October 4, 2002
Dear Reader,
In time for the 50th issue, we are happy to announce that Miyakodayori now has a home page. Ever wonder about the origin of the newsletter's unusual name? Do you wish you could access classic Miyakodayori essays and charts, such as Nobuo Tanaka's look at Uniqlo's business strategies or C.H. Kwan's statistical proof that coastal China is still poor despite the hype. It is all here, so please take a look and send us your thoughts:
http://www.rieti.go.jp/en/miyakodayori/index.html
And now, today's issue of Miyakodayori, written by RIETI fellow Gregory Jackson.
Corporate Accountability: What Japan Can Learn from Germany
Despite recent reforms, widespread ambivalence remains about how to reshape Japanese corporate governance in light of new shareholder pressures. Many Japanese fear that shareholder-value practices of US corporations undermine commitments to other corporate stakeholders. The bursting of the new economy bubble, and scandals at Enron and Worldcom have reinforced this ambivalence.
Yet, Japan can no longer simply return to its old stakeholder model. In particular, main banks no longer offer effective monitoring for most large corporations. But in looking to the experience of other countries, Japan remains too preoccupied with the American model. Japan can draw important lessons from how Germany's stakeholder model has evolved during the last decade.
Different Models of the Stakeholder Firm
German and Japanese corporate governance share certain features in contrast to the US model, including: concentrated ownership, no open market for corporate control, a central role for banks and bank-based financing, strong participation of employees in corporate management, stable employment and management strategy based on long-term organization building based on mutual trust and cooperation among stakeholders. Nonetheless, Germany and Japan institutionalize stakeholder governance in very different ways.
In Germany, ownership is concentrated among block-holders, such as families and holding companies unlike the more horizontal Japanese cross-shareholding. German employees have legal rights to information and codetermination (through works councils and representation in up to one-half of the seats on the corporate supervisory boards. Japanese employee participation is based on informal consultation mechanisms rather than law.
In Germany, industry-wide unions make sectoral wage agreements, thus promoting similar wages across firms and linking them to occupation rather than seniority. Training is also standardized according to public occupational profiles. Japanese industrial relations remain much more enterprise-centered and reinforce the segmentation of firm-internal labor markets. In German boardrooms, supervisory and management roles are legally separated and the supervisory board includes both outside investors and labor. In Japan, supervisory functions fall to statutory auditors, who lack power to dismiss management.
The Uncertain Road to Shareholder-Value
The US model faces a problem: while managers have strong incentives to promote shareholder-value, the market is rarely sufficient to guarantee the accountability of management in designing and implementing these measures. For example, institutional investors professionalize information gathering and investment strategies, but only occasionally get active in monitoring specific companies. Many unresolved issues lie behind current catchwords such as global standards, accountability, transparency, independence, or shareholder-value.
In an increasingly international and liberal economic order, German corporations have adopted a growing range of shareholder-value practices. In particular, the hostile takeover of Mannesmann by Vodaphone signaled the growing vulnerability of even very large corporations to an emerging market for corporate control. Corporate law reforms strengthened shareholder rights, recognized international accounting standards, and facilitated new practices such as managerial stock options, share buy-backs, spin-offs, de-diversification, etc. As in Japan, tight bank-industry relationships are loosening.
Yet Germany appears to be moving to a hybrid or enlightened form of shareholder value where labor remains a key player. German labor has given conditional support to shareholder-value, but used their influence to codetermine the substance. Employees favor greater transparency to enhance employee participation and managerial accountability. Unions also aim to reduce class conflict by using their boardroom power to share gains with investors-by discouraging excessive inequality and policing against short-term misincentives in managerial remuneration, as well as demanding employee share ownership when consenting to managerial stock options.
Often enough, investors and management face pressures to adopt short-term strategies that redistribute wealth in a zero-sum fashion. Yet German labor constrains management to resist such temptations and improves focus on long-term strategy and resources. Performance targets may be reached by productivity, rather than only cost-cutting or balance sheet manipulation. Or, faced with corporate restructuring (e.g., focus on core competence), labor may promote good buyers during spin-offs (e.g., those who intend to act as good employers). Ultimately, such strategies are compatible with the long-term interest of shareholders, even if short-term returns are sacrificed. And while shareholders exert strong pressures to shed labor, employee participation lessens the class conflicts and may bring out the positive sum potential of corporate reorganization.
Unlike Japan, German labor is supported by various institutions outside the firm, often mandated by law. Stakeholders negotiate flexible responses to shareholder pressures against the background of strong legal checks and balances. Likewise, industry-wide associations may delegate freedom to individual firms to alter collective agreements, but remain important in promoting minimum standards. Therefore, Germany's constitutional model can more easily reconcile notions of independence and transparency necessary in market relationships with negotiated governance among stakeholders.
In Japan, non-market institutions outside the firm are less developed. Recent legal reforms allow for more shareholder-oriented practices, but do too little to strengthen real checks and balances among stakeholders. Thus, Japanese stakeholders have greater trouble adapting to market pressures and slowed growth, given that their influence is rooted in mutually reinforcing firm-specific commitments rather than politically constructed rights and responsibilities. Consequently, Japan's insiders such as management and core employees fear and resist change. Meanwhile, the gap in managerial accountability widens.
Shareholder value and strong employee voice may be reconciled when the focus is on improving accountability, rather than redistributing wealth in the short-term. Germany seems on its way to developing a more successful hybrid that combines these elements, and may lead to a distinct approach from the US creative learning from Germany's experience may offer new ways forward, such as widening the definition of enterprise communities, placing the rights and responsibilities of stakeholders on a more public footing, and widening social safety nets outside the corporation. Looking beyond the Anglo-American paradigm may not only protect Japan's employees, but also raise standards of corporate accountability.
Author, Gregory Jackson
Fellow
Research Institute of Economy, Trade and Industry (RIETI)
Editor-in-Chief, Ichiro Araki
Director of Research
Research Institute of Economy, Trade and Industry (RIETI)
e-mail:
araki-ichiro@rieti.go.jp
tel: 03-3501-8248 fax: 03-3501-8416
RIETI invites you to visit its English website
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http://www.rieti.go.jp/en/index.html
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The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).
