Comparative Corporate Governance: Changing Profiles of National Diversity
A two-day academic conference was held on Jan. 8 (Wed.) and 9 (Thurs.) in Tokyo to discuss theoretical and empirical analyses of how corporate governance in different countries has changed in recent years. In-depth discussions were made from broad perspectives, not only from the viewpoint of economics but also from legal, sociological, historical and policy viewpoints. (See attached paper for the list of participants.)
Jan. 8 (Wed.)
First Session / Part I
The session began with RIETI President Masahiko Aoki's presentation entitled "Comparative Institutional Analysis of Corporate Governance," in which he introduced his analysis on four types of corporate governance systems, including the hierarchal model and the Silicon Valley model. He argued that comparative institutional analysis is an effective means to analyze diverse forms of corporate governance in terms of game theory where multiple equilibrium develop historically in relation to other linked or complementary sets of institutions. Aoki pointed out that diverse forms of corporate governance can be effective, the arrangement of corporate governance and its associated organizational architecture can develop together, and corporate governance system may be stabilized because of the complementarities among different domains. He also noted that while law may influence the structure and consequence of a game, legal rules - if not compatible with equilibria in their complementary domains - may not generate their intended results.
Franklin Allen, professor at University of Pennsylvania, followed with his presentation entitled "A Comparative Theory of Corporate Governance." Allen presented a theoretical model to show that there are two broad types - the Anglo-Saxon model (H-mode) and the stakeholder model (J-mode) - of corporate governance. The J-mode model involves senior and junior managers managing a company jointly, and thereby creating a longer time horizon that allows the stakeholder model can do better than the Anglo-Saxon model when markets are imperfect.
Noriyuki Yanagawa, RIETI faculty fellow and associate professor at University of Tokyo, and Takeo Hoshi, RIETI faculty fellow and professor at University of California, San Diego (UCSD), respectively offered their remarks on the presentations, and discussions followed.
First Session / Part II
Next, Curtis Milhaupt, professor at Columbia Law School, spoke on the theme of "Nonprofit Organizations as Investor Protection: Explaining the Puzzle of Corporate Law Enforcement in East Asia." Milhaupt said that NPOs - such as PSPD in South Korea, one organized by Securities & Futures Institute in Taiwan, and the Kabunushi (Shareholders) Ombudsman in Japan - are engaged in various activities and playing an important role in enhancing the enforcement of corporate governance. NPOs' activities are diverse because they are influenced by their respective historical, institutional and political backgrounds. The utilization of NPOs may be applicable to the enforcement of corporate governance in China. Jang Hasung, professor at Korea University, and Zenichi Shishido, professor at Seikei University, offered remarks on the presentation, and discussions followed.
Second Session / Part I
The second session began with presentation by Oren Sussman, professor at University of Oxford, on the theme of "Financial Distress and Bank Restructuring of Small to Medium Size UK Companies." While acknowledging that the U.S.-style corporate reorganization system (Chapter 11), which calls for intervention by a discretionary court, is often cited as a model elsewhere in the world, Sussman demonstrated that Britain's contract-oriented model is a speedy and efficient mechanism for corporate reorganization which is free from such problems as debt cancellation and premature liquidations by creditors.
Xu Peng, RIETI faculty fellow and professor at Hosei University, spoke on the theme of "Bankruptcy Resolution in Japan: Reorganization." Corporate reorganization in Japan is characterized by the replacement of management team in many bankrupt companies. Lenders' interventions are not necessarily as strong as they used to be. But creditors' priority is usually respected and the recent Civil Rehabilitation Law has substantially shortened time required for formulating a reorganization plan in comparison to the process under the Corporate Rehabilitation Law. Thus, Japan's legislation concerning corporate bankruptcies is generally fulfilling its intended purposes.
Allen and Yanagawa offered their remarks on the presentations, followed by discussions among participants.
Second Session / Part II
Hideaki Miyajima, RIETI faculty fellow and professor at Waseda University, and Yasuhiro Arikawa, RIETI faculty fellow and associate professor at Yamagata University, made presentation entitled "Investment and Corporate Governance in the 1990s." They showed that manufacturers' capital investment in the 1990s in Japan was in negative correlation with an increase in debts, whereas non-manufacturers' investment (especially in the real estate and construction sectors) was in positive correlation with an increase in debts. Manufacturers' investment conspicuously dropped following the financial crisis in 1997. This drop in investment may reflect either the disciplinary effect of large debts or a difficulty in raising external funds and subsequent underinvestment (or both). These phenomenon are closely related with shareholdings by foreign capitals, the ratio of main-bank loans to total loans, and the growth potential of each company.
Xu and Colin Mayer, professor at University of Oxford, offered their remarks, and discussions followed.
Jan. 9 (Thurs.)
Third Session / Part I
Gregory Jackson, RIETI fellow, made presentation entitled "Employees in German Corporate Governance: Changing Institutional Linkages, Complementarities and Tensions." Noting that what used to characteristic of German companies - such as long-term capital, long-term employment, consensus-oriented management, industry-wide labor unions - have been substantially eroded in recent years, he presented a sociological analysis of the three axes of "class conflict," "inside/outside conflict," and "accountability conflict." The framework showed that class conflict can be observed between shareholders/management and workers, inside/outside conflict between shareholders and management/workers, and accountability conflict between shareholders/workers and management. The empirical analysis showed that changes in share ownership and finance are closely associated with changes toward reduction of employment, new performance-related pay, and a changing role for German works councils. This move toward "shareholder value" in Germany companies has increased insider-outsider conflicts, while some positive potential exists to foster greater accountability than found in the U.S. model.
Hoshi and Masahiro Abe, RIETI faculty fellow and assistant professor at Dokkyo University, followed with their presentation entitled "Corporate Finance and Human Resource Management: Recent Changes in the Japanese Corporate Governance." They said that corporate governance in Japanese companies is in the process of major transformation that began in the late 1970s, that many of the changes are common with those in Germany, and that the characteristics of Japan's management-workers relations - such as lifetime employment system, seniority-oriented pay system and respect to special skills - began to change drastically in the 1990s. As emerging phenomenon, they cited the introduction of merit-oriented pay system, an increase in wage gap, and increase in the number of part-time workers. They also noted that companies tend to rely less on banks and have higher foreign capital ratio when they are without the lifetime employment system but with the merit-oriented pay system and flex time employment system, and without an award for long-term service but with an award for inventions.
Mari Sako, RIETI visiting fellow and professor at University of Oxford, offered remarks on the presentations, followed by discussions among participants.
Third Session / Part II
Colin Mayer made presentation entitled "The Origination and Evolution of the Ownership and Control." Based on an historical analysis on the ownership and control of British companies throughout the 20th century, Mayer pointed out that Britain, despite the absence of rules to protect investors, has highly dispersed ownership and a large-scale capital market. This finding is contrary to the general understanding that investor protection promotes the dispersion of ownership. He also noted that founding families maintained control over a company (for instance as a board director) even as ownership became dispersed, and that "trust" and "implicit contracts" within regional networks of investors may have played an important role in dispersing ownership. Consequently, Britain and Germany appear to have followed contrasting courses in the development of corporate structure with British companies' ownership structure in the beginning of the20th century resembling to that of today's German companies.
Jackson and Miyajima commented on the presentation, followed by discussions among participants.
Fourth Session / Part I
Tong Daochi, vice director at China Securities Regulatory Commission, made a presentation entitled "Corporate Governance Reform and China's Capital Market Development." He said that China's state-owned enterprises are often controlled by insiders and generally lack strong external governance, duty of loyalty, and professional management. Although substantial reform measures - including the introduction of outside directors, a duty of loyalty, the reinforcement of information disclosure and the fostering of institutional investors - were implemented, it is necessary to further strengthen their enforcement, he noted.
Meanwhile, Hu Angang, professor at Tsinghua University, spoke on the theme of "Corporate Governance in China in the Transitional Era: Review and Foresight." He said that interest in corporate governance has been enhanced following China's entry to the World Trade Organization and the 16th National Congress of the Communist Party of China. Chinese companies are categorized into five broad types - (1) state-owned enterprises, (2) family-owned companies, (3) private companies, (4) joint ventures and (5) companies with governance in a transitional stage - and each type differs in corporate form, type of owners, ownership structure, incentive system, and external structure. He also said that the government's role will become more important in capital market, while citing market liberalization, the fostering of institutional investors and the strengthening of board of directors as key issues in the future.
Aoki and Toshiya Tsugami, RIETI senior fellow, commented on the presentations and discussion followed.
Fourth Session / Part II
Jang Hasung, professor at Korea University, made presentation entitled "Evolution of Corporate Governance in Korea after the Economic Crisis." He said that corporate governance in South Korea has drastically changed through reform measures that include the introduction of outside directors and corporate auditors' committee, the reinforcement of information disclosure, the prohibition of cross-shareholdings, restriction over related companies transactions, the lifting of restrictions over foreign capital, the liberalization of hostile buyouts, the introduction of holding company system and cumulative voting system, the imposition of greater accountability of major shareholders, the strengthening of minority shareholders' rights, and the liberalization of class action lawsuits. However, a series of problems remain - "chaebol" conglomerate families' continuous control over companies, rampant presence of paper companies and fragile law enforcement. Jang's empirical analysis found a clear correlation between corporate governance index and corporate value. As future challenges, he cited the need to improve the overall legal system, for instance, creating a just and efficient court system, and enhance the role of civic societies such as activists representing minority shareholders.
Tetsuji Okazaki, RIETI faculty fellow and professor at the University of Tokyo, and Kotaro Tsuru, RIETI senior fellow, commented on the presentation and discussion followed.
Concluding the conference, Aoki underlined the importance of further deepening the comparative institutional analysis of corporate governance in each country, particularly focusing on East Asian economies. To build on the discussions at the symposium, he said that international cooperation among experts needs to be strengthened, noting that it is especially important to refine cross-sectional analysis by bringing together not only economists but also experts from other fields and practitioners.
(Text : AKAISHI Koichi)