Comparative Corporate Governance: the UK, China and Germany

The UK, China, and Germany, despite the economic recession, remain corporate giants that stand tall on a history of corporate success. However, mapping their success and the legal framework behind it is far from a case of one copying the other. As Otto-Kahn Freund has forcefully argued, the cultural, economic, and societal characteristics of different jurisdictions are unique and, as such, one should be careful of carbon-copying the laws that work well in one jurisdiction to a wholly different jurisdiction.1

With this point in mind, it becomes easier to see the reason why different jurisdictions adopt wholly different corporate governance structures and frameworks in the pursuit of a similar goal. The aim of this essay is to examine the corporate governance structures of the three economic Goliaths mentioned above: the UK, China, and Germany. In doing so, this essay will begin by examining the different models of corporate governance that have been adopted by these jurisdictions and look at the reasons behind these choices. Some discussion will also take place as to the role of influential events such as the economic recession. The essays also consider the impact of socio-economic and political factors (emanating through the choice of corporate governance structure) on how directors perform their duties. The essay concludes that, whilst socio-economic and political factors unique to each country have shaped the foundations of their corporate structures, the impact of globalisation and an inherent need to remain competitive in the global market is forcing states to rethink their previous corporate governance preferences. 

The respective theories of corporate governance

In whose interests is a company run? This question is not an abstract one that occupies the minds of academics alone but instead the answer to it serves an important functional purpose: the different parties interested in the running of the company, running from the all-important investing shareholder, to the employees, and further into periphery with the surrounding society and environment, all have heterogeneous and often conflicting interests,2 this makes the answer to our question important for those running the companies to be fully aware of which of these interests, and possibly plural, they are to serve.

The different approaches to corporate governance are evidenced by the fact that the UK, having recently moved away from the shareholder theory, by virtue of the reforms introduced by the Companies Act 20063 (CA 2006) adopts the enlightened shareholder theory where the interests of other stakeholders are to be considered when promoting the success of the company for the interests of the members as a whole. This theory, whilst on the face of it giving rise to an assumption that the interests of other stakeholders, such as employees and other expressly mentioned parties, is being considered, has received criticism because in truth these interests will remain subordinated to those of the members and, as such, there is a strong chance that the directors will pay nothing more than lip service to these interests.4 On the other end of the scale is Germany which has adopted the stakeholder theory. The German adoption of the stakeholder theory is by far the most extensive in so far as it holds a two-tier structure of corporate boards, a management board (Vorstand) and a supervisory board (Aufsichtsrat), the latter having representatives and members of the workforce alongside management.5 The most basic understanding of the stakeholder theory appreciates that other parties, beyond shareholders, such as employees and suppliers, all contribute to the running of the company and hence their interests should be considered.6

The reasons for these divergent choices are better understood when one appreciates the difference historical contexts under which the corporate structures of these countries were formed. As is well known, the impacts of the War had shattered the economic and social foundations of Germany to the extent where corporations, being key vehicles to rebuild the wounded socio-economic foundations of a country, were unable to seek investment from the wider public through both a lack of will and a lack of capital on the latter’s behalf.7 Remedying the capital gulf in the funding of corporations was therefore heavily reliant upon investment from the workforce, both in terms of wages and labour, and hence their interests became heavily important.8 The differences between the German and UK attitudes to corporate governance are well illustrated by the differences that were present at this point. Whilst German corporations struggled to find shareholders willing to invest in an economy damaged by warfare and a reputation that made it an unattractive trader on the global market, the UK was working on reinforcing the London Stock Exchange to address the concerns of investors in the hope of attracting greater levels of investment – this free market approach was a magnet for investment.9

In turn, however, this very notion of German codetermination that was important to protect the key investors within a corporation has been argued as a reason why German companies continue to have concentrated ownership as opposed to the dispersed ownership patterns seen in the UK by virtue of the UK stock exchange.10 This point provides the perfect transition for considering the roots of the shareholder theory and the later transition to the enlightened shareholder theory in the UK. The prevalence of the UK stock market for publically traded shares in public companies made the pursuit of profit for such shareholders the paramount concern for those concerned with attracting greater investment and reaping the rewards of these successes.11 However, the fall of Enron, through corporate abuses and short-termism is marked as a grave corporate disasters; but this was one of the inherent problems with the shareholder value theory whereby directors of companies, often in pursuit of larger bonuses, sought short-term profit with little regard for the future sustainability of the company, this in turn led to such corporate failures that highlighted the problem of the shareholder value theory.12 It is worth noting, however, that these principles of the free market have been challenged again, like they were with the collapse of Enron,13 in the light of the fall of large free market players in the context of the financial crisis such as Lehman brothers, and there are now calls for the UK to move towards an approach encompassing greater corporate social responsibility in the light of the harm caused to society by the misbehaviours and misgivings of a corporate giant.14

Historically, Germany has been the battle ground for tension between banks and politicians, the latter fearing of the former’s excessive rise to powers, and hence political pressures have forced banks out of corporations.15 However, one wonders whether these political interests have since given way to market pressures. It has been argued that in the face of globalisation and a change in the stance taken by banks now wishing to have a greater emphasis on the yield of their investments, German corporate governance has moved away from its wholly stakeholder model to an approach that also considers the interests of shareholders.16

A factor that must be remembered with contemporary European, and to a certain extent global corporate governance structures is that they are the victims of increased and ever-increasing globalisation. The “Delaware effect”, whereby reduced taxation in the American state of Delaware attracted masses of corporations to establish in the state due to its financially attractive regime and meant other states had to follow in their fiscal measures to remain competitive and prevent the mass exodus of companies from their states, can lead to a “race to the top” or a “race to the bottom”.17 The former being the enactment of subjectively desirable laws to attract those companies concerned with maintaining their reputation. The latter involves the enactment between states of highly competitive, but sometimes undesirable laws to attract the masses. It has been argued that this effect is slowly making its way to Europe where, through the allowances of freedom of establishment and freedom of movement introduced by the European Union, alongside increased ease of transportation and developments in the technology sectors, states are being forced (or voluntarily opting to) to alter their traditional corporate governance structures and change the rules by which they operate to both attract new corporations and prevent those already established within from choosing to establish themselves in a more attractive jurisdiction.18

A discussion on China has so far been absent. This is because China’s company law history book is comparatively young and has involved a series of transplantations.19 The first Chinese Corporate Law did not make its appearance until 1904 when, under the Qing Dynasty, the Gonglisü was drafted and quickly rendered inadequate for reasons including corruption and foreign monopolies.20 The key distinguishing feature from the above two jurisdictions when it comes to corporate legal structure in China is the ownership structure and inherent controls that followed. As discussed, UK companies have enjoyed dispersed share ownership through the stock market; whereas Germany, on the other hand, has experienced greater closely held ownership of companies. China entertains a wholly different concept. The ownership of Chinese companies tends to be mixed, with ownership concentrated between the state, other institutions, and private individuals (the state owning 30.9% of common stock in 1995).21 This structure and the inherent control that was divided between different types of shareholders gave rise to something that would likely concern the free market world in which UK law operates. Under the state-owned enterprise (“SOE”) the state was given the majority of the control with regards to the company, for example, the state could appoint and remove individuals from management whilst other non-state shareholders had their role within the company limited to investing and receiving a fixed dividend – a little like a debenture holder.22 State capitalism of this nature was deemed as an important control on the rise of private economic actors, it was deemed that it would not be appropriate or safe for society if private companies were able to monopolise certain key sectors of the economy, such as banks or utility providers.23

However, circumstances have since changed. It is argued by Schipani and Liu that the emergence of the Chinese stock market now challenges the corporate governance structure described above and the two are incompatible.24 It was already noted in the work of Xiaonian and Wang that the increase in share ownership by the state seemed to have a negative impact on the productivity of the subject institutions.25 The empirical reason that are described here are illustrative of reasons why market economies prefer governments to avoid interfering in corporate matters. Whilst the in 1993 the Chinese Corporate Law was somewhat amended so as to allow both corporate and state governance, the preference of legislators for state control is still evident from the fact that those corporations that are under state control enjoy waivers on several requirements.

Berle and Means’ famous work identified that where there exists a division between those that manage the company and those that own the company this will inevitably give rise to an agency problem (whereby the interests of the owners (shareholders) are different from the interests of those that run the company (directors).26 The way directors are to conduct their duties evolves largely from the above corporate structures.

For a long time the UK directors’ duties were not codified, part of the reason for this was that the duties were owed to the shareholders alone and transposed around generating a level of profit that would maximise the return on their investments; subsequently, moving away from the shareholder theory in light of various economic downturns, which led to a consideration of the interests of other stakeholders, meant that it was held necessary to codify these duties so directors could ascertain to whom they owed duties and in which context.27 Indeed, the idea of greater corporate social responsibility has been floated since the Industrial revolution in the 18th Century where terrible living and working conditions increased the gulf between the working class and the elite as the former worked under treacherous conditions in order to swell the profit margins of the latter (usually business owners and investors).28 Directors in China, on the other hand, are not able to benefit from such clarity as codification of duties may bring because, whilst the state has indicated that it will have less interference in the governance of companies in the light of China’s accession to the World Trade Organisation29 and China’s emerging market economy, many directors have argued that the state is still interfering in their conduct to the point that it still dictates the appointment and removal of directors from the board and also have an excessive influence at shareholders’ meetings – such a political dogged reservation of state power means directors are unable to act freely to run their businesses and do not feel independent of the state.30 Indeed not all directors of Chinese companies have fought for independence: some directors sought government interference and share ownership by the state on the grounds that this would make them somewhat immune from the scrutiny of their shareholders.31 And for Germany, the prominence of the stakeholder theory has meant directors continue to share their duties with members of the workforce, especially in relation to board structure, in the hope that this will allow the views of the workforce to be taken into account.

The three economic powers in question, China, the UK, and Germany, have all adopted vastly different approaches to corporate governance and the legal framework surrounding companies, though all in pursuit of generating wealth per se. It is indeed correct to opine that, in the past, the socio-economic and political forces at play have largely shaped these structures. The impacts of the world wars and differing political opinions to the generation and distribution of wealth alongside the allocation of powers for such wealth generating vehicles are just a minute selection from a vast array of factors that have worked to shape the differing corporate landscapes that have come to be. However, as has been seen with Germany, globalisation and the rise of free movement through supranational actors such as the European Union has “encouraged” some countries to abandon their dogged pursuit of a particular corporate governance structure in order to remain competitive and commercially attractive. The same effect can be seen in China; the previous dominance of the government for various reasons including prevent monopolisation by the private entities has proved to cause a struggle as China transposes towards a market economy and continues to open its doors to the rest of the world. The UK, once an iconic guardian of the shareholder theory, is being coerced into changing its course in light of the storm at sea generated by the economic recession and the fall of previously assumed “untouchable” corporate giants”. It may be a question of semantics in these circumstances to ask whether political will and socio-economic factors are being subordinated in place of a multinational approach to commerce or whether political and socio-legal theories have themselves changed and are embracing a more global ideology.

As the world becomes a metaphorically smaller place, and the mobility of corporations picks up pace with greater ease, it remains to be seen whether one category of corporate governance structure will emerge dominant over the others to the point of elimination. 

1 Otto Kahn-Freund, ‘On Uses and Misuses of Comparative Law’ (1974) 37(1) M.L.Rev. 1.

2 Andrew Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s Enlightened Shareholder Value Approach’ (2007) 59 Sydney Law Review 577.

3 See in particular Section 172 CA 2006.

4 Andrew Keay, ‘Section 172(1) of the Companies Act 2006: An Interpretation and Assessment’ (2007) 28(4) Comp.Law. 106, 109.

5 H. Kent Baker & Ronald Anderson, Corporate Governance: A Synthesis of Theory, Research, and Practice, (John Wiley & Sons, 2010), 181.


Friedrich Kübler, ‘Comment: On Mark Roe, German Codetermination and German Securities Markets’ (1998- 1999) 5 Colum.J.Eur.L. 213, 217.


Brian Cheffins, ‘Law, Economics, and the UK’s System of Corporate Governance: Lessons from History’ (2001) 1 J.Corp.L.Stud. 71, 86.

10 Mark Roe, ‘German Codetermination and German Securities Markets’ (1998-1999) 5 Colum.J.Eur.L. 199, 199. 

11 Ibid.

12 Andrew Keay, The Enlightened Shareholder Value Principle and Corporate Governance, (Routledge, 2012), 233.

13 Supra, fn.12.

14 Jean Jacques du Plessis et al, Principles of Contemporary Corporate Governance, (Cambridge University Press, 2010), 425. 

15 Mark Roe, ‘Some Differences in Corporate Structure in Germany, Japan, and the United States’ (1992-1993) 102 Yale.L.J. 1927, 1967-1977.

16 Peer Fiss and Edward Zajac, ‘The Diffusion of Ideas and Contested Terrain: The (Non)Adoption of a Shareholder Value Orientation Among German Firms’ (2004) 49(4). Admin.Sci.Q. 501, 508.

17 John Vella, “Sparking Regulatory Competition in European Company Law: A Response”, in De la Feria, R. and Vogenauer, S. (eds.) Prohibition of Abuse of Law: A New General Principle of EU Law?, (Hart, 2010), 107.

18 Jay Gajjar, ‘Your Dominion or Mine? A Critical Evaluation of the Case Law on Freedom of Establishment of Companies’, (2013) 24(2) I.C.C.L.R. 50, 55-56.

19 Xiaoning Li, A Comparative Study of Shareholders' Derivative Actions: England, the United States, Germany, and China, (Kluwer, 2007), 241.

20 Ibid.

21 Xiaonian Xu & Yan Wang, ‘Ownership Structure and Corporate Governance in Chinese Stock Companies’ (1999) 10 China Economics Review 75, 77.

22 Yuwa Wei, Comparative Corporate Governance: A Chinese Perspective, (Kluwer Law International, 2003), 7-9. 

23 Ibid, 9.

24 Cindy Schipani and Junhai Liu, ‘Corporate Governance in China: There and Now’ (2002) 1(1) Colum.Bus.L.Rev. 1, 2-4.

25 Xu & Wang, fn.18, 92-94.

26 Adolf Berle and Gardiner Means, The Modern Corporation and Private Property. (Harcourt, Brace and World, 1967).

27 Company Law Review Steering Group, Modern Company Law for a Competitive Economy: Developing the Framework (2000) para. 3.14.

28 Jill Solomon, Corporate Governance and Accountability, (John Wiley & Sons, 2011).

29 Schipani and Liu, fn.24, 4.

30 Schipani and Liu, fn.24, 28-35.

31 Wei, Y. Fn.22. 

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