5 - Corporate Governance Relationships: Patterns and Explanations

Summary

Perhaps more than universality of services, formal relationship building with nonfinancial firms constitutes both a keystone of the German commercial banking system and a fundamental point of divergence between the German and Anglo-American corporate financial systems. Three practices typically associated with the German universal banks fall under the heading of relationship banking: equity stakeholding, proxy voting of customers' shares, and representation in the supervisory boards of industrial firms. In other words, relationship banking relates to those bank activities that cede to them at least partial control over the decisions and actions of their client firms. In theory, corporate ownership and governance relationships between banks and firms discipline banks and firms to behave in each other's long-term interest. Thus, relationship banking is seen as an important advantage of the German system and is seen as integral to the operations of the universal banks, even though the two characteristics are theoretically and empirically distinct from one another.

BANK-HELD EQUITY STAKES IN NONFINANCIAL FIRMS

One of the most prevalent notions in the literature on German corporate finance is that the universal banks held significant equity stakes in firms and used those positions to exert influence over those firms' decisions. Long-term holdings of equities – or anything held over the close of a business year – should appear in the balance sheets of the banks. One measure of the importance of equity stakes relative to the other activities of the banks is their size and variety.