A Comparative Study of Corporate Governance Issues: The Case of Germany and Romania[dagger]

By Ovidiu-NicualeBordean; Pop, Zenovia Cristiana | IUP Journal of Corporate Governance, January 2012 | Go to article overview

A Comparative Study of Corporate Governance Issues: The Case of Germany and Romania[dagger]


Ovidiu-NicualeBordean, Pop, Zenovia Cristiana, IUP Journal of Corporate Governance


Introduction

The process of joining the European Union (EU) came along with tough macroeconomic conditions for the Central and East European (CEE) countries. The adherence to the EU did not replace these burdens from CEE economies; moreover, they continued to struggle with issues concerning high rates of unemployment, great budget deficits, high external rates, narrow-based economic structure, large informal economic sectors, poor corporate efficiencies and productivities and lack of appropriate legal and financial infrastructures (Yeoh, 2007).

After some resounding bad strategic decisions, it seems that the foreign investors have learned their lesson and think twice before they decide a large merger or spectacular acquisition in CEE. They do this by assessing the structure and pattern of corporate governance frameworks of emerging economies like those of the CEE countries. In such a case, it would be not only advisable, but also necessary for CEE to keep up with the best practices in corporate governance if they want to benefit from the foreign investments.

The ability to attract foreign investments is not the single reason for which countries that are facing 'transition' have to comply with corporate governance frameworks. Privatization of firms, which were earlier in the hands of state, has raised corporate governance. Further, the allocation of capital has also become a much more complex process due to liberalization, technological progress and opening of the financial markets (Bobirca and Miclaus, 2007). All these have made corporate governance more important and more difficult to achieve.

These past developments created an acute need for corporate governance rules in CEE, which led, in the end, to the adoption of corporate governance codes within all the CEE countries. These set of rules and regulations look alike for a majority of the CEE, as they describe comprehensive standards of good governance, like, for example, the protection of minority shareholders; issues of disclosure and transparency; constitution of boards, compensation issues, etc. (Puffer and McCarthy, 2003). Yet, the corporate governance practices tend to be very different from one country to another, especially among the developed and transition economies in Europe, with some specific features for CEE economies.

Within the context of this framework, we envisioned our research to study about the distinctive issues of corporate governance rules and practices in the two countries of CEE: Romania and Germany. This paper tries to address the following questions:

1. What are the main determinants of the Romanian corporate governance framework?

2. Are there any common features between the Romanian and German corporate governance system?

The paper starts with a thorough assessment of the German corporate governance model which was used by the CEE countries to draw inspiration for their initial corporate governance regimes. The paper introduces the corporate governance codes of the two countries and further tries to distinguish between the corporate governance practices of the two countries through a cross-case analysis, using public information.

Corporate Governance in Germany

The German corporate governance system is considered to be a network-oriented insider in contrast to the American system which is outsider-oriented (Franks and Mayer, 1995; and Baum, 2005). The major characteristic features of the German corporate governance model are: the internal focus and the role played by the Supervisory Board in appointing, supervising and advising the members of the Management Board. In the meantime, the elements of external corporate governance play a subordinate role in the German model. For a better understanding of the model, this paper shall take a deeper look at how it evolved in the beginning, in the early 1990s. The Organization for Economic Cooperation and Development (OECD) took up the topic of corporate governance, and in 1998, it developed a catalog of standards and guidelines for good corporate governance practices. …

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