Institutional Investors in French and German Corporate Governance: The Transformation of Corporate Governance and the Stability of Coordination. CES Germany & Europe Working Paper, no.07.2, 2008

This paper examines the transformation of the system of corporate governance of France and Germany from the mid-1990s to early 2007. I focus on the rise of foreign ownership as a key in-dicator of shifts in corporate governance. The empirical data presented in this paper on the in-vestment portfolios of short-term institutional investors, namely actively managed mutual funds, shows a marked preference for the French market over that of Germany. The case of American and British-based hedge funds serves as a supporting comparative case study. I argue that the firm-level institutional arrangements of workplace organization constitute the most significant variable to account for this difference – the concentration of power in top executives in France fitting better with the preferences and investment strategies of short-term oriented institutional investors. I do not want to suggest that the institutional characteristics of workplace organization constitute the only investment driver of actively managed mutual funds. I also analyze the shortcomings of three alternative co-varying explanations – degree of internationalization, own-ership structure of companies, and background of corporate executives. I demonstrate how key notions of the Varieties of Capitalism theoretical perspective – institutional interaction, institu-tional latency, and the distinction between institutional framework and the mode of coordination that follows from these institutions – provide important theoretical insights to assess the impli-cations of causal complexity phenomenon. In particular, this mid-range level theoretical perspec-tive illuminates how necessary and/or sufficient conditions operate and vary across advanced capitalist economies