13    16    86    72    14    5    82   170
Large 6 banks      6     91   100   405   320   24    19   71   483
Regional banks    26    61    72   252   202    16    9    55   314
Private bankers   23    49    38   170   137    4        3    14   185
Cooperative banks   8     2     4    19    16    2       4    31    73
Total             94    220   236   986   6d    67    47   319   1344
(Ti. "
Explanation of columns:
(1): # of banks reporting Board members
(2): # of bankers holding the presidency of the Board
(3): # of bankers holding the vice-presidency of the Board
(4): # of bankers reported as Board members
(2) to (4) refer to Boards of AG's
(5): # of firms with bankers on the Board (only AG's)
(6) to (8) are the same as (2) to (4), but for GmbH's
(9): # of bankers holding Bo.rd seats including AG's,
GmbH's as well as all other legal incorporations?'
source: Monopolkommission [32,p.256],Immenga [25,p. 109]
Regardless of how prevalent the presence of bankers in German Boards is, one may
not forget the role of the Board as a negotiating forum between capital and labor. Table 4
shows the membership structure of the Boards of the largest 100 firms. As was the intent of
the law, not quite half of the Board members are labor representatives. Moreover, the
unions associated with the DGB account for more members than all banks combined, and
they would certainly have more overlapping goals than the different banks. Not regarding
the issue of Board presidency, one may then treat the issue of the power of the DGB with
equal importance te the issue of the power of the banks. Moreover, the table confirms the
notion voiced above that in the way German law defined Board structure, the banker is not
an "add man out".
2CDeviation because of multiple representation
21According to the "Mitbestimmungsgesetz" Jating May 4th 1976, all AG's, GmbH's, as
well as KGaA's with more than 2000 employees have to have an Aufsichtsrat with labor
representation.
18



Table 4: Board composition in the largest 100 fims in 1986
Member's institutions                            # of          of
Boards      Board
members
Private banks                                     59            114
Other banks                                       37            51
Employees/Managers from industry                  81           368
Politicians/Government employees                  24            69
Other representatives of Capital                  61            147
Members of trade unions                           77            197
Thereof: Unions associated with the DGB         76           181
Other labor representatives                       83           520
Total                                             84           1466
source: Herrhausen (22,p. 108]
One may even consider that bankers hold the presidency of the Board more often,
because they represent a third group of stakeholders having 'capital-like" incentives due to
their equity holdings and market making activities in common stock, as well as "labor-like"
like incentive owing to the fact that debt as well as labor represent a fixed claim on the firm,
in which case they would be an ideal mediator in a German Board. This, however, must
remain a speculative issue as labor representatives are the first to attribute banks to the
"capitalist" side (see Greiffenberg [16]), and one cannot dismiss the possibility that also the
bank as a lender can theoretically make decisions to expropriate labor.
Yet, one banker interviewed in the course of this research stated that he usually
defended labor interests during Board negotiations, for example by sponsoring increases in
the company's pension fund for its employees. This is definitely not in the immediate
interest of the bank, and only supports the role of the Board president to act as a mediator
between capital and labor interests. These issues lead directly to the heart of the discussion
on the power of the German banks in German industry, namely the possibility of conflicts of
interest that could induce the banker to exploit his position of influence in contradiction to
the intent of the position.
3.4. ConfUlcts of interest
In this section we have to address the question more closely, in how far the
controversial issues in German banking, namely equity ownership, proxy votes, and Board
memberships, interfere with the "proper" incentives and interests of a universal bank, and
how a bank with significant influence in any of the three areas can use its power to the
detriment of any other group, and there are obviously many: banks are dealing with
managements, union representatives, labor leaders from within the respective firms, other
19



banks that compete for market share in any service provided by universal banks, majority
shareholders, and small shareholders.
All of these stakeholders and potential stakeholders have among themselves conflicting
interests in the decisions concerning the firm, and one would have to ask in the first place,
what the proper incentives of a bank are, and what the resulting ideal behavior would be that
we would like to see in a bank. From the point of view of a regulator, this ideal of the role
of banks in a society would have to established first, before one can go on to analyze,
whether the criticized features of German universal banks actually interfere with the
hypothetical ideal.
3.4.1. Fms' value maximizing behavior and the conflicts of
Interest among different groups of stakeholders
Taking the position of a regulator, the hypothetical ideal would be a situation in
which externalities are minimized given the presumption that externalities tend to retard
economic growth as the economic agents are more concerned with exploiting the externality -
thus transferring existing wealth to them from other economic agents - rather than being
concerned about creating economic wealth through growth. Externalities principally must be
viewed as a source of econornic waste, be it labor or capital that is used to exploit the
externality.
The problem of exernalities is in some sense synonymous to the agency problem, as
the decision-making agent has the power and opportunity to expropriate the principal due to
their hicrogeneous information and interests. As is well known, the theoretical solution to
this conflict lies in the less-informed principal providing incentives to the agent to harmonize
their interests. Ronald Coase 171 has shown in his seminal paper that in the absence of
communication barriers such as asymmetric information, there need not be any externalities,
as any such problem could be solved via negotiations of the involved parties which yield a
mutually accepted consensus.
Albeit the presence of cultural norms that try to define a certain homogeneity within a
society,22 it would be futile to believe that in today's diverse societies this can be a way to
eliminate all conflicts associated with externalities. The most efficient solution to a conflict
of interest is primarily the decentralized one: negotiations involving all interested parties.
Only if this is not feasible due to massive communication problems - be they asymmetric
information or the largeness of numbers of involved parties - do we need to find a more
efficient governance structure for decision-making, be it institutions that negotiate for a large
clientele of members, or be it laws sanctioning the exploitation of an extemality.
2This has been tried in the socialist countries with well-known results,where the education
system was supposed to condition people to ut.iformly work towards the goals of the socialist
society.
20



Translating these general insights to the problem of the various interests of the various
claimholders against a firm, it is important to note is that in the first step the firm generates
economic value, and that only in the second step do the claimholders argue on how to split
the gains among each other. The task is then to set the conditions for the firm's management
to maximize firm value, and to distribute the gains among the claimants with the least
friction.
The above reasoning suggests that the preferred solution would be a negotiated
outcome, if that is not prevented by excessive communication problems. For the first goal,
maximizing firm value, Myers [36] has shown that in the presence of debt financing, a
management acting in the interest of equity owners alone may not undertake a positive NPV
project. This underinvestment problem would not be present, were management liable to an
established consensus between debt and equity claimants, and not equity investors alone.
Similar arguments could be made for the relationship between capital and labor.
We want to suggest with such reasoning that the composition of the German Board
consisting of members of various interest groups, mitigates the problem of management not
maximizing firm value due to reasons of stakeholder conflicts alone. The conflict between
Board and management is partially resolved by defining a true outside Board that
management has to report to, and may not be a part of. Likewise, the division of the firm's
economic gains between wages, salaries, interest, and dividends is defined in a consensus
process involving all parties.
Obviously, there are also reasons against such a broad Board structure, namely the
likelihood of negotiations deadlock because of too much heterogeneity of its participants.
These are the kdnds of transactions costs that would make alternative corporate governance
structures preferable, and it is clear from the discussion preceding the passing of the
"Mitbestimmungsgesetz"23 that these were precisely the fears of the representatives of
"Capital": time consuming negotiations with labor would now be continued in corporate
Boards, leaving no more room for a meaningful supervisory function. The practice in the
last 15 years has shown that continued partisan decision-making in the Boards has not
dominated the news so that the experiment seemed to have worked according to the original
intent.
To propose the German Board system as a solution to the problem of managements
not maximizing the value of the firm does, of course, require a big conceptual leap away
from the understanding of property rights as is still found in the United States today, where
ownership rights belong only to the shareholders, and they are hence the only ones deciding
on who may serve on the Board to represent them. Bleicher, Leberl, and Paul [S,p.431
quote Milton Friedman: "In a free-enterprise, private-property system, a corporate executive
is an employee of the owners of the business. He has direct responsibility to his employers.
That responsibility is to conduct the business in accordance with their desires, which
23See Der Spiegel [11] with a 1968 cover issue on legislated labor representation on
corporate Boards.
21



generally will be to make as much money as possible while conforming to the basic rules of
the society, both those embodied in laws and those embodied in ethical customs."
BLP comment that the unequivocal subordination of management under the owners
rejects any considerations of external interests. One may not forget that also the creation of
property rights in a society was a means towards an end in the sense that only property rights
could provide sufficient incentives to individuals to participate creatively in the business
process, thereby increasing the wealth of the society. This has been proven by contradiction
with the recent experiences of the socialist countries. However, it is not a reason, to view
property rights as an end in themselves, and if shareholders collectively waive parts of their
property rights in an attempt to overcome agency problems24 with other claimants on the
firm, then this is a Pareto-superior solution to the conflict, hence socially desirable.
The point made in this section was that the structure of the German Board as a
negotiating forum among different claimholders ultimately serves the purpose to maximize
firm value. NJext, we have to analyze how bankers fit into this structure.
3.4.2. The conflict oo interest within a universal bank
Subsequently, we are going to argue that a universal banking system averts the
problem of a factionalization of stakeholder interests. The banker in Germany issues loans to
his clients, underwrites their equity in financial markets, and markets these claims to the
general public. Hence, there are three profit centers within the bank that could potentially
benefit from any influence of the bank, be it via proxy votes and equity holdings or Board
seats. Not considering the problem that shareholders within themselves are a highly
heterogeneous groups, making it difficult for that part of the bank that deals in equities to
adequately represent their clientele in order to take market share away from competitors,
there is a fundamental conflict of interest between the lending side of the bank and the
equity-dealing side of the bank.
Once a bank would induce management to act overly conservative in order to secure
the repayment of the loans, the bank would act against its interest to maximize share value
and attract retail business in the equity markets. The same conflict occurs, when it comes to
the dividend decision. One banker interviewed in the course of this project that had held
Board seats including Board presidencies in his career stressed that he had usually argued to
increase the dividend, reflecting that he had taken the side of the shareholders in their
negotiations with management, which would instead prefer to have profits allocated to
retained eamings.
7AIt must be noted again here that due to the assumption of bounded rationality in
transactions cost economics, the solution to an agency conflict may involve the transfer of
authority, as for example the partial transfer of property rigiats. This solution could not be fount!
in an agency model with the traditional assumptions of "economic man".
22



This was supported in discussions with other bankers who stated that the fee earning
business of securities dealings was more lucrative than the interest business in loans, and it
supports again the conclusion drawn by the monopolies commission that banks "intimate"
relations with industry were rather independent of their lending business.
Likewise, the monopolies commission had not found significant links between banks'
power and their ability to influience firms' decisions when it came to selecting an agent to
underwrite equity issues, as they argued that the few firms that frequently went to the market
to finance their ventures had enough negotiating power to override any non-competitive
interests of the bank. Bannock [l,p.230J actually made ths reverse point, which was also
confirmed by a manager of a large company interviewed here: 'A house-bank that did not
show solidarity with management (by advising its cliLnts to buy shares in its company and
advising them to vote their shares with management on shareholders meetings) would soon
cease to be the company's house-bank."
This, of course, turns the whole discussion on the power of the banks upside down,
and makes this more of an issue of the lack of power of the banks, because they are in a
vulnerable position due to their business interests. This seemed to be the only critique of the
system where bankers hold proxy votes and seats on the Boards that was not rejected by any
evidence available. One may not forget, howevter, that the president of the Board has - in
case it is called for - the decisive vote whether to dismiss management or not so that there is
ultimately a healthy balance of power.
T'he first conclusion in this section should be that there is no apparent evidence for the
abuse of power of the banks when it comes to either securing business away on a grand scale
from competing banks, nor neglecting the interests of small equity investors in favor of the
banks loan portfolio. The only problematic issue may be that banks are not strong enough to
represent shareholders in their negotiations with management.
Moreover, the banker himself has so many competing interests that it is unlikely that
he chooses one in favor of another one. This brings us back to the basic question that we
started out with: What are the appropriate incentives of a banker? Especially when the bank
holds both an equity stake23 as well as loans in the firm, it becomes clear that the banks
incentives resemble more those of an owner-manager in an unleveraged firm (with the
exception of the incentives versus other debt holders), which counters the negative
consequences of a factionalization of stakeholder interests, and it may be precisely this
feature of a universal banker that makes him a prominent candidate for a Board position.
In the course of the consensus-shaping process between the various stakeholders of a
firm, the Board structure as defined by German law is supposed to minimize the impact of
stakeholder conflicts on firm policy. The banker is a likely candidate of a Board president,
because his incentives are closest to the incentives of the firm viewed as a whole. He is the
2"The same effect is achieved through the bank's involvement in equity markets, as they are
also representing equity interests to attract retail investors.
23



person most likely to support the process of reaching a consensus, which is vital for the
efficiency of the Board given that capital and labor representatives have such heterogeneous
interests.
It must be stressed again that the conclusion to support Board membership of bankers
is not universally true, but is rooted in three important features of the German system: that
the Board is a true outside Board, that its composition is very heterogeneous, and that the
banker in a universal banks shares the incentives of debt and equity alike, and is hence most
interested in the growth of tbe asset side of the balance sheet, rather than redistribution on
the liability side.
3.S. From collateral to creditworthiness lending
We have argued above that because of the possible authority granted to bankers
through equity shares, proxy votes, and Board seats, banks would be more willing to lend
long-term as opposed to those banks that do not enjoy these privileges. We want to argue
for another advantage that comes with this structure.
While the academic literature has essentially decided to talk mostly about loan
valuations in terns of the probability of repayment, the real world of banking in Germany
seems to be far from the ideal of creditworthiness lending. Gessner et. al. [15] showed in a
study on bankruptcies that banks were on average able to secure 85% of the amount of loa;s
in default through their collateral.
A banker interviewed in the course of this research stated that the presence of a
representative of the bank on the respective company's Board made it more likely that the
company received unsecured funds, which then obviously reduced the liquidity constraints of
the company because of the informational advantage the bank gains with the Board seat.
Unfortunately, there are no data available to support this claim, but Hoshi, Kashyap, and
Sharfstein [231 found similar evidence in the Japanese market, making this argument also
plausible for the German banks.
The important thing to realize when discussing the issue of the power of German
banks is that they may actually be seeking influence for the sole purpose of expanding their
business. Similar to the credit guarantee agencies, which provide the banks with security in
the absence of collateral, the influence of banks in large firms, which are not eligible for
government support for obvious reasons, may serve as a substitute for collateral.
In the absence of governance structures that ensure a continued relationship of trust
between borrower and lender, financial claims cannot - by virtue of the nature of the product
- be traded in a highly competitive spot market. Banks' seats on Boards or their voting
proxies may simply support a relationship of trust when no material security is available. In
the language of Williamson (47] firms would provide hostages to support the exchange of
funds - the same rationale as applied to equity holdings above. These arguments go hand ir.
hand with the statements made by bankers in the interviews that there is comparatively little
no price discrimination between loans contingent on the risk of the borrower. Financial
24



markets function only to a small extent via the price mechanism. Riskier borrowers are
rationed out of the market. In that sense, the abolition of banks' source of power would
predictably lead to less liquidity in industry.
3.6. The hov, ;ebamk as an equity underwriter and the question of under-
capitalzation of German industry
Discussants of the German financial system never fail to stress the low equity
endowment of German industry. Likewise, the report issued by the Verband der Vereine
Creditreform [43] singled out low equity capital as one of the most commonly stated reasons
for bankruptcy. As the banks are responsible for placing the claims on the capital markets,
they are often subjected to the blame for 'retarded" equity markets. We cannot follow this
point of view here.
First of all, a true comparison of equity ratios across nations would require a
comparison of the possibilities under the respective nation's tax laws to build hidden
reserves. Especially with respect to real estate valuation, but also to some extent with
respect to building precautionary reserves, German firms seem to enjoy some discretion to
add to hidden reserves.26
More important in this context, we know that there are only about 2000 firms
chared as AG, and these are the only firms that banks help with their capitalization.
Moreover, banks seem to enjoy higher profits in the equity business than in the loan business
so that they actually have every incentive to convince a client firm to go public. The
imiting factor is not the banking system, but it is the legal definition of the AG as a
corporate charter, with disclosure requirements and labour representation on the Board as
strong disincentives to go public.
We have shown in Harm (18] that German industry is made up to a large extent of
smaller firms that are not publicly traded. The industry is still separated into two distinct
groups: the few large AG's, which are subjected to one of the world's most rigorous
standards of corporate democracy, and the bulk of all other firms, which live under rather
old-fashioned "capitalist" corporate governance structures. At least when it comes to the
smaller firms in the "Mittelstand", one may well argue whether it needs legal standards to
enforce corporate democracy in an environment where the numbers of involved people is
small enough to allow for individual negotiations. In any event, the conclusion here must be
that despite the German banks' involvement in equity markets, the true reasons for the
26This can also counter the criticism by Steinherr and Huveneers [42] that the large extent
of financing via retained earnings show the weakness of the German banks to finance industry
appropriately. Hidden reserves are built with tax shelters, making the self-financing a result of
tax legislation. According to the pecking order theory of finance, internal financing is always
preferred to external financing, and the support of the former via tax shelters makes self-
financing the choice of an entrepreneur, not the failure of banks.
25



undercapitalization of German industry - if it is truly a problem - mTust be searched for in the
legislative system that defines corporate charters.
26



4. Summary and fral analysis                                                       X
Authority has been a part of societies since the beginning of the formation of social
groups, and it has been a pervasive issue ever since. The problem with the concept is that
authority is redundant if it does not face dissent, but that it is challenged with abuse of power
from those that have a dissenting opinion. In that spirit, the issue of the power of German
banks is not an issue about banks, but an issue about the concepts of power and authority.
Authority is especially sinister to the economist, who has been trained to study decentralized
markets, and authority carries the bad taste of socialist planned economies. Only recently
has the economic profession discovered the efficiency properties of authority, analyzed in
detail by Williamson's [46] theories on Transactions Cost Economics. We have selectively
made a case above that such reasoning - applied to the nature of financial claims - may well
lead to efficient debt contracts with authority provisions materializing in Board seats, proxy
votes, or equity ownership.
While it is true that these issues defining the power of the banks may have their roots
only in the history of the German banking system, and may have outlived their cause in
today's world, we mean to have shown above that these institutions have maintained their
existence due to external factors, most notably the legislation defining Board composition and
bankruptcy legislation. It is still possible to make a case for the efficiency properties of the
mode of financing of large industry in Germany in the given legislative environment,
although the hypothesis is empirically untestable. In the absence of empirical tests
determining the optimal mode of financing, a critique of the present mode of financing large
industry in Germany has to focus on the abuses verified in the present system. When it
comes to anticompetitive pressures exerted by banks, be it in the banking system itself or in
industry, banks have been vindicated by all major studies examining the banking system'.
The same holds true for the issue of conflicts of interest between the major stakeholders in
the corporation, and we have suggested above that the present structure of corporate
governance may well be the one in which managers are provided with the correct incentives
to maximize firm value.
The recommendations of the monopolies commission [34] to limit bank ownership of
non-bank firms to between 5% and 10% of the enterprise, and the softer recommendation of
the Gessler commission to limit bank ownership to a blocking minority (25 % plus one
share), are all based on the potential for abuse, but not on actually verified abuse. We can
go back to what was said above: the potential for abuse is a phenomenon that is by definition
linked to the concept of authority so that limiting legislation does not necessarily address the
particular features of the financing of large industry, but is rather an expression of man's
innate fear of the abuse of power by an authoritative position.
Legislation according to the recommendations has not been passed in Germany, and
we portray the view here that this was the correct policy response, as the mere potential for
27Monopolkommission [32,34], Gessler Commission (Kriimmel [30]), Economists Advisory
Group (171, Biischgen [6]
27



abuse of power cannot be a trigger for legislative action, but only verified abuse due to a
tilted balance of power, which has not been detected in Germany. It would therefore also be
a major mistake to follow the recommendations of Steinherr and Huveneers [421 to pass
baning legislation for the European Community to that respect, as also they have nothing
else to offer but the potential for abuse.
The success of the German banking system will be decided in the European
marketplace, and it is may well be that German banks will act very differently in another
European country with a different legal and cultural environment. To deny the German
banking system a test in the marketplace on the basis of hypothetical problems would be a
potential limitation of the efficiency of the emerging European financial marketplace.
It is often challenged that the undercapitalization of industry is displaying a major
weak point in the financial system. We have been arguing above that the large extent of self-
financing may well have its roots in the tax laws allowing the build-up of hidden reserves.
These hidden reserves should first of all be counted towards equity, which could arguably
improve the standing of German industry in international statistics on capitalization.
Moreover, the build-up of hidden reserves and the accompanying financing via depreciation
is a matter of natural choice according to the pecking order theory of finance, and does not
necessarily imply a weakness of the financial institutions.
Likewise, the small size of German equity markets is not a consequence of German
banks preferring to issue loans to their clients. According to the bankers that were
interviewed, the profit motive leads them to argue for firms going public. The binding
constraint is the legal definition of the AG as a corporate charter, limiting the demand of
entrepreneurs to go public. We may see significant changes when the European Community
decides to define corporate charters that can be adopted throughout Europe.
In this author's opinion, one of the most important reasons for the success of the large
industry in Germany are the rigorous standards of corporate democracy as laid out in the
legal definition of Board structure. The quality of financial intermediation rises and falls
with the quality of a governance structure representing the interests of investors and creditors
alike. The inclusion of labor in the consensus process has led to rather peaceful Capital-
Labor relations in Germany, reducing the agency costs of repeated strikes.
Similar costs arising from the conflict between debt and equity are reduced by the role
of banks in the financing process. The present Board structure reduces the negotiation costs
between the various stakeholders in the firms by strengthening the decentralized consensus
shaping process, ultimately providing the best incentives for managements to maximize firm
value unimpeded by stakeholder conflicts.
Although we are aware of the political obstacles in a number of countries today to
pass legislation towards corporate democracy, the beginning step is to define a Board as a
forum of true outsiders with largely control responsibilities, curtailing the Board's authority
with regard to ongoing managerial decisions. This structure was legislated in Germany
already in the 1870s, and such a Board structure leads to a natural evolution towards a
28



negotiating forum for all stakeholders, ultimately also explaining the role of German banks in
the corporate goverance institutions today.
29



Table la: 1978 Ownership of the largest 100 firms
*'                      .           =- -.'
_______ _______ ______Owners              _  _   _  _  _  _  _  _
Name                 R nk   Publio      Bank.    100biggest Individuals  Foreign   O°e       Sma
_______________  ~~~172   Seator   & Insurance  Cam"o.nkm &Fs tla  Owe   Imrnveso   hwveeta
Volksw!genwerk AG                     1    20,00%          0__                          _       _           0,00%
Siemens AG                            2                                                 _      I         1 80,00%
Oaimler-Ssnz AG                       3   _             "50%       10,00%               14,00%
Thyssen AG                            4                                        - 26%                       65.00%
VEGA AG                               5    44,00%                                                   -      56 00%
BASF AG                               6                                                                     >80%
AEGTelefunken                         7                                                                     >60%
Hoechst AG                            8                           __                     -          -       >80%
Ruhrkohis AG                          9                            27.20%               13,02%
Bayer AG                              10                                                                   >80%
RWE AG                                11    >60%                                         _   _
Friednch Krupp GmbH                   13                                      74,99%   25,01%
ESSO AG                               14
Gutshoffnungshu.tte Aktiemein         15               30,00%                  -20%             _
Fi'ck Industneverwaltung KGeA         17                                      100,00%
Deutsche Shali AG                     18
Mannesmann AG                         19                                                                   >80%
Bosch GmbH                            22
Mstailgbessllchaft AG                23                > 50%       > 25%                16,46%      _
Rosmtsms Ciguesentabriken GmbH        24                                      65,00%
Gelsenbera AG                         26                           96,10%
Saizgirler AG                         28   100.00%  _
Karstedt AG                           30               >50%                           _
ARAL AG                               31                            -84%                                  _
Deutsche BP AG                        32                        _ -
Kaufhof AG                            33               >50%
Gustav Schickedent KG                 40                                      100,00%
Ootker-Gruppe                        41                                       100,00%           _ -=_-
Hernke KG_A 43                                                                100,00%         _
loocknr Humbodt  ut          44            _A                       650%    _                              >60%
Deutscha Lufthans AG                 45 ! >75%_
C&A Breannk__myer                     47                   ! - -              100,00%
Ia3rsche Motorenwerke AG             49 1 _70%
CO OP Zantrale AG                     50 s                                              22,40%   77,60%
Standard Elaktnk Lorenz AG            51                                                85.93%.
Philipp Hoitmenn AG                   52 I             >50%
Mobil Oil AG                         53                        _
Hochtef AG                            54               >25%        33,89%
BsvWa AG                              55               > 256%                                  I
Ssaabergwerke AG                     Ss   100.00%  __            _
0egugs1                            I 57                > 25%       > 12%  _      _                       _>50%
Klonckner-Werke AG                   58                                      _          > 28%      >_ >50%
Preussag AG                          59               40,00%                                               'S 0%
Neckermann Voremnd AG                S61                          S1i20%_
Horten AG                             62               25,00%                  -        >25%  _
Oeutsche Babcock Ag                   65 _|  5          >5%                             25 02%  _     __    70%
VEW AG                                 o 66   52,56%   >15%        7,59%                    -  _          _
Vereinigte lndustrieunternehmen AG    67   100,00%
Bosch-Siemens Hausgersete GmbH     , 68 4                          50.00%                      |
Otto Wolff AG                        69                                         75%
Dvckerhoff & Widmann AG              72 |                o6,00%    13,00%      -30%     .                 __I
Stahiwerke Roechling-Surbach GmbH     73                         _             2,10%    97,90%
Ruhrpas AG                           74  _1 _                _     550%                          34,80%I
Continental Gumimi-Werke AG        I75  |              <25%        11,59%                                  >60%
StrabagauAG                          76   _                        >25%                         _          >50%
Chemisch. Wnrke Huses AG             77   _                       100,00%
Stahlwedrk Suedwestalen AG           78  _ __ _ _          _       98.90%                      |         |
_G|undl AG                            79 ._..___                                         >12% 1-|
_apagULoyd AG.                        80                >75%                 _                               -
source. Monopolkommbsudon (341



Table 1: 1978 Ownership of the largest 100 firms
.__ __ _ __     I  IOwners  I___I_I-
Nanm                I Rank ,  Public  i  Banks    100 biggoe  Individuals  Forign I otl      Small
1972   sector  I & Insurance  Compenbu ne   l Families  Owner  Investom.  Investor
Aqfa Goveert AG        _              81                   _       50.00%   1_      _   150,00% 1
Mosserechmidt-Baelkow-Blohm GmbH      82   28.05%          _        22.02%      4,89%    12,75%S
Otto Vereend                          83                               _       50.00%   15,00%S_
Stumm GrnbH - Mebenaft Gnippe         84                   _        ___         >60%
Axel Springer Verlag AG               86                           _           100.00% S 
Schering AG                           87                        O_    _                                   _ >50%
AG der Dillinger Huettenwerke         92                     __    > 25%                  >50%
Wilhelm Werhahn                       94             -         _               100,00%           _
Getreide-Import GmbH                  98               100,00%
Undo AG                              100  _ _                     _          _                               '90%
Benrteamnnn AG                      8670  _              _                     89,30%     -
Bilfinge + Berger Sau-AG             73 *               <50%         _                                      >50%
Franz Hanild & Cie. GmtbH            76 _       _                              99,00%             _ _
Bp"mwerk AG                          770   60,00%    _             40,00%
Tendefmenn Werenhandelsgesellachsft    79 -                                    100,00%
Elf Minerelodl GmbH                  900                                                 2,83%
Maginr-DOeutz AG                     83-                           98,00%                       1
E. Kampffmoyer                       88s '_    100,00%
Zahnradfabrik Friedrichehafen       I 89   T                                             4,0010,0
Touristik Union International GmbH KG   i 95*   12,37%                                        %
Rheineche Olefinwerke GmbH         1 990 I--            __       | 100,00%
1978 ranking, as no 1972 ranking                  I            i- I
source: Monopolkommission (341



Table I b! 1988 Ownership of the largest 1 00 firms
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _I  I O w n e rs Ij     i   j _    _     _     _
Nor"                  lRanklRank 100 bigsetj  Banks  IFPoreign I Publia  Individual. J  Smail I  Other
_________________________   19721 1 9881 Corpn aIe i& Insurancel Owners   Sector   & Families I Investors  Investors
Daimler-Benz AG                          3   1   1 2,00%    134.90%    14.00%   ___    ____  44,60%                    450
SeesAG                               2     2  1        .   f_ F                      I% 10.00%    90,00@J
Volkswagenwerk AG___3                                    _17_0 ___82_40
HoechstAGa                                                                  >2%< %
Ruhrkohle AG                          9....a.    90.50%                                        _____9,50%
VEBAAG                                   5     9  II                                                       100.00%
Thy'ssen AG.                             4    10lo     ___       9,90%               ___    25,60%    54,50%
RWE AG                                 I11   1 1      2.10%    ____30,80%    _ _                           630
Deutsche Bank AG                         I     1 2  ____4,__                                               1 0-0,I 00 %-
Bayrische Motratnwerke AG               49    14     0,80%       5,00%    ____                   0.0 1%    44,19%
Ford-Werke AG                            /     is __________ 99,80%   _____0.20%
Deutsche Lufthansa AG                   45      6                5,00%    1___   71.45%   ______23,55%    ___
Adam 0pellAG                             /  ~1L                          1100,00%1
IBM   Deutschlanid  GmbH                    I   a8~_________               100,00%   _ _ _ _   _ _ __ _ ____
Dresdner Bank  AG                      ti_ _ _ _ _ _ _ _ _                 __ _  _   ____  __   ___ ___
Fiedrnch Krupp GmbH                     1 3  [201_______ _ I 25,01%   ____ 74, 99%    _________
MAN AG                 _____            / 21           ~        21.20%    ____________78.80%   ___
Allianz Holding AG                    I/      22              I                                          {7S,00%  I25.00%
Messersohmidt-Boelkow-Slohm GmbH        82 1231 13.7%    : 14,60%    10,70%   52.30%      8.70%             ___   ____
Comrnmrzbank AG                               24I%                                                            O,0     ___
Karstadt AG                             30 25i                   >so                 ____    ___I            <S0%    ____
Sazite     G28                                2      _ _ __      __ _ __1100.00%               _ _ _ _      _ _ _      _ _ _
Hoesch AG                                  ti7l                                                          [100,00%
AlIg. Doutsche Philips lndustne Gmbl4    I    28             I._____  1100.00%                  ___
Asea Brown Boveni AG                        j29                _____76,00%                                 24__00__
FeldmOhIa Nobel AG                            30.                        I -_ __    100.00%
Deutscha Unilever Gmbl4.....  32  ____    ___   100.00%  I___    ____    ___
Zahnradfebnik Ffiedrchshafen             /133  I____    ____  ________   100,00%  I,____
Standard Elektrik Lorenz AG             1 SI  34 j ____ T___   85,90%                          ____    14,10%
Kauf hot AG                           ' 33  135!                                                            <SO%_>_0_
Gustav Schickedanz KG                   401 36                 ____I                            100.00%  I____
9ayensche  Vereinsbank  AG                                                                                 867_____T_ __ _ _ _ _ _ _ _ _ __ _1_ _ _ _ _ a,00%   i _14 _00 _
Degussa                                 57.   38    17,00%      12.50%  1 ____j____    63.00%  1 7,50%
Saarbergwetrke  AG                    I   SO  3.    __ _ _ _   _ _ _ _      _ _ _   100,00%     _  _ _ _ ____         ____
VEW AG                                  as6   40    13,40%      >1 5.9%  1        i>50%   ____               .  20,7%  ____
Bayer. Hype.- und Wechsalbank AG       ___ 1 41   ____   24.20%  I ______________   75.80%   _____
Metallgesallschaft AG                   23    42.   8,68%       42,50%,,  35.00%  I_________13.82%
ITT Gas. fCar Betetligungen mbH          I    43 I ________   100,00%1
Carl-Ze,ss-Sdiftunip                     /    44-1                                                                   10.0
ieartlelsiann AG                      {       45                                             i _______                0000
Preukea OAG                             so'   4                 48,80%              _____ 5,00%   I46,20%
Henkel KGoA                431 47T                _ ___I70,00%  T21,50%    8,50%
Nixdorf Computer AG                      i     4   ________ _______ 
BATIG Gas. frjrBetedligungen mbH              49 '                       +    00%I              500%I5,0
Continental Gurnnmi-Werke AG                                              10SO               I.          -1000  
FAG Kugelfischer Georg Schifar KGaA    S/5 I ______I1,_________                                 0____   100.00%
Hamburger Ges. fiOr Beated. Verw. mbH         52              1                      005%      4.00    ___I
Verainigte  industrieunternohmnen  AG     L.7   S .  I____        ____     ____ ____          ______      100,00%    ____
sayernwerk AG                            /I J54    38.84%    _____ j ____61,16%  I____ 
Ruhfgas  AG                             74   _55     36,31%      _ _ _ _ _ _ _ _1_ _       _    _ _ _ _     ____
D~eutsche  Babcock  Au                  65   Is6 I_____{_____              ____I_____ I                   100,00%    ____
Undo AG                               iJ.00   57L               32.00%   _ _          _ __ _ _ 6,0
K(loeckner-Werke AG                     Ss.A..  58__a__~  19,60%. , ___40_____44%
Scherina AG                   -~~~1 8                             .    . 9                       100,00%
source: Monopalkommjession (351



Table 1lb: 1988 Ownership of the largest 100 firma
1  i     ~Ownersi I_                          _  _  _   _  __   _  _   _  _
Name           ~~~~Rantk I Rank I 100 biggest I  Banks  I Foreign iPublic   Individuals iSmall     Other
1972119881 Comeanies I& insurancel Ownens   Sector   & Families i Investors i Investors
Hattie Warani- und Kaufhaus GmbH       /  I e0 I                                            0,0        
Westdatutache Landesbankc Girozantrale      el6  I____                           66,60%  1                     1 33,40%
Enka AG                                /    62 I                        97L,20%  j                   1 _2,80%
Compagnie de Saint-Gobain           !/       63I           1.I...            24
Saarstahl V8lkling.n GmbN       ~       j 64   _____ i____   24.00%   76,00%  1   ____1 ___   ____
C&A Branninkmeyer                     47   65 1                        _________I 100,00%  I_________
AskcDetscheA    K                           6     4u0%h6,9%                       __AG_ es_____T 55.00%   45,00%
HAchkoe DetchG uhu  AG41 .67      4,0    1                                                r          T0 '3;7,2%    > 1,9%
Axel Sprnger Voilag AG                88  6AL                         1 1            __  50,10%    39,90%    10,00%
Bosch-Siemens Hausceraets GmbH      T  8   69    100,00%_____11
Rheinmetail Berli AG                I/    70 I _____                   ____                 32.00%    33,30%   34,70%
Kloecknerl'Humboldt Datz AG            44 I 71  _____<51,48%                                > >24,88   < 23,64%   ___
NestI6 Deutichland AG               I/    72        __________97,60%  _____2,40%   ____
Wackcer-Chemtie GmbH                 11173 1  50,00%                                        so___    ____    000%  ___
Freudenberg  &  Co.                 I  /         ______1 74___          ____     _____I100.00%         _  _ _    ____
Philipp Holzmenn AG                   52   75    20,00%   ____43_                                      39____57____
Berliner KCraft- und Ucht AG        [..L   76~   20,00%   ______ _____               0%   ______29,20%    ___
Volksft0rsorge Ot. Labensvers. AG      I    771  3001%                   50%I              ____                  44,98%
OG Bank Ot. Gnensoanschaftsbank        /    78  _________                         0,50%  I             -    ~ 99,50%
C.H. Boehringer Sohn, ingelheim        I    79   1   __________ ____                       100.00%    I____ ____
Otto  Versand                       L    3  80   I __________      ____4 65.00%                        _ ___    35.00%
Bank fOr Gemeunwirtschaft AG           /81    50.01%                    0,50   i ___   ____   ___               49,49%
Victoria Lebenaversicherungs AG        I/82'                                                          100.00% I___
Rlughafen  Frankfurt Main  AG          1    83   1 __ _ _ _ _ _ _ _      _ _ _   100,00%   I_____ _____ ____
Diehl GmbH  &  Co.                      /i  84    T_ _ _  _  _   _ __    _  _ _  _  _  __1100,00%    1    _ _ _ _ _ _ _
Eschweiler Bergwerkseverein AG      I    r 85s                          96,50%  ____1   ___    3,50%   ____
Biehtinger Mannheim GmnbH           I /    as        ___  ____                    __   7Vioo.oo%____
NUch8linR__f_nw_k1 KGa___/    8                                        100,00%.  I___
Grundia AG                            .79   88    7.10%   j ____   24.50%  ____    68,40%    ___
Beiersdort AG                       jI 89   _____j31,20%  1,  > 25%   I -20%    __
PWA Papierwerke Weldhof-Asch. AG            go ~2.  ____  I 2500%                10.00%  ,[615,00%   ____
E. Merck                            I/ 91  ____                                          j100,00%  I________
B~ergmann Elaktrncititswewke AG         I   92    37%0    6 1.9%,  I ________   ____      1.10%. ___
Miele  &  Cie. GmbH4 &  Co.         I   /    93  __ _ _       _ _ _      _ _ _Ii  100.00%    I_ _ __              _ _ _
Sayen.sche Landasbank Girozentrals          94 I                                  0,00%             .50,00%
SKF GmbH                               / 95  _____    ____99.90% '.____ 0.10%
Alusuesse Deutachland GmbH             I  96 1 __________100,00% I____
Strabag Sau-AG                      I76   97 ____    ___                                     > 25%     <75% ____
VDO Adolf Schindling AG             I    18  ______ I___                                    73,70%  I 26.30%   _____
Energie-Versorgung Schwaben AG      I      9      ____ .-100,00%                                     _________
Aechnenr und MUnchnar Beteil. AG       / I 100 I                        X___I_____1.,00%  i80.00%  ____
I*Maionty stake in Messarschmidt-Boelkow-81ohm GmbH sold to Daimler-Benz AG in 19___9_
Bargmiann shares sold completely (98.9%) to non-bank as of 1/1 /89     99I____
source Monopolkommiasion 13S1



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32



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