This paper examines the many changes which have transformed the German system of corporate governance during the last seven odd years. It concludes that it is in the process of converging towards the Anglo-American model and that this has fundamentally affected the way strategic decisions are made in firms. Convergence is not seen as a functional necessity, nor is it viewed as inevitable. The paper offers both a theoretical exploration of institutional and system transformation and an empirical study which substantiates the theoretical position taken with evidence about recent trends in capital markets, banks, government and firms. Empirical evidence from the pharmaceutical/chemical industry is supplemented by data on firms in other sectors, including the financial sector. The theoretical examination of institutional change focuses on the notions of system logic, institutional complementarity, functional conversion and hybridisation. It examines both external sources of change and internal powerful actors who promote the process of transformation. The notions of hybridisation of the German business system, as well as claims about functional conversion and the evolution of a new complementarity between institutions, are rejected in favour of a trend towards convergence. The transformation in capital markets and the rise to dominance of the notion of shareholder value is particularly affecting large international and quoted firms, but is gradually spreading also to other parts of the economy. This transformation is affecting labour and industrial relations in negative ways, as well as posing a threat to the German production model of diversified quality production.
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