Stable, Strict, and Ineffective? the Liability of Managers in the German Stock Companies Act

The effective protection of property rights is one of the central requirements for the evolution and the operation of modern capitalism. Protecting the investors’ property against any kind of misuse by those commanding the resources is a central challenge in modern corporations and marks the heart of the principle-agent problem. The legal norm of managers’ liability addresses this problem by defining the context in which managers can be held responsible for damages, and by regulating the procedure as well as the extent for claiming compensation. As such, managers’ liability is an integral part of an economy’s general corporate governance structure. Furthermore, legal regulation of economic malpractices on the firm level provides us with information on how society understands and attributes personal responsibility.

Starting from the well-established distinction of shareholder and stakeholder-oriented corporate governance regimes, the paper takes a historical perspective on managers’ liability. It traces the regulatory developments of the norm in the German Stock Companies Act and the norm's significance over time. The German norm is interesting especially, as it is acknowledged for its strictness in international comparison. Furthermore, the German Stock Companies Act is interesting for its double turn during the 20^thcentury from shareholder to stakeholder and (at least partly) back to shareholder-orientation (Klages 2010).

I argue first, that despite adaptions in the wordings the legal norm itself proves remarkably stable over time. While the norm originated in the late 19^th century, aiming especially at protecting shareholders’ interests from employed managers it remained largely unchanged even during the rise and dominance of the German stakeholder-orientation. It is only at the turn of the century that the norm itself has been changed, largely as part of the process to reform the German corporate governance regime. Secondly, argue that while mangers’ liability may appear ‘harmless’ during the time of the network-based Deutschland AG but improving since the turn of the century, it may rather be the other way around. As Cioffi (2009) noted, the stakeholder-orientation of German corporate governance did not promote fiduciary duty claims. But even today, such claims have increase only slowly falling short of the expectations and intentions of the shareholder-oriented reforms since the 1990s. Furthermore, the spread of D&O liability insurances calls into question the disciplining effects of the norm itself. Finally, the paper discusses the effectiveness of the regulatory changes since the late 1990s. Based on an analysis of the growing number of court decisions on managers’ liability, the limits of political interventions for solving the genuine principal-agent problem are presented.