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Knowledge Co-Creation - Profiles of researchers

New Developments in Corporate Governance Research
- The Japanese System as Seen from the World Economy -

Hideaki Miyajima, Professor, Waseda University Faculty of Commerce
Associate Director, Waseda Institute for Advanced Study (WIAS)
Associate Director, Waseda Institute for Corporation Law and Society(*)

(*) Selected for the 21st Century COE Program and Global COE Program
by the Ministry of Education, Culture, Sports, Science and Technology.

A lost 10 years and the major reform of Japanese corporations

Until today, I have spent approximately 30 years researching the economic system and corporate system of Japan. I had never imagined that themes such as corporate governance and M&A would become the focus of my research 20 or 30 years ago.

The phrase "corporate governance" spread rapidly throughout Japan from around the late 1990s. In the background of this development was a decline in the Japanese corporate system, which in the 1980s possessed a high level of international competitive power and advanced into the global economy, but which suddenly lost this competitive power upon entering the 1990s.

Until that time, the secret of the strength of Japanese corporations was said to exist in long-term business relationships and employment relationships which differed from market-based economic approaches. The network of subcontracting corporations that were similar to "affiliated companies" began to attract attention from overseas, as did the "main bank system", a unique management system in which stock is mutually held between group corporations. However, these kinds of systems gradually began to crumble upon entering the 1990s.

The Japanese system, which was a strength in the past, began to strongly display negative aspects such as excessive investment and reduced capital efficiency. Through the economic world and Japanese society in general, there was rapid spreading of a mood that the current trends were unacceptable and that corporate governance must be fundamentally reformed.

The 10 years between the first half of the 1990s and the beginning of the 21st century are often referred to as the "lost 10 years". However, it was also an age in which Japanese corporations and the Japanese economy made great efforts and sacrifices to reform their own systems. When looking at newspaper articles, the frequency of usage for the phrase "corporate governance" suddenly increased in 1997, in the midst of a worsening bank crisis and bad debt problems. Frequency of usage for the phrase peaked before and after amendments were made to the Commerce Law in 2002 to 2003.

As for the specific reforms that were made, firstly, mutual holding of stock was rapidly dissolved. Next, reforms were made for operational organizations such as boards of directors. There was a strong trend for the boards of directors at Japanese corporations to be composed of individuals who started as employees of the corporation. For these reason, the boards tended to excessively protect the profits of employees rather than shareholders. It is inevitable for monitoring functions to become lax when the internal perspective is strong, and it is difficult to carry out restructuring, even when needed.

In order to escape from this stagnation, it was necessary to establish a management system that would correct bias by changing from an internal perspective to an external perspective, would emphasize value from the perspective of stockholders, and would maximum growth of corporations. In 1997, the Anti-Monopoly Law was revised in an attempt by the Japanese government to provide institutional support for these reforms. This revision made it possible to establish holding companies. Furthermore, in a major revision of the Commercial Law in 2002, it became possible to organize separate boards of directors for the execution functions and supervisory functions of management.

Shift to hybrid management

As these management reforms proceeded, the prevailing outlook around 2002 and 2003 was that the Japanese corporate system would converge towards an American system. It was naively believed that escaping from the Japanese system and seeking a global standard of corporate management meant conducting reforms to imitate the American management system.

However, when examining Japanese corporations after the period of 2002 to 2003, it appears that the actual condition is different. I conducted an analysis of 723 publicly traded corporations (other than financial corporations) and discovered that the actual condition is one of great diversity (refer to Table 1). It has become apparent that while some corporations made a radical shift towards the American system, there are a large number of corporations that have shifted towards a "hybrid type" that efficiently combines the Japanese system and the American system. These types of corporations have become the new standard for Japanese corporations. Such corporations are moving towards financing and shareholder composition that are based on capital markets, yet also emphasize long-term relationships for executive reform and employment.

Table 1: Analysis regarding the Corporate Governance of Japanese Corporations
From "Corporate Governance in Japan" (2007) M. Aoki, G. Jackson (co-editor/co-author)

"Corporate Governance in Japan: Institutional Change and Organizational Diversity"
M. Aoki, G. Jackson, Gregory, H. Miyajima (co-editor/co-author), Oxford Univ. Press, 2007.

A prime example is the Japanese manufacturing industry. They strength of this industry lies in a system that reflects the knowledge and experience of on-site employees to technological innovations and management innovations. For example, both an operating officer system and the role of external auditor have been implemented at Toyota Motor Corporation. However, Toyota espouses the belief that personnel possessing on-site knowledge are essential to management. For this reason, Toyota has implemented a system which combines the board of directors and operating officers, without implementing an external board of directors. This system indicates that, as long as personnel possessing special organizational knowledge remain an important management source for corporations, it is not prudent to reform all of the Japanese long-term employee practices and business relation practices.

An opposite example is found in the case of the financial industry. In such a case, overall financial knowledge and ability that can be used at any corporation is more important than special organizational knowledge. In these kinds of industries, it may be better to reform the board of directors and internal organizations to resemble the American system. This shift is actually occurring in such industries.

Increased "In-Out" M&As

M&As (Mergers and Acquisitions) are another pillar of my research theme and are related to corporate governance. In the past, M&As were rarely seen in Japan, but they have increased rapidly since 1999.

I conducted an analysis to clarify the actual reason that an M&A boom occurred in Japan, as well as to examine the effects of that boom. I reached the conclusion that M&As played an extremely large role in the structural adjustment of the Japanese economy.

When economic innovation is viewed from the perspective of the metabolism of corporate society, effects appear as a result of the following 3 patterns: 1) new corporations appear rapidly, 2) declining corporations rapidly withdraw, and 3) existing corporations institute self-reform. The ratio of innovations that result from patterns 1) and 2) is overwhelmingly high in the American economic system. Conversely, in the Japanese economic system, innovations occur exclusively as a result of pattern 3). The ratios of 1) and 2) have risen significantly in Japan compared to the past, but even so, 3) remains as the core pattern. In this way, a system is realized in which existing corporations retain their form while producing innovations. This system is the reason that the method of M&A fulfills such a large role in economic reform.

"Japanese M&: Impact on Corporate Governance, Organizational Efficiency, and Corporate Value" H. Miyajima (editor/ author), Toyo Keizai, 2007 / Recipient of 2nd M&A Forum Award (2008)

The term "M&A" covers a wide variety of types and patterns. Among these types and patterns, I believe that the acquirement of foreign corporations, known as "in-out" M&As, will increase in Japan in the future. In 2006, public attention was generated by a string of large-scale acquirements, such as the acquirement of the United Kingdom's Pilkington by Nippon Sheet glass and the acquirement of America's Westinghouse by Toshiba. Both of these acquirements came in conjunction with advancement into foreign markets, aiming for efficient international expansion by acquiring companies which already possessed a share of the market in the relevant country. This is a prime example of M&As as a growth strategy for existing corporations.

Furthermore, the use of acquirements rather than mergers is a special feature of Japanese M&As. In the case of mergers, integration is necessary which includes the corporate culture and employment practices of both corporations. This integration has resulted in a variety of obstacles for Japanese corporations and has not worked well. However, in the case of acquirements, it is possible to integrate management while preserving the uniqueness of the acquired corporation to a certain extent. This method is a good fit for Japanese corporations, and is a major reason why M&As have greatly increased since the ban on holding companies was removed.

Development of evaluation tool through an industrial-academic alliance

In order for these research results to be widely utilized in society, a Corporate Governance Evaluation System was developed through joint research by the Waseda University Finance Institute (currently the Waseda Institute for Finance) and the NLI Research Institute. From 2003, an alliance was formed with Nikkei Incorporated, and the system was merchandised as computer application software. Two versions of the software have been developed. The first is based on the most recent data of approximately 3,500 listed corporations and displays rankings by using a unique evaluation with a maximum score of 10 points. The second version makes is possible to freely perform valuation analysis using the data of individual corporations. The software is also used during university lectures, and many inquiries have been received from research institutions and corporations.

Corporate Governance Evaluation System (CGES), Ranking Analysis Screen (left) and Individual Corporation Analysis Screen (right).

In the future, the issue in question is how to position Japanese corporate governance in the framework of the international economic system. In the 1980s, the Japanese economy received a high level of interest from the world. However, the idea spread that there was no longer anything to be learned from the Japanese system, and interest is currently receding. From now on, it is no longer appropriate to emphasize special features that are inherent to Japan. Rather, we must firmly capture both the unique characteristics and universality of the Japanese system and speak in terms of how problems appearing in America and in China are dealt with in Japan. This is the only way to gain interest from the rest of the world.

An international research network is vital to achieving this goal. Currently, research exchange network is being formed between the Research Institute of Economy, Trade, and Industry IAA (RIETI) (the Waseda Institute for Advanced Study and the Waseda Institute for Corporation Law and Society form the core of the RIETI), the Harvard University Reischauer Institute, the University of London Business School, and Oxford University. We are advancing a plan for joint development with foreign researchers in comparative research of international corporate governance and in research regarding historical advancements of the 20th century and later.

Hideaki Miyajima
Professor, Waseda University Faculty of Commerce Associate Director, Waseda Institute for Advanced Study (WIAS) Associate Director, Waseda Institute for Corporation Law and Society(*)

(*) Selected for the 21st Century COE Program and Global COE Program by the Ministry of Education, Culture, Sports, Science and Technology.

Graduated from the Rikkyo University School of Economics in 1978. Completed the master's program at the Rikkyo University Graduate School of Economics in 1980. Completed the 2nd doctorate program at the Tokyo University Graduate School of Economics in 1985. Completed the doctorate program at the Waseda University School of Commerce in 2005. Served as a Research Associate at the Tokyo University Institute of Social Science and then as an Assistant Professor and Associate Professor at the Waseda University School of Commerce before becoming a Professor in 1995. Served in various research positions at the Harvard University Reischauer Institute. Served as Special Research Official at the Ministry of Finance, Policy Research Institute from 2001. Served as Faculty Fellow at the Research Institute of Economy, Trade, and Industry IAA (RIETI) from 2002. Served as Associate Director at the Waseda Institute for Corporation Law and Society (selected for the 21st Century COE Program and Global COE Program by the Ministry of Education, Culture, Sports, Science and Technology) from 2003, and assumed the concurrent position of Associate Director at the Waseda Institute for Advanced Study from 2006. His many works include "Economic History of Industrial Policy and Corporate Governance: Micro Analysis of the Development of Japanese Economy" (author) and "The Modern Japanese Economy" (co-author).

WASEDAWASEDA UNVERSITY Research Promotion  http://www.waseda.jp/rps/