Presentation Summary #5
Franklin ALLEN University of Pennsylvania
In the US, corporate governance means that firms should provide wealth for shareholders. In the rest of the world, the meaning of this phrase is different, so that American observers conclude that corporate governance outside the US is bad. Standard corporate governance mechanisms include an effective board with sufficient outsiders, management compensation that is aligned with shareholders' interests, a market for corporate control, and intervention by banks.
But if you look at corporate governance in Japan, these mechanisms are not applicable. For example, Toyota's board of directors has 60 people and only one outsider. Toyota's management is paid less than they would be in the US and traditionally they have not had stock options. And there are no hostile takeovers in Japan. According to the standard view, Toyota should be a poorly run firm and have produced low returns for shareholders. But, by contrast, Toyota is very successful. In fact, in the long run, Toyota performed better for shareholders than did Ford, GM and even the S&P 500.
What is wrong with the standard US view here? It ignores alternative forms of capitalism such as stakeholder capitalism, which is where companies pursue the interests of many stakeholders. Stakeholder capitalism has not been analyzed as much as Anglo-Saxon capitalism.
The conclusion of my research is that in an imperfect world, stakeholder capitalism can do better than Anglo-Saxon capitalism. J-mode firms are based on consensus. And the J-mode allows the efficient allocation to be implemented because the effect of requiring consensus is that decisions are made for the long run. An important characteristic of the Japanese system is lifetime employment in an inflexible labor market. In case of a shock, J-mode firms maintain wages and employment high even if this means cutting returns to shareholders.
In sum, Anglo-Saxon capitalism is only one form of capitalism. Stakeholder capitalism can be superior if there are imperfections. Stakeholder capitalism needs to be more carefully studied. Finally, it is important not to attribute the effects of the collapse of the bubble to corporate governance. I would bet that ten years from now, people will be saying that Japanese corporate governance is good and American is bad.
