Labor and Comparative Corporate Governance in Times of Pension Capitalism Independent Directors, Shareholder Empowerment and Long-Termism: The Transatlantic Perspective

By Roth, Markus | Fordham Journal of Corporate & Financial Law, October 1, 2013 | Go to article overview

Labor and Comparative Corporate Governance in Times of Pension Capitalism Independent Directors, Shareholder Empowerment and Long-Termism: The Transatlantic Perspective


Roth, Markus, Fordham Journal of Corporate & Financial Law


Introduction

Correctly understood, the effects of labor and pensions are not only central to the corporate governance debate; as the United States, United Kingdom, the Netherlands, and Switzerland show, pension systems largely make up capital markets.1 Other continental European countries, such as Germany and Austria, illustrate that a lack of significant pension assets corresponds with a lack of deep capital markets. While pension assets in the United States, the United Kingdom, Switzerland, and the Netherlands exceed their gross domestic product ("GDP"), occupational pension assets account for less than a quarter of GDP in Germany and Austria.2 Germany and Austria provide for quasi-parity or third-parity board-level co-determination of employees,3 which is unknown to the United Kingdom, the United States, and Switzerland, and not mandatory for international holding companies in the Netherlands.4 Although the Netherlands does provide for third-parity co-determination for national companies, international holding companies like EADS, the parent company of Airbus, are co-determination free.

Reflecting the great importance of occupational pensions and public pension funds in the United States, Peter Drucker popularized the phrase "pension-fund socialism" shortly after the introduction of the Employee Retirement Income Security Act ("ERISA") in the 1970s.5 This concept captures the overwhelming importance of the pension fund industry in the U.S., and of employees as ultimate beneficiaries.6 In the United Kingdom, the term "pension-fund capitalism" was coined at the height of the stock market around the new millennium.7 Until then, countries that lacked, or had only a minor presence of, occupational pensions tended to have a blockholder corporate governance system, while dispersed ownership was the common form in countries focused on occupational pensions.8 The ownership structure has evolved, at least in Germany, leaving many blue chips in dispersed ownership and most with a majority of foreign shareholders.4 In a separate worldwide trend, occupational pension schemes changed from defined benefits ("DB") to defined contributions ("DC"), thereby shifting the investment risk from the employers to employees, and investment from pension funds to investment companies.10 Therefore, the term "pension capitalism" is more accurate and will be used in this contribution on comparative corporate governance from the transatlantic perspective.

Different levels of reliance on occupational pensions correlate with total market capitalization of the respective countries and, inter alia, different funding levels of financial supervisory agencies." This correlation is more significant than the civil law/common law country explanation.12 The importance of private pension assets may better explain such differences than investor protection as measured by La Porta et al.13 This approach has been criticized for failing to consider all relevant mechanisms of investor protection.14 The shareholder empowerment debate in the United States highlights this critique.15 In continental Europe, nominating directors is a common mechanism for investor protection.16 This mechanism is now available in the United States as well-it is procedurally and economically feasible-with pension funds having played a critical role in the political process.17 Interestingly, the United States played a central role in implementing director primacy in German corporate governance.18 However, director primacy has not gone so far as to exclude shareholders from nominating directors.19

Besides the balance of shareholder rights and director primacy in corporate governance, this article focuses on independent directors and long-termism in times of pension capitalism. The independent director paradigm was the first principle promoted by the Council of Institutional Investors ("CII"), and was later accepted.20 On its website, CII stresses that shareholders in the 1980s "had little say in most corporate decisions,"21 suggesting that CII promoted and successfully launched shareholder empowerment. …

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