A. Introduction

In the spring of 2000, a commission entitled Corporate Governance—Unternehmensführung (corporate management)—Unternehmenskontrolle (Corporate Control)—Modernisierung des Aktienrechts (Modernization of corporate law), made up of a group of politicians, selected lawyers and business practitioners from banking and insurance, took up the task of engaging in an in-depth analysis of the structure and challenges of German corporate governance. As the commission’s work drew to an end and its three-hundred-page report was presented to an interested public on Tuesday, July 10, 2001, it was the German Law Journal’s (Journal’s or GLJ’s) pleasure and honor to provide its readers with the first-hand insights of Professor Theodor Baums of the University of Frankfurt’s Institute of Banking Law, who headed the commission and drafted its report. The GLJ asked Professor Baums questions on both specifics of the commission’s report as well as the heritage and future prospects of German corporate and capital market law.

By means of introduction, the GLJ simply took the opportunity to—albeit very briefly—sketch fundamental elements of German Capital Market Law. Although excellent studies are easily accessible,¹ it suffices to point out some central characteristics. The term corporate governance covers the rules pertaining to the management and control of the corporation. The problems of separation of ownership (investors and shareholders) and control (management), as laid out in Adolf Bearle’s and Gardiner (p. 230 ) Means’ watershed study from 1932,² has been on the minds of bankers, lawyers, investors, and other corporate founders for a long time.³ Comparative studies after Berle’s and Means’ book revealed striking differences between the structure of the capital markets in the United States (U.S.) and, say, Germany.⁴ The American corporate market is characterized by dispersed ownership and a strong focus on market control. The German system, however, is determined by the presence of an immensely concentrated ownership, mostly dominated by banks and other institutional investors. Another telling difference is the two-tier structure of German corporate governance, in which a management board is under the control of a supervisory board consisting of representatives of investors and stakeholders. In 1965, the German parliament adopted a huge reform of the German Stock Corporation Act of 1937 (Aktiengesetz), the policy objective being to allow an increasing number of investors to buy equity in order to contain a concentration of ownership while providing for a broad distribution of shares.⁵ Although the law brought about a number of changes to transparency requirements, disclosure, shareholder meetings, and shareholder litigation, the system as a whole stayed the same. Mainly, the strong influence of banks as primary investors and shareholders was not been broken. The striking difference in the U.S. or American model is closely connected to the function and role played by banks in the economic system. Although German law always allowed its universal banks to offer all financial services and control other industries through significant stock holdings, American legislation, early on, insisted on the separation of commercial and investment banking. A proposed European Directive on the harmonization of corporate governance structures (Company Law Directive Number 5) has still not been finally drafted. Nevertheless, in 1998, the German Bundestag (parliament) adopted the KonTraG (Gesetz für mehr Kontrolle und Transparenz im Unternehmen) that allows for a number of improvements to central corporate governance.⁶ The debate about the reforms necessary to German corporate and capital market law will transcend national borders, a point Professor Baums convincingly underlines in the following interview. Although it is necessary to bear in mind and be sensitive to national political heritage and socio-economic dependencies, the search for good corporate governance must take place on an international, global scale. This national and international perspective will allow us to come up with adequate answers to the pressing questions being put to our existing law.

(p. 231 ) B. Questions

GLJ: Professor Baums, your commission has just published its impressive report of more than three hundred pages on many aspects that are central to the future of German corporate law and capital market law. What do you take to be the principal achievements and insights of the Report?

Baums: We had 148 recommendations on the future of our company law, i.e., for listed as well as for smaller companies in the form of a joint stock corporation (Aktiengesellschaft). Central aspects, on which we received recommendations and upon which we focused our work, were prospects of reforming our auditing and accounting process, the rules of which are laid down in the commercial code (Handelsgesetzbuch). Other aspects concerned shareholders and investors, finance instruments, as well as the consequences of important developments in information technology. When we speak here of the work that was done by the commission and of the reform proposals that it has presented, both with regard to amendments of mandatory company law as well as with regard to the creation of a Code of Best Practice, we must see that the reform eventually touches upon all organs, indeed, all bodies of the corporation. That includes the managing board (Vorstand) and, in the German system, the supervisory board (Aufsichtsrat), which is different from the structure as it exists in, say, Anglo-American companies. In Germany, the main characteristic embodied in the so-called two-tier system is the difference between the managing and the supervisory boards. Furthermore, the reform proposal touches upon the role and the function of the general meeting (Hauptversammlung) and on the role of the annual auditor, who, as we will see, will play a very decisive and eminent role in the implementation and control of the “soft law” laid down in a corporate governance code. What has become obvious is that a lot of attention must be given to the communication between the shareholder and the company and vice versa, as well as to the communications among the shareholders themselves. Therefore, one of our central aims was to illuminate the intricacies connected with the rights of the shareholder vis-à-vis the company and its management. Trying to pinpoint what might be the central achievement of the commission’s work, it seems that the report reflects a strong hope for the promotion of improvements of our corporate governance system and the functioning of the capital market, hence of the performance of our firms. This can only be achieved in tandem with an attentive and caring eye on the rights of shareholders and on the German capital market as a whole.

GLJ: What do you expect the first reactions to the commission’s report to be? Among government members, among lawyers, bankers and in the academy? And what do you think to be central in your proposals—the so-called Code of Best Practice?

Baums: The reaction is very positive. That may have to do, for one, with the composition of the group. It was made up of representatives of business, shareholder activists, lawyers and legal academics, trade unionists, as well as four high-ranking members of the government. Thus, it was possible to integrate a very broad range of perspectives into the group’s work. For this reason I tend to expect a broad acceptance by the market as a whole.

We do suggest a Code of Best Practice. But most of our recommendations refer to improvements of our statutes in corporate law. Most of the easier amendments to our statutory corporate law can be made during the present parliamentary session, that is, before the national elections in 2002. The more complicated amendments could be (p. 232 ) implemented after the election. The Code of Best Practice, for which we developed a number of recommendations as well, is to be developed further by a commission that is to be set up by the government in the following days, with the aim of completing its work by the end of this year.

GLJ: The term corporate governance would likely trigger associations with American names, such as Adolph Berle and Gardiner Means (1932), Ronald Coase (1937) (whose work built upon and was further elaborated upon by thinkers such as Jensen, Meckling (1976, Jensen 2000), Alchian and Demsetz (1972)), Ronald Gilson, or Mark Roe (1991, 1994). Many of these scholars are your contemporaries, and they have immensely shaped the debate. Behind these names lie competing theories as to the nature of the firm. Through the design of models that perceive the corporation as a nexus of contracts or, alternatively, as an organizational entity between hierarchy and market (Williamson 1975), we have been attempting to grapple with the great challenge that the collective actor firm has put to us since the beginning: “How to effectively mobilize the vested interests while safeguarding their protection?” Or, in other words, referring to Berle’s and Means’ focused analysis, the question is: “How to reconcile ownership and control?” In light of this American theoretical background, where do you see the main focus of the German debate on corporate governance?

Baums: There are certain factors and underlying forces that lead the specific German structure in another direction. First, what we observe in the capital markets is an internationalization of shareholdings. When Vodafone launched its hostile takeover bid for Mannesmann, they found out—for the first time—that the majority of Mannesmann was made up by foreign institutional investors, basically from Anglo-Saxon countries. This is a factual, empirical observation that leads to interesting legal questions. For example, we must ask ourselves how to preserve the rights of foreign shareholders. How are they to be adequately informed or invited to the shareholders’ meeting? It is, among others, this background against which we must check whether our rules still fit. A second development, which will be of eminent importance for the future prospects of German corporate governance, is that we are witnessing the decline of state-organized pension and old-age security systems. Therefore, we will need a second, a private arm for old-age entitlements, which—as has become apparent—will rely predominantly on the capital markets, be this through immediate or institutional investments such as investment or pension funds. The third development that we have to confront is related to the progress made in the field of technology. Information and communication technology have made such great progress that, inevitably, transaction costs related to information and control can substantially be reduced. By means of modern technology, it will be possible in the future to take part in a German shareholders’ meeting while in Los Angeles. At the same time, we can think of board meetings taking place in cyber space. This changes corporate law dramatically. A fourth development that we need to consider is the challenge presented by the need for venture financing. Thus, the challenge put to us is how our regulatory framework fits the need for venture finance, as in cases of startups in formative industries. There can be no doubt, in my view, that, in order to have mature and competitive grown-up firms, you have to provide for a living and vivid venture finance culture. In contrast, our rigid corporate law is designed with a view to large, publicly held and “arrived” companies, but less for smaller startup firms. Therefore, we first have to look at the specific finance needs of these small, “beginning” firms and then be more flexible or introduce new finance instruments (p. 233 ) for those firms such as redeemable shares or tracking stock. Observing these developments, we—in the commission over the past year—have closely analyzed, e.g., the existing rules on auditing in our commercial code in order to formulate first steps in an ongoing process of reforming our corporate law in the hopes of making it as competitive as necessary.

GLJ: With regard to the good responses that you and your commission received for the questions put out before selected experts and practitioners, how would you describe the particular importance of national debates for the reform and improvement of vital and eminent elements of a legal order? Do you see path dependencies at work? Do they stand in the way of mutual learning with and from other countries’ experiences or do they, instead, provide a rationale for the respective embeddedness of different corporate governance systems?

Baums: Of course, there are path dependencies. Our system of co-determination (Mitbestimmung), our two-tier structure at the top of German companies (Vorstand, Aufsichtsrat), and other unique structural features of our corporate law system are, no doubt, path dependent. The idea of path dependency implies that proposed solutions to certain problems must fit the terms of this path dependency, meaning that, in different environments, you can find differing technical solutions to one and the same problem. Thus, our particular technical answers will appear different than would be the case in, say, Great Britain or the United States. The real issues, however, are the same, even though the normative answers may be different. Here, we need to be aware of the challenges presented by what we call globalization or the pressures I already mentioned with regard to technical advances and its influence on communication techniques, the principal-agent problem between shareholders and managers, the conflicts of interest between the majority and the minority, communication between the company and the shareholders as well as among the shareholders. We can see that the issues are common while the answers may vary greatly. And these answers are, to a certain extent, path dependent in themselves.

There is, however, a second and more complicated dimension of path dependency: Formerly, the German system was a closed system in the sense that there were personal and capital connections between firms and, as a result, the absence of a market for corporate control. Traditionally, banks maintained a strong position by holding large equity shares and voting the stock that was deposited with them. Furthermore, banks would send their representatives to the supervisory board. All in all, this close-knit structure cemented a very specific form of corporate finance as well as corporate governance. If we consider reform proposals in the light of path dependency, we find ourselves asking whether breaking one or two elements out of the system would lead to the general collapse of the system. Hence, every step into a new direction must be taken with great care. To ignore the embeddedness of regulations and models in a particular setting might led to catastrophe. In the commission, we have tried to always remain aware of this problem.

GLJ: The level of sensitivity of a lawmaker to the particular environment appears to be particularly high. The question, then, is to whom do you—the commission—turn for recommendations, advice, and input? How did you choose the eighty groups, foundations, representational organizations to whom the commission sent out the questionnaires? In other words: Who are the actors in this form of acprof-making process?

Baums: The answer to this question must be given from a political science background. Looking at the style of policy-making of our present chancellor, Mr. Schröder, the (p. 234 ) importance of setting up commissions in order to research various issues and to formulate solutions becomes obvious. To a certain extent, this bypasses the role of the parliament. To choose one recent example, we might name the Immigration Commission chaired by Rita Süssmuth from the Christian Democratic Party. In this commission, you could see representatives from every part of the political spectrum. If these people come to a conclusion, if they indeed reach consensus, then there is a strong chance that it will be echoed and embraced by political forces in society. This might be the real trick by which such commissions operate. It may seem that this process for generating legal proposals and this particular mode of paving the way for later amendments in hard or, with regard to the already mentioned Code of Best Practice, soft law, circumvents the political opposition and even the parliament. Nevertheless, it is true that the commission’s work provides a mechanism to promote a possibly very broad consensus. Of course, considering the composition of the commission and the attempt to include a broad range of societal interests, there is a certain persuasiveness that follows from the commission’s establishment and its work: It is, therefore, very difficult to challenge the commission’s findings and proposals as they appear to reflect—at least to some degree—a societal consensus. In my commission, we had, an impressive lineup, including leaders of the big trade unions and financial institutions; high-ranking government and administration members; as well as parliamentary representatives. Thus, the commission’s work is done and presented with quite a strong political force behind it. And this is one way of being political. Certainly, there are concerns about the relationship between such commissions and the parliamentary acprof-making procedures. And surely there is no question of its admissibility from a legal point of view. But there is more to it. If we look at, say, the Prussian King, then we find that eminent political decisions were prepared within the so-called state’s council (Staatsrat), one or even a number of bodies that ultimately took on ruling competences. Yet in a parliamentary democracy we can see similar processes at work, processes that, in fact, make the reality of an established commission that, eventually, issues rule amendment proposals, seem less alien to the system as such. If you look at the practice of detailed issues being debated and prepared in commissions and then presented to parliamentary vote, you surely have a picture that ultimately does not vary so drastically from what commissions such as this one do. And, even more, already in the bureaucracy itself, i.e., within the government, there are ways by which a minister or other official may react to proposals coming from industry or other economic lobbyists that can at best be called erratic. To establish a commission, then, at an early stage of deliberation, is another way of creating a body of people, all of them independent and not—necessarily—belonging to the ruling parties. We should acknowledge that, considering the commission’s composition and its efficient way of inviting expert testimony and close advice by many different interest groups, this acprof- proposing body is able to reach results in a way an official, traditional acprof-making body would—most likely—not have been able to.

GLJ: Would you describe the commission’s work then as a kind of “third way” of acprof-making, parliamentary deliberation being one and administrative rule-making the other? In comparison to these alternatives, to what extent does the commission’s work satisfy the need for democratic accountability?

Baums: First, we ought to keep in mind that the commission is not a body elected by an ordinary constituency. Instead, the commission’s members were selected by the chancellor. At the same time, there is no conflict with democratic legitimacy because the commission (p. 235 ) functions as a preparatory organ. It remains the parliament’s competence to vote for or against the various proposals made by the commission. Depending on the commission’s composition, there can indeed be a strong positive prejudice in favor of the commission’s proposals, which can be expected to facilitate the ensuing parliamentary acprof-making. In this light, preparatory work and drafting proposals, whether they are done by the bureaucracy or by a commission, qualify in the same way under the scrutiny of a functioning parliamentary process.

GLJ: After these very illuminating observations concerning the institutional side of this form of acprof-making, let us now turn to the substantial dimension. Here, the central question seems to be the nature of the relationship between a legislative act, on one hand, and what your commission proposes as a Code of Best Practice, on the other. This code must be seen as soft law as compared to the hard law of legislative acts, i.e., to the already-existing mandatory corporate law to which your commission also has made a great number of amendment proposals. Although the code itself will be drafted in the following months, your commission already has suggested a number of elements and, most importantly, urged the adoption of the governing principle Comply or explain. Would you, please, illuminate what lies behind this idea?

Baums: We have to ask ourselves, indeed, what the advantages are of mandatory corporate law. Certainly, the share that we have available is a standardized product and it is a result of fixed, mandatory corporate law. Definite advantages for the capital market ensue from this. After all, the market has no interest in researching every detail of any company’s charter. Instead, the shares and their value—ignoring for a moment all other intricacies involved here—can be assessed within this standardized setting by the potential investor. On the other hand, we need to see the negative effects of mandatory law. In treating highly different firms in the same manner, it proves too rigid. In comparison, soft law, as my commission envisions it, is far more flexible as it allows for individual adaptation to the particular structure and needs of companies.

In the course of our work, we learned a great deal about the possibilities of combining elements of hard and soft law, in particular, by directing our attention abroad, namely, to Great Britain. The English enacted a code, which is part of the listing rules at the London Stock Exchange (LSE). The LSE enforced the code before this task was taken on by the United Kingdom (UK) Listing Authority, a London-based supervisory agency for the LSE. If a firm is not in compliance with the code, it can be taken off the listing. The underlying idea is that the code contains cornerstones and principles as well as recommendations for good corporate practice. The firm must either comply—as if the code were mandatory law—or, alternatively, is obliged to explain any deviation to the capital market. This justification will center on the specific needs of the firm, and, with this information, the firm also will have to communicate to the market the set of rules it is implementing instead.

To give an example, we can take a quick look at the provisions in the German Stock Corporation Act with regard to the required number of annual meetings of the supervisory board, (§ 110 AG). Though the catchall requirement of four meetings of the board in person might be adequate for certain, mainly large companies, the same justification does not seem to be available for, say, a sleeping firm solely holding some real estate. Why would anyone object to this firm’s supervisory board meeting only once a year for the balance-sheet approval? In contrast to the written law, there are many firms for (p. 236 ) which it is appropriate to meet more than four times a year. Here, we can see quite clearly the inflexibility of mandatory law. Now, if we were to embed this rule within a corporate governance code, the company would have the option to either comply with it or to explain the reasons for which it adopts an alternative rule. If a company explains its reasons for holding monthly supervisory board meetings, then the market would surely honor this.

But the question of enforceability arises. Delisting would, for several reasons, not be an adequate option. Already, the governing administrative law renders such procedures highly difficult. Instead, we in the commission propose another mechanism, which builds on an entirely different understanding of enforcing and sanctioning firms’ behavior. Our suggestion is to focus on the annual auditor who shall check and certify a particular firm’s compliance or deviation by demanding relevant information from the supervisory board. In case of the firm’s noncompliance with either the rule as provided in the code or as declared by the company itself, the auditor would have the discretion if not the duty to withhold the annual declaration (Testat).

GLJ: What you just described appears to be very close to what other scholars have called reflexive law, i.e., a way of creating and recreating law in steady adaptation to the specific circumstances in a concrete case. With regard to your commission’s work, this would be the implementation of corporate law provisions and their execution as well as control not only in direct communication with the firms but, in fact, by these firms themselves. Now, as we might see here, the beautiful reflections of law made by those that are to be governed by it, we must still ask ourselves why it is so difficult to come up with this, seemingly, simple and persuasive proposal. Could the reasons be found in the political roots of a corporate law system that your American colleague Mark Roe so pointedly analyzed in a comparison of Germany, Japan, and the United States? What are we to think, from that perspective, of the chancellor’s decision to free himself for a moment from political constraints and, instead, simply invite a group of experts, thereby initiating a highly efficient dialogue across various societal interest fields and, at the end of the day, presenting a whole catalogue of clear proposals? Considering the fact that you and your commission have had an overwhelmingly good response to your invitation of interest group opinions, it almost seems to be as if this procedure has no downside.

Baums: We have to make a clear distinction between the issues that many participants in the discussion, including the commission, find to necessarily be situated in a body of mandatory law and those aspects that ought to be transferred into a code. If we ask ourselves why we need mandatory corporate law, we can list three main arguments in favor of adopting rules by means of a legislative procedure built on parliamentary deliberation. The first argument focuses on the advantages of mandatory law in connection with lowering transaction costs. The mere existence of a legal provision in written corporate law takes the obligation off the contracting parties for additional bargaining. The next argument is concerned with the avoidance of market failure. In the case of torts committed by organs of a limited liability company, or company creditors with little or no bargaining power, we can easily see that ensuing negative effects can, for example, be avoided or mitigated by statutory creditor protection. Finally, the third argument picks up what Max Weber referred to as autonomous political decisions. Unlike the aspects just mentioned—lowering transaction costs or avoiding market failure—the idea of an autonomous political decision embodies a different idea altogether. Let us take the (p. 237 ) example of the codetermination of employees (Mitbestimmung), surely one of the most debated—including internationally—characteristics of German corporate governance. We must see that we are dealing here with a political decision in the Weberian sense. While you might be able to promote the reduction of transaction costs by enabling law, i.e., the prospect of incentives and rewards, this does not apply to market failure and, surely, not to the issue of codetermination. These demand, by their nature, mandatory law for their implementation and enforcement and there is no room, seemingly, for the use of a Code of Best Practice. The Code of Best Practice, by definition, need not be strictly complied with. Therefore, if you desire strict compliance, this is not an avenue you can follow. In this light, the Code of Best Practice appears to be the place for those provisions in reaction to which you expect the appearance of “bad actors,” who will cheat or attempt to cheat the market. Besides the sanction we already mentioned, with regard to the annual control of the public accountant, there is a great chance that—under the regime of nonmandatory law—the risk of market cheating by some firms is even higher. The sanction we might expect from the market—reputation or, rather, punishment by loss of reputation—depends on information in the absence of which, there most likely will be no sanction.

When our commission made its recommendations, we necessarily had to bear these limits of the code in mind. Again, however, we can learn by looking abroad: The Cadbury Commission in Great Britain and the code enacted by the commission in 1992, foresees that there are regular empirical checks executed by special research groups and meant to gather information on the level of the firms’ compliance with the code’s provisions. If these checks reveal strikingly broad cases of noncompliance, the commission can propose the removal of these rules from the code. The commission, which will soon be in charge of drafting a Code of Best Practice for the German market, ought to follow the British example. This means that, regularly, there must be market research in order to gain information as to the level of compliance with certain rules contained in the Code. If specific rules are found to be regularly disregarded, then there can be recommendations to shift back and enact this specific rule within mandatory, statutory law. What we see here is, indeed, a completely different acprof-making process.

GLJ: One, that apparently appeals to you, is that right?

Baums: Indeed. And it is not altogether alien to our legal system. This becomes evident in light of the procedure laid down in Paragraphs 342 and 342a of the German Commercial Code (Handelsgesetzbuch), which are related to the establishment of private bodies for the creation of accounting principles. Although this is not entirely the same model embodied in a Code of Best Practice, we can still see here a specific institutional as well as substantial openness and flexibility. Namely, the mentioned provisions in the Commercial Code allow for the recognition by the Federal Ministry of Justice of a private body for setting standards, and the creation of rules by this body in accordance with the governing accounting principles. This framework does, in fact, constitute a form of soft law comparable to that which we found in the British Code. The rules adopted by this standard setting body are published by the Official German Gazette (Bundesanzeiger) and applied by the accounting profession and the firms. This acprof-making process unfolds in close proximity to the economy, and it is very flexible as there is no need for a lengthy parliamentary debate. And it is transparent. Yet, there is one decisive feature that we already briefly (p. 238 ) touched upon, a feature that makes our proposal, in my view, more charming even in comparison with the accounting model. Precisely, our model allows for an autonomous development of rules within the firms. And this is missing in the German Accounting Standards Committee (Deutsches Rechnungslegungs Standards Committee e.V., http://drsc.de).

GLJ: If we speak about the specifics of this acprof-making process, which certainly includes your commission and the dialogue it entered into with outside experts, you might want to illuminate the extent to which the deliberations that continue to take place are a national, international or, possibly, global affair.

Baums: We did, indeed, invite expert opinions from a large share of German interest groups including—among others—the Federation of German Industry (Bundesverband der deutschen Industrie (BDI), http://www.bdi-online.de/), the Chamber of Commerce (Deutscher Industrie- und Handelskammertag (DIHT), http://www.diht.de/), the Federal Federation of Bankers (Bundesverband deutscher Banken, www.bankenverband.de) and other members of the German business community—as we were concerned with German corporate law. But we know that German corporate law does not only affect German investors. It affects many international institutional investors as well. Therefore, we approached big institutional investors as well as international institutions and experts who deal with corporate governance on an international level. In addition to that, we asked a large American advisor to institutional investors to publish our questionnaire on its website in order to trigger more recommendations. The response was tremendous. We received a great amount of very valuable and helpful information and suggestions but, most important, most of the responses commenced with expressions of their gratitude and their appreciation for being allowed to speak out in a German acprof-making process—an unprecedented event.

We need to keep in mind that this procedure is not fit for every issue. But unlike cases that ask for analytical, scientific answers, eventually leaving little room for deliberation, we were and are dealing here with issues and rules that are very close to the actors who will have to live with them. Therefore, there is a strong case to be made for close deliberation with those affected interests.

GLJ: Would you assume that parliamentary bodies, as such, are less apt or inclined to initiate and enter into such rich dialogues with interest groups? And what do you think of the already existing corporate governance principles such as those established by the Organization of Economic and Commercial Development (OECD) or the material prepared by the World Bank?

Baums: We frequently see in the German Bundestag, but even more frequently in other, foreign parliaments, that national and international experts are invited to testify. This shows that acprof-making has, naturally, been taking on international dimensions and that dialogue like that in which my commission recently was engaged is—per definition—not entirely confined to national borders. The capital market is not, neither are the actors within it. As to the principles worked out by the international organizations you mentioned: We have to bear in mind the supranational character of these institutions. There is a great number of nation-states—among them Germany, represented by Professor Feddersen from Frankfurt and the German Ministry of Justice—that participate in the drafting of the principles. From this it follows, almost automatically, that a certain level of generality and lack of detail will result, at least when compared with, say, corporate (p. 239 ) governance rules prepared within a national political economy. The result is what we might call an average, a medium standard of good corporate governance as a recommendation to the member states. Such recommendations build on the premise and the presumption that they are, basically, applicable everywhere. As for Germany, our mandatory corporate governance rules doubtless meet these standards.

In some respects, then, such international standards are very helpful as points of orientation—but they are not detailed enough with respect to a thorough overhaul of a national system that already is in place. Therefore, we need to consider international standards while also paying close attention to our national specifics, including the institution of codetermination as well as the two-tier structure consisting of management and supervisory board.

GLJ: In this light, would you tend to recognize trends toward a globalization of corporate law which, to be sure, does not grow independent of its national setting and embeddedness but, instead, incorporates specific background conditions that are characteristic to the nation-state in which the law—and the economic, political, and social system in which it evolved—developed over time? As Peter Hall and David Soskice have recently suggested under the heading of “Varieties of Capitalism,” when attempting to assess the national or international nature of rules, institutions, and actors, we ought to ask for the specific environmental factors that have accompanied and at least shared a role in building and developing certain structures. How do you assess this persisting national quality of economic actors and institutions? Are we speaking of “Law without” or of “Law beyond” the State, especially in light of the central role still played by such terms as Standortvorteil (locational advantage)?

Baums: In my view, we must take a historical perspective in order to answer this question. It may be true that, formerly, the stronger correlation was between the nation-state and a national economy with corresponding rules set by the nation-state for its national economy. But we see, for example with regard to Prussia, that the Prussian King sent an official to England in order to gather information on the causes of the English economic success. Thus, what we see early on in continental Europe is this glance across borders, a decisive comparative perspective, which was considered to be of vital importance at times of reform of national statutes or institutions. It was, at the same time, an academic learning process leading to a variety of outside perspectives on issues that often were observed only from within.

Though this process continues, a dramatic new development is taking place: Today, we are faced with a competition for rules. This is very evident in tax law. It also is true for company law. In a cross-border merger, you will today ask the question where to put the headquarters of the group and we must see that trends can be observed to place it in countries that do not require codetermination. There is yet another development that comes into play here: When we speak of accounting and auditing rules, we surely speak of the most internationalized rules around. Not only are there differences among the rules of individual nation-states, but there are international standard setters as well. These associations are non-formal, non-state, and they develop far-reaching rules and standards. These eventually will serve as models for national as well as for European Union (EU) legislation. This development does not render the nation-state superfluous because the implementation and transformation of the rules still involves the nation-state. At the same time, (p. 240 ) if the nation-state does not comply with these rules, then considerable economic disadvantages will result. Thus, these international informal standard-setters exert strong pressure on nation-states to comply with these rules if a punishment by the international capital market is to be avoided. This dimension goes beyond that of the bilateral “learning from your neighbor” and that of the competition for regulation. The market force that we see unfolding here is much more difficult to assess because it no longer is obvious how to define the lines of national boundaries. The advent of informal international actors and the pressure they can exert in connection with the international capital market against non-complying nation states presents a new challenge to our traditional understanding of corporate law but also international law.

Meanwhile, corporate law, traditionally of a national nature, has become highly internationalized by, for example, the EU harmonization process and the internationalization of investment. Large investors, in particular, have a great influence on national acprof-making and were active with our commission, having recommended standards that can be found worldwide. This market pressure is difficult to assess because it does not result from what we naturally identify as market behavior: competition. The strong role played by these informal international actors evades our traditional assessments. And, although we find many standards put forward by such actors convincing, we, with a view to our German system, cannot simply adopt all of them. Other countries, such as the United States, have a strong capital market culture embedded in what we might almost call the country’s popular culture: While an American traditionally might invest his or her money in the capital market, the German would tend to deposit the money into a savings account. These differences are reflected in the specific creation of control and supervisory agencies for the capital market in various countries. And the crucial importance of the organization of a capital market can now be seen in light of the erosion of traditional state-dominated security systems (old-age and pension systems). The successful turn to the capital market as a substitute for declining public security and welfare systems depends to a large extent on the specific level of capital market supervision and control. And here it seems: The best of all possibilities—and keeping in mind what we have said about embeddedness and national characteristics—is to imitate your best competitor.

So, not instead of but, rather, along with the necessarily detailed and analytical scrutiny of single elements and aspects of the envisioned reform, we need to remain aware of the background of both the rules we might want to change in the future as well as the instruments we employ in this reform process. So, our aim cannot solely be to turn certain screws a bit further. Instead, we need to think about the system and the specific challenges to which it is exposed. Only then can we answer the question of whether we will eventually need to follow a very different path.