The relationship between German banks and large German firms

German banks are often criticized, or praised, depending on a person's viewpoint, for owning German industry and for playing an active part in corporate control. The author argues that this misrepresents German banking. First, the number of German firms a bank can own or control, although significant, is limited. Second, although most of the largest 100 firms have a bank member on their supervisory board, this does not imply effective bank control. Third, the role of the banker in the supervisory board has to be viewed in the light of the rigorous standards of corporate governance imposed on German public firms. fourth, bank ownership of industry is not pervasive, but is in fact limited to a few special cases. Fifth and last, proxy voting is more important than stock ownership as a potential means of control. The author argues that the German system of corporate governance represents an efficient attempt to minimize socially wasteful behavior. The negotiated consensus achieved in the board room provides better incentives to management to maximize firm value and social welfare than the factionalized U.S. system.