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Where is Japan's Corporate Governance Heading?
-The Key is in Refining Hybridization-

Hideaki Miyajima
Professor, Faculty of Commerce, Waseda University

Japanese companies are now at a crossroads. In the past, the corporate governance of Japanese companies was characterized by the main-bank system, cross-shareholding, boards comprising insiders (internally promoted executives), and employee-focused management. Corporate managers strongly represented their employees and pressure on corporate management from the stock market was blocked off through cross-shareholding between companies. This meant the possibility of managers acting in accordance with the interests of the insiders (such as through heavy investments in the assigning of posts to employees) but this was controlled through monitoring by the main banks. This form of Japanese corporate governance was dominant twenty years ago and fit in with the economic climate of the times.

This structure started to become dysfunctional and quickly transformed in 1997, however, when the economic bubble collapsed, triggering the banking crisis. The main banks, which were expected to bail out client companies whose performance was suffering, were facing financial crises themselves. The ratio of foreign investors rapidly increased, and currently cross-border institutional investors own 25% of the shares issued by companies listed on the Tokyo Stock Exchange are owned by. Furthermore, this number is greater when looking at the weight that is accounted for in trading, as it is said that 60 to 70% of the trading volume on the Tokyo Stock Exchange is currently controlled by foreign investors. Mutual shareholding, on the other hand, which characterized the ownership structure of Japanese companies, was quickly dismantled with a focus on cross-holding between companies and banks. The structures of boards that monitor managers and reforms of compensation plans that give managers incentives became the subject of active debates, and the need for strengthening shareholder sovereignty was advocated as a replacement for management that leaned heavily on employee sovereignty.

Now, the questions are: how far the characteristics of Japan's corporate governance have changed, what kinds of characteristics Japan's corporate governance has at the moment, where it is headed, and what kinds of reforms would be desirable.

I have directly addressed such issues as part of the research in the Waseda University Global COE "Creating a New Corporate Legal Framework for a Mature Civil Society" program and through the activities of the corporate governance study group at the Research Institute of Economy, Trade and Industry (RIETI). The results have been disclosed as publications including Corporate Governance in Japan, (Oxford University Press, 2007) and The Frontier of Corporate Governance Analysis [Kigyo Tochi Bunseki No Frontier] (Nippon-Hyoron-sha, 2008), and the research results of recent years have been compiled in Japan's Corporate Governance-For Its Redesigning and the Recovery of Competitiveness [Nihon No Kigyo Tochi - Sono Saisekkei To Kyousouryoku Kaifuku Ni Mukete] (Toyo Keizai, 2011) not long ago. The viewpoints shown by the analyses we conducted, which have comprehensively followed the evolution of Japan's corporate governance from the banking crisis and the bankruptcy of Lehman Brothers to the present, are basically as described below.

Today's corporate governance in Japan neither converges uniformly with the trends of American-type market models nor is it simply sustained by conventional structure. Rather, a hybrid-type structure is gradually becoming dominant, in which a Japanese-style relation-based structure and an American-style market-based structure are merged together. Furthermore, the performance of some Japanese companies that have evolved through incorporating these hybrid-type structures is significantly high. However, these institutional changes (hybridization) involve new costs, as conflicts between the two differing modes cannot be avoided. Therefore, the refining of hybrid-type structures will become a major issue in corporate strategy and policy matters.

Regarding corporate governance, we must not only consider the relationship between factors such as banks and the stock market or changes in corporate board reforms. It is important to also comprehensively analyze the relationship between corporate governance and organizational architecture as well as the relationship between corporate governance and corporate behavior or performance. From this standpoint, we have also analyzed the effects that corporate governance has had on R&D investments, financing alternatives, and dividend and hiring policies. For example, the possibilities of new relationships with main banks, the current status of the revival of mutual holding and the functionality of the increase of foreign investors, the economic role of buyout funds, the relationship between corporate governance and the selecting of employment systems, the actual conditions and problem points of the governance of business organizations, and the analyses of the economic functions of listed subsidiaries are important issues. Furthermore, studies on the effects of the global financial crisis on corporate systems are being conducted as much as possible in recent years. There is the somewhat emotional criticism of the excessive commercialization that is growing due to the financial deregulation as of 1980 and the advancing of globalization as the global financial crisis progresses, but it is our hope that sober analyses of the effects of commercialization could be provided through our analyses.

Our research group consists of spirited researchers who have a deep interest in corporate governance in the fields of economics, business administration, financial theory, and corporate law, and who conduct analyses through the formulating of their own unique data sets and the latest economic models. Therefore, Japan's Corporate Governance mentioned above is certainly not an easy read. However, the demonstration results contain eye-opening and surprising facts as well as firm and factual evidence on viewpoints that have been regarded only as theories until now. The points shown below are but a few examples.

- The effectiveness of the monitors of clients of megabanks that have been established through mergers is supported by the possibilities of the withdrawing of the funds of regional banks that participate in joint financing.

- It has been pointed out that pressure from the stock market frequently accelerates corporate management in excess, but this has not yet been proven.

- There is definitely an interactive correlation between the amount of the stock holding ratio of cross-border institutional investors and corporate performance.

- There is a strong tendency of companies that need to adopt outside directors avoiding their adoption, and companies without sufficient reasons to adopt outside directors adopting them.

- Japanese companies are now transferring power to individual business organizations (business units, in-house companies, and subsidiaries), but the development of the monitors in the transferring of power, especially to subsidiaries, is insufficient, and this can lead to moral hazards.

- Listed subsidiaries are frequently criticized as jeopardizing the interests of minority shareholders, but their performance is by no means poor, and the evidence that deprivation occurs is scarce at best.

These are some of the interesting discoveries that the publication is filled with.

We hope that our research results could be of great benefit not only to researchers of economics who specialize in areas such as corporate finance and corporate behavior, but also to researchers and practitioners in the field of management and law who are interested in the actual conditions and reforms of Japan's corporate governance, and businessmen who are widely exploring the future direction of the reforms of Japanese companies as well.

Related Sites

- Global COE (Global Center of Excellence)

- "Creating a New Corporate Legal Framework for a Mature Civil Society" program

- The Research Institute of Economy, Trade and Industry

- MIYAJIMA Laboratory

Hideaki Miyajima
Professor, Faculty of Commerce, Waseda University
(Japanese Economy, Graduate School of Commerce),
Director Waseda Institute for Advanced Study (WIAS)

Graduated from the School of Economics, Rikkyo University, completed the Doctoral Course at the Graduate School of Economics, the University of Tokyo, and acquired a Doctor of Commercial Science degree at Waseda University. Assigned to current post after serving as Research Associate at the Institute of Social Science, the University of Tokyo, visiting researcher at the Reischauer Institute of Japanese Studies, Harvard University, and more. Serves as an RIETI Faculty Fellow and a Special Research Fellow, Policy Research Institute, Ministry of Finance of Japan, and joining to the several projects to the World Banks.
His research themes are the Japanese economy, Japanese economic history, and corporate governance.
Main Publications: Japan's Corporate Governance-For Its Redesigning and the Recovering of Competitiveness [Nihon No Kigyo Tochi - Sono Saisekkei To Kyousouryoku Kaifuku Ni Mukete] (Toyo Keizai, 2011), The Modern Japanese Economy, 3rd edition, From Postwar Reconstruction to After the Financial Crisis [Gendai Nihon Keizai, Dai 3 Han, Sengo Fukkou Kara Kinyu Kikigo Made] (Yuhikaku ARMA, coauthor, 2011), The Frontier of Corporate Governance Analysis [Kigyo Tochi Bunseki No Frontier] (coauthor and editing, Nippon-Hyoron-sha, 2008), Japanese M&A: Impact on Corporate Governance, Organizational Efficiency, and Corporate Value [Nihon No M&A: Kigyo Tochi, Soshiki Koritsu, Kigyo Kachi He No Impact] (coauthor and editing, Toyo Keizai, 2007), Economic History of Industrial Policy and Corporate Governance: Micro Analysis of the Development of Japanese Economy (Yuhikaku, 2004), The Modern Japanese Economy-New Edition [Gendai Nihon Keizai - Shinpan] (coauthor, Yuhikaku, 2006), Corporate Governance in Japan, (co-editing, Oxford University Press, 2007). His works also include many more research articles.