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The 2006 Asian Roundtable on Corporate Governance Session 2 Enforcement Problem in Japan

The 2006 Asian Roundtable on Corporate Governance Session 2 Enforcement Problem in Japan. Seki Obata Keio Business School Japan Bangkok, Thailand 14-15 September 2006. Japan could be the best capital market. Japan: Very well developed Economy The Second largest capital market

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The 2006 Asian Roundtable on Corporate Governance Session 2 Enforcement Problem in Japan

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  1. The 2006 Asian Roundtable on Corporate GovernanceSession 2Enforcement Problem in Japan Seki Obata Keio Business School Japan Bangkok, Thailand 14-15 September 2006

  2. Japan could be the best capital market • Japan: • Very well developed Economy • The Second largest capital market • Quality of Government： very high • Rule of law: good quality Japanese Financial Market could be the ideal one without corporate governance problems

  3. What factors important? • For capital market development • Good economy • High level income per capita • Good quality of government • Most important one: Legal system

  4. Law is important • Legal system is one of the most important factor for financial market • Outside Investor protection Is the key factor • Shleifer et al (1997,1998） • Legal origin seems matter • Common law countries' markets perform better

  5. Why does legal system matter? • Protection on outside dispersed investors • By statues (Shleifer et al 1997,1998) • Common law countries protect outside investors, French law countries do not. • German law countries protect them moderately well. • Japan: • Score of investor protection is high • but not so much as Singapore and HK

  6. Still, Japan has the governance problemWhy? • Japanese problems are not so wild • Not direct theft of corporate cash flow or assets • Financial figure manipulation • Insider trading • Unfair transaction in the stock market

  7. Bad enforcement • Japanese law: the statute is very good • But • Enforcement system is not effective. • Law efficiency score: much lower compared to the score for the statute

  8. Why bad enforcement? • Corruption? • Not the issue in Japan • Incentive? • Not strong incentive to wipe out insider trading and price manipulation for government official • but not so weak • Shortage of staffs • Now improving

  9. Two fundamental problems • Legal structure • German law system • But commerce law and security law: imported from US after the WWII • Mismatch • Ex: security law stipulate that all unfair transaction and insider trading prohibited and punished • Practically, prosecutors and court both seem hesitated to use this code: unbalanced with all other legal systems and legal convention • Emphasize the bright line rule, not discussion in the court room

  10. High Legal cost • Rare private enforcement • Legal cost is very high • Not only financially but culturally • Then shortage of lawyers in this field and also their experience • The same story for judges

  11. Encourage the gamble • Therefore, only clearly illegal transactions would be indicted • Prosecutors need the bright lined crime • Then, those who focus only on the cash return (not reputation) would try to execute the risky transaction in the gray zone • Gray zone: substantially illegal but no violation of the bright line rule • Only bad people try to gamble and they would be never captured if they are clever and sophisticated enough • Bad people would thrive and decent people feel unfair.

  12. High legal cost also for public enforcement • Incentive for prosecutors • They should win a case with 100% probability • This comes just from convention: • People believe that prosecutors’ decisions are always right

  13. Livedoor case • Livedoor case • CEO and founder Horie and other directors arrested and indicted now on trial • Effectively insider trading and unfair transaction (price manipulation) • However, prosecutors tries to establish this case as manipulation of accounting figure and intentionally false disclosure • Because of the bright line rule sentiment

  14. Murakami case • Activist fund manager Murakami also arrested related to Nippon Broadcasting System that Livedoor tried to buy out • Insider trading • Livedoor directors told prosecutors facts of insider trading • Prosecutors finally decided to arrest Murakami • This time, prosecutors got the evidence of confession from Livedoor directors

  15. Other factors • Cultural factors • Not strict opinion on insider trading • Investment on some stock usually some kind of insider information

  16. Other factors II • Private enforcement: not effective in Japan • One reason: no large shareholder with an incentive to maximize the share price • Good corporate governance system without the player to implement

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