- Written and edited by MIYAJIMA Hideaki
Co-author/editor's words (preface)
* This publication is in Japanese. An English translation is not available.
A book that identifies the evolution of corporate governance in Japan from the late 1990s to the present day
In late 1990s, when the macroeconomic environment surrounding Japanese firms underwent changes in tandem with the rapid progress in deregulation and institutional changes, Japanese firms adopted major reforms to corporate governance as well as to their business and organizations. Corporate governance in Japan, traditionally characterized by the main bank system, cross shareholdings, boards consisting of insiders (directors promoted from within the company), and employee-focused management began to change rapidly following the nation's banking crisis in 1997. The direction of the progress and outcomes of reforms have received significant attention both in Japan and overseas.
The aim of this book is to comprehensively capture the progress of corporate governance in Japan during the period from the time of the banking crisis in 1997 through the Lehman Shock in 2008 until the present day.
Significant research has been published on this subject in Japan and other countries, including Aoki, Jackson and Miyajima eds., Corporate Governance in Japan: Institutional Change and Organizational Diversity (Oxford University Press, 2007), in which this author also participated as one of the editors.
However, empirical analyses in most of the previous research has only covered the years up to the early 2000s, when the issue of bad loans emerged as a serious crisis, and did not look at the subsequent economic upturn. Interest in previous research was focused on whether progress in corporate governance in Japan would converge on the American model or maintain its national trajectory, while little analysis was done on the impact of changes in corporate governance on corporate behavior and performance. Moreover, in the relatively few cases in which such analysis was undertaken, the primary target of interests was on the channels through which the characteristics of traditional Japanese firms propelled the bubble economy and the subsequent downturn.
In contrast, this book seeks to conduct a comprehensive analysis not only of the changes in external and internal governance, but also of the relationships between corporate governance and organizational architecture. Furthermore, this book highlights the impact of changing corporate governance on corporate behavior and performance. The authors of this book offer a fresh take on the possibility of new main bank relationships, the reality of the second coming of cross shareholdings, the functions of the growing foreign investment presence, the economic roles of buyout funds, and other aspects. The unique contribution made by this book may be the point that the authors have clarified the relationships between corporate governance and the employment system, the governance over business units (in-house company and fully owned subsidiaries), and possible conflict of interest between parents firms and minority shareholder in listed subsidiaries. Moreover, this volume empirically analyzes the impacts of corporate governance on R&D investments, financial choices, and dividend and employment policies. As such, it may be said that this book offers broad perspectives that are not comparable with similar books published in the past.
In this book, the editor illustrates the unique understanding that corporate governance in modern Japan is a hybrid of structures based on Japanese relationships and American market-based structures. He stresses new aspects of costs associated with this institutional change (hybridization). This last view remains a hypothetical one and this author would like to ask their readers for criticism and instruction.
The authors of this volume also attempted to refer to the impact of the global financial crisis on corporate systems wherever possible. As the world has drifted deeper into financial distress since the autumn of 2008, the progress of financial liberalization and globalization that began in 1980 has drawn somewhat emotional criticism as being over reliant on free markets. The authors hope to provide a non-emotional frame of reference about the impact of free markets through the empirical analyses conducted in this book.
This book is the outcome of a project led by Hideaki Miyajima and undertaken by the Corporate Governance Study Group at the Research Institute of Economy, Trade and Industry (RIETI). Established in 2002 under Masahiko Aoki, a former President and Chief Research Officer (CRO), the study group has continued with its research activities, with the participation of leading researchers in the field and practitioners. The major themes of the study group have been to track the reforms of governance structures in Japanese firms since the late 1990s and consider the impact of the reforms on corporate performance.
From the work of the study group, outcomes of analysis on the transformation of corporate governance structure until early 2000 were published in Aoki et al. eds, Corporate Governance in Japan, as mentioned above. The results of analysis on the determinants of M&A, the incidence of which had rapidly increased from the end of the 1990s, and their economic roles were published in M&A in Japan: The Impact on Corporate Governance, Organizational Efficiency and Firm Value (Toyo Keizai, Inc., 2007), edited by Hideaki Miyajima. Fortunately, these publications have been accepted as standards in this field. This book follows them as the third publication to come out of the study group.
The formation of the study group that led to the creation of this book was in 2007. Initially, on the premise that, of the class of questions concerning corporate governance, literature providing an analyses of internal governance (boards of directors, incentive systems) and external governance (discipline imposed by shareholders and creditors, the roles of M&A) had already evolved to a certain extent, the group's starting point was to identify the remaining issues for analysis. For this reason, the study group organized monthly research conferences on "The Frontier of Corporate Governance Analysis," with participants from the Industrial Organization Division of the Ministry of Economy, Trade and Industry, aiming to re-examine what issues were subjected to review from academic and political perspectives. Concurrently with this, an international symposium was held, called "Organization and Performance: Understanding the Diversity of Firms" (November 2008), cosponsored by Maison Franco-Japonaise and Waseda University's Global COE Program. This was followed by a conference titled "Business Law and Innovation Conference" (October 2009), which was cosponsored by Hitotsubashi University and Waseda University's GCOE Program. Through these conferences, attempts were made to gather the latest analyses of corporate governance both in Japan and overseas.
In fiscal 2009, the study group began the work of compiling the results of research on the evolution of governance structure of Japanese firms and the future outlook, with an eye to narrowing the points of debate relating to "The Frontier of Corporate Governance Analysis," mentioned above. The focus of analysis was placed on basic and long-term issues including the evolution of holding structures over the long term, the direction of governance restructuring contingent on the state, the design of internal governance which is an incentive compatible with the accumulation of human assets, the complementary and substitutive relationships between external and internal governance, and the impact of changes in corporate governance on corporate behavior. Meanwhile, the global financial crisis that started in the autumn of 2008 has had a profound effect on corporate governance in Japan. In response, each of the authors was requested to consciously consider this point when writing their contribution to this book and to refer to it as much as possible.
In March 2010, a workshop was held to examine the first drafts. The authors were joined by Hideshi Itoh (Professor, Graduate School of Commerce and Management, Hitotsubashi University), Seki Obata (Associate Professor, Graduate School of Business Administration, Keio University), Hideo Owan (Institute of Social Science, The University of Tokyo), and Kotaro Inoue (Graduate School of Business Administration, Keio University). In March 2011, a symposium was held with the support by Waseda University's GCOE Program under the title "Evolution of the Japanese Corporate System: Redesigning Corporate Governance Following the Financial Crisis" to focus on the portion of this book that had strong political implications.
The authors of this book are active researchers with an interest in corporate governance in the fields of economics, business administration, and financial theory. Each chapter is based on data sets uniquely established by its author and empirical tests using the latest econometric models. While the authors were asked to undertake an empirical examination of the assigned subject with academic rigor, they were also requested to take on some risk in answering the question of what needed to change and what needed to be reformed in corporate governance in Japan in recent years. I take this opportunity to express my sincere gratitude to my fellow authors, who readily responded to several requests for revision during the preparation of this book.
Obviously, I am well aware that the reorganization of business that began to take place in various forms in recent years has not been fully examined and that there is a lack of analysis about compensation schemes and governance issues in startup companies. The conclusions drawn from this study must inevitably be provisional in nature, reflecting ongoing reform in corporate governance. Analysis of the impact of the global financial crisis was also lacking, partly because of the limited data available.
Even so, I think that in this book we have succeeded in drawing the big picture of corporate governance in Japan, organized to a certain extent. My hope is that the analyses in this book serve as a starting point for further advances in corporate governance analysis.
In this research project, outstanding support was provided by Mr. Masahisa Fujita, President and Chief Research Officer of RIETI, Mr. Kozo Oikawa, former Chairman, Mr. Hideaki Tomita, Research Coordinator, and Ms. Hikaru Matsumoto and other staff members of RIETI. The study group had active participants also from the Industrial Organization Division of the Ministry of Economy, Trade and Industry, particularly Mr. Hiroaki Niihara, former Director, and Mr. Futoshi Nasuno, Director, who provided considerable expertise and advice on the state of corporate governance and concerns for people in the field. During the preparation for publication of this book, Mr. Takuya Kawanishi, a research assistant in this project, provided support. I express my gratitude for his care and attention, which has made the publication of this book possible.
Lastly, I received great assistance from Mr. Tomoyasu Sato of Toyo Keizai, Inc., as I did during the editing and publication of my previous book, M&A in Japan: The Impact on Corporate Governance, Organizational Efficiency and Firm Value. Mr. Sato's generous and consistently positive advice was greatly encouraging. I would also like to express my sincere gratitude to all those who have generously extended assistance.