Corporate Finance and Governance: Japan-Europe Comparisons

MIYAJIMA Hideaki, RIETI Faculty Fellow, Professor at Waseda University, and Vice Director of the Waseda Institute of Finance, made the following presentation titled "Changing J-type Firms and the Role of M&A in Corporate Governance."

The structure of corporate governance that has customarily been referred to as the Japanese model has undergone dramatic changes over the past decade. First, the governance structure characterized by main bank relationships, cross-shareholding relations, and a board of directors consisting largely of inside managers is undergoing significant changes today. Moreover, the system of corporate governance applied by Japanese companies is becoming increasingly diverse. Therefore, their structures are now different in nature from what they used to be. Second, there are significant changes in the relations between Japanese corporations and outside investors. These changes are shifting the structure of corporate governance toward a market-based system. Third, on the other hand, there has been no substantive progress in the reform of corporate boards and the introduction of performance-based compensation systems, though these issues have attracted considerable attention. Thus, the characteristics that are unique to Japanese corporations still remain largely intact.

Mergers and acquisitions have been increasing in Japan both in number and value since 1997. In the U.S., M&As developed with respect to both concentration and choice in the 1980s as a result of the inefficiency produced by conglomerate diversifications, and M&As took place frequently in the communications, financial, and aviation industries in the 1990s against a backdrop of innovation and deregulation. In Japan, these two developments have been progressing simultaneously. M&As have become an important means for corporate growth and reorganization, and market-based methods of corporate control have gradually begun to put down roots.

M&As have had positive effects, but we have to conclude that Japanese corporations have not taken sufficient advantage of them as a mechanism for corporate reorganization and management discipline. Two systemic factors --the existence of stable shareholders and main bank relationships -- may be constraining M&A activity. At least until about 2002, Japanese banks may have tried to prevent client companies from becoming M&A targets to prevent their non-performing loans from becoming more visible. We found from provisional estimates that stable shareholdings and strong main-bank relations were indeed exerting a restraining influence on M&A activity. Therefore, although the number of M&As has been increasing, there is a possibility that systemic factors are limiting the corporate reorganization efforts that should be carried out.

Empirical studies to date show that Japanese companies are becoming increasingly diversified. The implications of this diversity are: First; it is unrealistic to establish uniform regulations as compulsory legal rules. Second, companies that still maintain cross-shareholdings as well as strong relations with banks and are falling behind in their efforts to improve their corporate governance are the main targets of reform. However, today's ownership structure shields such companies from market pressure. Against this backdrop, M&As have become increasingly important in promoting corporate reorganization and imposing managerial discipline. Hence, the imposition of uniform and excessively stringent regulations on the initial stages of mergers and acquisitions could serve to reduce the pressure for takeovers and the restructuring of companies that are in need of reform.

The following questions were taken from the floor regarding these two addresses:

1. While Japanese companies are moving toward the U.S. model, Japan's social structure and economic system are closer to those of continental Europe than those of the U.S. In this situation, is corporate governance in Japan moving in the right direction?
2. I have the impression that Japanese companies have not learned much about the Corporate Takeover Directive and corporate Takeover Code. Could you give us your views about that?

Professor MIYAJIMA responded to question number 1 as follows:

It is difficult to say which direction is correct. Those making takeover attempts include green-mailers as well as people who have appropriate management plans. The EU is trying to create a system that imposes strict M&A regulations at the initial stage and seeks to prevent managers from resorting easily to poison pills to head off interference from green-mailers. But there is a possibility that regulation may end up thwarting even those M&As which are positive for corporate reorganization. On the other hand, the U.S. system, which has eased restrictions on the initial stages of M&As while allowing companies to protect themselves with poison pills, does not reduce the potential for corporate reorganization but cannot block green-mailers either. Both systems have advantages and disadvantages. There is no one system that is overwhelmingly advantageous.

Basically, there are those things that Professor Mayer has already pointed out. In addition, it is difficult to introduce the U.S. system because of the paucity of legal cases that can serve as precedents. Nevertheless, since Japan has been making changes that are closely in line with the U.S. model, it is necessary to take compatibility into consideration if the EU model is to be introduced.

Professor MAYER responded to question number 2 as follows:

It is necessary to consider three issues as a set. The first issue is corporate takeovers. The second is the structure of cross-shareholdings and other control mechanisms, and the third is whether we should seek a single regulatory system or allow room to choose from among different systems.

Regarding corporate takeovers, the ratio of hostile takeovers to the number of companies has traditionally been higher in the UK than in the U.S. The biggest difference between the two is that while minority shareholders are protected in the U.S. through the courts, such protection is based on a single set of rules in the UK.

Cross-shareholding may encourage inefficiency, but forcing changes in the corporate sectors can be extremely disruptive. Cross-shareholding has merits like stability, but the fact that the pattern of dispersed ownership is working well in the U.S. does not mean that other systems will function as well.

We cannot impose a single system of regulations as long as different types of companies exist. We should allow companies to choose from different forms of regulatory systems. In Europe, companies are choosing regulatory systems to follow, and we think this will produce the most beneficial results if shareholders are sufficiently protected.