Corporate governance reforms in japan
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Corporate governance reforms in Japan. Toru Umeda Professor Reitaku University, Japan. Main features of the Japanese corporate model in the 1980s. Cross-holding of shares among businesses Strong government-business ties: ‘ convoy capitalism ’

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Corporate governance reforms in Japan

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Corporate governance reforms in Japan

Toru Umeda


Reitaku University, Japan

Main features of the Japanese corporate model in the 1980s

  • Cross-holding of shares among businesses

  • Strong government-business ties:

    ‘convoy capitalism’

  • No distinction between execution and supervision

  • Debt finance preferred to equity finance

  • Seniority and life time employment system

Cross-shareholding among industrial groupings called ‘keiretsu’

- made equity markets illiquid

- provided a business with a good defense against hostile takeovers

- rendered shareholders passive owners

As a result, corporate management became indifferent to shareholders interest

No clear distinction between supervision and execution

  • Few outside directors adopted:

    the lack of effective control on the president’s power

  • Board meeting infrequent, decisions rubber-stamped

  • Board size tended to be too large for an effective decision-making

  • These represented the dysfunction of the board in controlling management

Changes taking place in the last decade

  • Shareholdings of banks fell: from 21 percent in 1990 to 5.7 percent in 2003

  • Foreign ownership has grown: from 7.3 percent in 1990 to 20.3 percent in 2004

  • Shareholders have become more vocal, visible and active than before

  • Shareholder activism: dialogue, proposals, proxy voting, and litigation

  • SRI movements have been a topic of concern

  • Management is increasingly aware of the importance of enhancing shareholder value

Reforms regarding the separation of control and management

  • Legislative amendment efforts made to strengthen control management:

  • Outside auditors, and attempted to mandate outside directors, but impacts limited

  • A breakthrough: May 2002 amendments to the Commercial Code, enforced in April 2004

  • Paved the way for a large company to opt for an American style of corporate governance

Under the ‘Committee system’

A large company is to

- do away with corporate auditors

- instead establish the three committees for nomination, compensation and audit, each consisting of three directors and more with the majority being outside persons

- introduce the new office of executing officers separate from the board,

responsible for the execution of business operations, distinguishing control and management.

But in practice

  • Only a limited number of companies have shifted to the new system: 1.2 %

  • Under the conventional auditor system

    more companies introducing a new non-statutory corporate officers post,

    - delegating some execution power to such officers,

    - slashing the number of directors

  • A third, mixed type with no statutory base seems gaining force

  • “One-size-fits-all”approach not adopted

Growing CSR concern focusing various stakeholders

  • consumers, customers, employees, local communities, and future generations

  • Relative positioning: the shareholder is part of a group of stakeholders

  • A survey shows corporate managers put more weight on customers than before

  • Corporate management is expected to respond to stakeholders’ interest

  • Should the concept of shareholder primacy be declared dead?

  • The ‘shareholder primacy’ concept continues to play an important role

  • CSR: a strategy for a business to gain reputation and trust from its stakeholders

  • Corporate efforts to respond to demands of the other stakeholders serve in theory the interest of the shareholder

  • CSR efforts will lead to reputation hike, making the company more sustainable,

    which ought to serve the interest of the shareholder in the long run


  • When prompted by short-term profitability or when combined with greed, shareholder primacy practices could undermine the interest of the other stakeholders

    - cutting corners only to jeopardize the safety and welfare of employees, consumers

    - degrading the environmental integrity

  • This is why shareholder primacy needs to be circumscribed

  • What should be praised is ‘enlightened shareholder primacy’, not greed-driven one

No optimism: enlightened shareholder primacy becoming common

  • Market realities: short-term greedy players tend to prevail, preying on long-term players

  • Markets unequipped with mechanisms to deter short-term profit seekers from snatching fruits which long-term players would share in their hands in the long run

  • This is the very field where ethical values should play critical roles

    integrity, trust and self-restraint

Shareholders’ interest diversified

  • The rise of social investors demanding corporate management to address social issues: including human rights practices, effective implementation of labor standards, and environmental concerns, by sometimes resorting to SRI strategies

  • Shareholders’ interest used to be associated only with the financial bottom line

  • It now extends to cover the so-called ‘triple bottom lines’

  • This can be called ‘enlightened shareholder interest’

  • A main concern of corporate governance is:

    the sustainability or long-term profitability of a company,

    not a short-term maximization of shareholder value

  • This is where corporate governance concerns meet with CSR concerns


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