Corporate governance reforms in Japan Toru Umeda Professor

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
• 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
• 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
• 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