Are We There Yet? Financialization and the Principal-Agent Problem
The separation of ownership (or ultimate risk) and control over resources in modern corporations marks one of the crucial problems to be solved in modern capitalism. Agency-literature presents financial and capital markets as efficient and effective means to solve this problem. Despite insights from comparative research that different forms for controlling managers may be equally effective, over the past 20 years different countries have implemented shareholder-oriented reforms, and targeted at strengthening the national financial markets. Germany has been a case in time, moving from a stakeholder-oriented, network-based system of corporate governance towards a more marked-based and shareholder-oriented regime.
Especially the lack of transparency associated with the German company network raised serious doubts about the extent to which managers where effectively controlled rather than controlling themselves. The reforms of the 1990s and early 2000s were introduced to strengthen competition and transparency as means to discipline the managers. The effectiveness of these measures is disputed, however. Top managers are largely acknowledged as being the beneficiaries of the reform process (Cioffi 2009).
The paper adds to this discussion by investigating two fields which were part of the reform process and which are directly linked to the managers’ personal interests, namely compensation and personal liability. In both fields top managers indeed seem to benefit from the new control regime. Additionally, the paper analyses political attempts to counter these trends by more fine-grained regulation. It is argued that these attempts have widely been unsuccessful, partly exacerbating the problem. Finally, following these observations the paper expects a continued race for more detailed legal regulation.