Section 11 analyses corporate governance systems in the West. We compare the marketbased system in the United States to the more bank-based systems in Japan and Germany. No attempt is made to evaluate which system is the best. The focus is on the conditions necessary for different models of corporate governance to flourish.

Section III analyses the current conditions existing in central and eastern Europe. We concentrate on the degree of liquidity of corporate securities markets, the restructuring requirements of firms, and conditions in the banking sector including the degree of state influence, the bad debt burden, competition, supervision, and the incentives banks face with regard to their asset portfolio.

Section IV draws the threads of the two previous sections together and compares the conditions necessary for successful operation of the various governance models in the west with the existing conditions in the transition countries. Implications are drawn for the appropriate role of banks in the ownership and governance of firms.

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

As a field of research, comparative corporate governance is in its infancy. The major industrialised countries in the west appear to present us with dramatically different institutional arrangements for corporate governance. Yet we lack a consensus as to why these different arrangements came about, what the advantages and disadvantages of each system are, and whether one system is clearly better at the resolution of agency problems between the various stakeholders of the firm. This poses a problem for scholars attempting to derive lessons from the west for the countries in central Europe and Russia undergoing the transition from socialism. In putting forward recommendations for these countries on the role of banks in corporate governance, this paper will consequently be somewhat circumspect. It will try to identify common points of agreement among researchers on westem models of corporate governance, and derive implications for the countries in transition.

We start with a description of the corporate governance mechanisms in the U.S., Japan and Germany. Particular attention is paid to the role of banks and their ownership of firms in each country. Then we describe the main costs and benefits of having banks play a primary role in the governance mechanism through the ownership of firms. We do not draw any conclusions about the relative superiority of one western model over another. Instead we identify the underlying conditions of capital markets, the restructuring requirements of firms, and bank supervision, governance and competition that appear necessary for the successful operation of each system. By comparing these requirements with the existing conditions in central Europe and Russia, we draw implications for the feasibility of the different western models in the transition countries.

# **A. Western Models of Corporate Governance**

We describe the role of banks in the corporate governance mechanism in the U.S., Japan and Germany, with a particular focus on three important characteristics of the mechanism in each country: the structure of corporate ownership, bank-enterprise relations, and the market for corporate control.

## _The_ **_structure_** _of_ **_corporate ownership_**

Differences in the ownership of firms across countries are illustrated to some degree by simple inspection of the aggregate statistics on the ownership of listed companies in table 1. Table I reveals the far heavier weight of banks in Japan compared to the U.S. Germany appears to lie somewhere between Japan and the U.S. in terms of bank ownership of corporate equity. In Germany, 3