CORPORATE GOVERNANCE AND CORPORATE PERFORMANCE: A COMPARISON OF GERMANY, JAPAN, AND THE U.S.

Contrary to assertions that there are fundamental differences in the efficiency of "market-based" and "relationship-oriented" corporate governance systems, this article presents evidence that the German, Japanese, and American systems appear about equally effective in disciplining poor managerial performance. For example, both the job security and total compensation of German and Japanese managers appear to be tied to stock performance and current cash flows- measures that some would refer to as "short-term"-to roughly the same extent as those of U.S. managers. Furthermore, the punishments and rewards for German and Japanese managers are not more sensitive to sales growth-a measure some would refer to as "long-term"-than those of their U.S. counterparts.
But, if there is no clear difference between the three governance systems in responding to poor stock and earnings performance, there is one important difference: the U.S. system is more effective than the German and Japanese systems in discouraging successful companies from overinvest-ing. One reason for this is the fact that U.S. managers hold much larger equity positions than managers in Japan and Germany. Another important factor, however, is the difficulty faced by Japanese companies in returning capital to their shareholders. Dividends are minimal; and, until 1995, it was illegal for a Japanese company to repurchase its stock.