Table 5

# **Average annual volume of completed domestic mergers and corporate transactions with disclosed values, 1985-89**

Volume (in billions of USS).. 1,070 61.3 4.2 As a percentage of total market capitalisation **............** 41.1 3.1 2.3 Dollar values calculated at current exchange rates for each of the five years covered. Market capitalisation figures are for 1987, converted to dollars at prevailing exchange rates. Sources: For the United States and Germany, Securities Data Corporation, Mergers and Corporate Transactions database; for Japan, Yamaichi Securities Corporation, as reported in Beiter (1991).

# **B. The Role of Banks In Corporate Governance in the West**

In the U.S., the banks' primary role in the corporate governance mechanism is through their role as lenders. Even here the equitable subordination fear may make banks reluctant to play a big role in the governance of the firm. They typically own no equity in the firm, are infrequently represented on the board, and maintain only arms-length relationships with their borrowers. Their main governance tool appears to be covenants they insert in the loan contract and the maturity they set for the loan.

This does not mean however that banks do not exert control over firms in the U.S. when the law allows them to do so. For example, in firms that file for bankruptcy or restructure their debt privately, bank lenders and other financial institutions with debt outstanding to the firm frequently receive significant blocks of voting stock, appoint their representatives to the board of directors, and insert restrictive covenants in the companies' restructured lending agreements to give them more say in the firm's investment and financing policies (see Gilson (1990)).! 1 U.S. firms that undergo financial distress thus appear to take on some of the characteristics that the typical Japanese and German firms exhibit--notably, high ownership concentration, large equity and debt stakes held by banks and bank representation on the board of directors.

In Japan, the corporate control framework is related to the "keiretsu" form of corporate organisation, where a group of firms based in different industries are centred around a bank. The nonfinancial firms in the group tend to have product market links among them, and take small equity stakes in each other. They all tend to have strong but not exclusive borrowing links with the banks and other financial institutions in the keiretsu, who also take large equity stakes in them. While individual banks will take stakes of less than 10% in firms, collectively banks will own about 20% of the firm, and banks and life insurance companies together may own around 35-40%. Ownership concentration is relatively high, as is the concentration of debt claims. Collectively, banks are the most important large shareholders of firms and until recently have also been their only major source of external finance. Consequently, they have had a potentially very powerful position as active monitors of management either through the board or more informally through the Presidents Club 11 U.S. **law** allows banks a significantly more active role in the governance of the firm once it defaults on loans owed to the bank.

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