The Evolution of Corporate Governance in Japan

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BY Takaya Seki, Meiji University and Thomas Clarke, University of Technology Sydney

TOKYO and SYDNEY: 16 May 2013 - The evolution of corporate governance in Japan towards international standards continues. However popular perceptions of Japanese corporate governance often focus on a lack of board independence with few outside directors, insufficient disclosure, and the prevalence of cross-shareholdings. On the contrary as the structure of share ownership in Japan changes, disclosure is developing, and independent directors increasing in number. The future of corporate governance in Japan lies in how the relationships between companies and shareholders are developed. Japanese companies in addition to full board members, also include Kansayakus who are Audit and Supervisory Board Members performing a role similar to audit committees, and are becoming more outspoken.

Lessons are being learned in Japan from the incidents of accounting fraud and other corporate wrong-doing in Japan, as in the Kanebo, Seibu and Olympus cases (and with reference to Olympus a very thorough investigatory report is now published). The classic corporate crimes identified in Japan such as payments to racketeers and corruption are diminishing. All companies are now encouraged to appoint at least one outside director, or required to state reasons justifying why they do not have any outside directors

The underlying concepts of Japanese corporate law are similar to those in other major economies, and with similar duties of directors. By comparison executive remuneration remains modest, and both for executives and boards the enduring success of the corporation is paramount. However the proportion of overseas ownership of shares in Japanese corporations has increased to 27% (from 5% in 1990), and this has brought new influences as traditional Keiretsu inter-corporate shareholdings have been unwound. Overseas superannuation, insurance and investment funds together with hedge funds and other short terms investors are having an impact in the Japanese corporate sector.

The institutional investors are more critical on corporate governance issues, and dissident shareholders are attempting to leverage their argument and voting. What is required is a better understanding between companies and institutional investors, and while calling for the accountability of corporations, institutions should be aware of their own accountabilities to ultimate beneficiaries. Yet as in other economies company directors find it increasingly difficult to establish relationships with short-term investors.

As the drive for change in Japanese corporate governance accelerates, fundamental questions are being asked presently in Japan similar to those posed by Berle and Means:  Whose interests should a company serve?  Is it the property of shareholders, for them to do whatever they want with it, or does it have a wider social purpose?

With a keen focus on product development, high quality, and growth in market share for the long term Japanese corporations turbo-charged their way to market dominance in major sectors of the Western economies in the 1970s and 1980s. The Japanese economic miracle inspired (and invested in) the rapid economic development of the East Asian economies. The bursting of the Japanese bubble in the early 1990s coincided with the revival of the US economy around software industries in the 1990s, and finance in the 2000s.

As Japan reforms its economy and corporate governance the argument is that If equity markets are to play a fuller role this requires dismantling of inter-corporate equity holdings, more transparent corporate decision-making, and corporate governance that is more responsive to shareholder pressure (Morck and Yeung). This gives rise to a tension between the concept of the company as a community, and the company as property: “On one side ‘traditional’ Japanese corporate governance, is characterised by features such as the power of internally promoted management to run large, listed companies with minimal external supervision, concern with the company as a continuing community, and a lack of direct attention to shareholder interests. On the other side the view that in order to restore the national economy to good health, Japanese business needed to adhere to an emerging global consensus in corporate governance” (Buchanan and Deakin 2007: p.1; Ahmadjian, 2003, p.222).

In the past the growing contrast between the US emphasis on shareholder value and the Japanese indifference to shareholder rights was observed, but had few practical implications because the two systems had few opportunities to impact. Though there were some earlier incidents with T.Boone Pickens and other western investors, the more recent emergence of hedge fund activism in Japan provided the context for a classic contest of governance principles. “American activist hedge funds were often confrontational investors who targeted companies which they believed were squandering shareholder value” (Buchanan, Chai, and Deakin 2012:5) .

When Steel Partners attempted to acquire Bull-Dog Food Company, Bull-Dog adopted a defence strategy Steel claimed illegal, but the Tokyo High Court ruled the US hedge fund an “abusive acquirer.” A similar contest between the British hedge fund – The Children’s Investment Fund in its intervention in J-Power demonstrated aggressive tactics by activist investors not likely to succeed in Japan. However the Japanese system has become more shareholder friendly during this period, and dialogue is taking place about higher standards of governance and accountability. But the survival of the company as an enduring successful business remains more important in Japan than investors who hold shares at any given time (Financial Times 27 June 2012).

Japan has much to learn from the West about corporate governance, transparency and accountability. The West has much to learn from Japan about the conception of the corporation as a community, and directors and executives commitment to enduring business success.

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