"Global standards". One doesn't hear the words quite as often as one did four or five years ago. The urge to imitate everything American - which is what the phrase usually meant - has diminished with the end of the "new economy" boom. But the assumption that the whole globe is destined to move towards a homogeneous future of Anglo-Saxon capitalism and American-style democracy is still common. This paper argues that such convergence is neither inevitable nor desirable.
Corporate governance: the should question
Let us take the desirable question first. Why should nation-states seek to create or preserve legal frameworks fostering distinctive national modes of corporate governance different from those of the globally dominant American model? There are two answers to those questions: the outcomes argument and the preconditions argument.
The outcomes argument is simply this. Economic systems are embedded in societies with distinctive values to which their citizens may be attached. Corporate governance institutions, embodying views of the relative importance of property rights and other human rights, affect, for example, the liberty vs. equality trade-off. How much inequality of income and life chances can be tolerated to achieve greater economic freedom and economic efficiency? Why is economic efficiency important - as a precondition for the nation's prestige in the international system, or for individual welfare? The general consensual views on these matters are rather different in Scandinavia, say, or in Japan, from what they are in America.
The preconditions argument is this. Economic textbooks may assume a universal human nature with a narrow range of motives and maximands, but the range is in fact quite wide. The variations are, moreover, still nationally distinctive, both in explicit ethical systems and in the moral implications of dominant patterns of kinship, friendship and economic exchange. Hence, institutions built on the assumption of one dominant pattern of motivations may work quite differently in a society with different patterns. Institutions are best made if tailor-made to local values, not taken off the shelf.
A global consensus? The deviant and the normal
Nevertheless, the notion that capitalism is one and indivisible, and that there is one best way of organising business corporations persists. Take a sample of the 380,000 web sites that Google offers you when you search for "corporate governance" and you will see that the vast majority of them reflect this view unquestioningly. The pronouncements of the OECD offer good examples of the importance of international organisations as factors making for convergence.
Look, for instance, at the report of its Business Sector Advisory Council in 1998. It does, indeed, pay lipservice to national diversity, at least in its opening fanfare statements. "Generating long-term economic gain to enhance shareholder (or investor) value is necessary to attract equity investment capital and is, therefore, the corporation's central mission. At the same time however, corporations must function in the larger society. To varying degrees, different national systems and individual corporations may temper the economic objective of the corporation to address non-economic objectives." (My italics) But the overwhelming consideration was "the global competition for capital" which required that corporations be transparent both about "their economic and non-economic objectives".
"Economic"? "Non-economic"? Maximising the returns to capital is "economic", manipulating the distribution of income, maximizing employment or the returns to labour, is somehow "non-economic". Curious.
Because one needs capital, attracting it becomes the corporation's "central" mission? What sort of logic is that? Moreover, there are other scarce factors of production besides capital; think of "efficiency wage theory" which once had as much vogue among neo-classical economists as agency theory does now. There is no obvious reason why the first sentence of that report should not read "Generating long-term economic gain to pay good wages and salaries is necessary to attract good employees and is, therefore, the corporation's central mission."
National differences, Value differences
To return to "economic" and "non-economic," the fact is that the diversity of views as to what should be the "mission" of the corporation is not just "national." Too often the debate in Japan is couched in national - indeed, frequently nationalist - terms. "Nihontekikeiei needs to be preserved" it is said, "because it is Nihonteki and every patriot ought to be in favour of it."
But there is a wide variation, in Japan as well as in other countries, in views of the "mission" of the corporation. They reflect differences in ideology, the diversity of political values. Neo-liberals would thoroughly agree with the OECD's emphasis on accounting profit or enhancement of shareholder value; neo-mercantilists might in addition be concerned with corporate contributions to national competitiveness (taking account, for example, of external economies generated by corporations through employee training or environmental improvement); communitarians would be concerned about one particular externality - the quality of social relations which the corporation promotes, social democrats might agree about maximising value added per unit of given resources, but be equally interested in the way in which the distribution of value added, as between returns to labour and returns to capital, affects the overall societal income distribution. Nihontekikeiei fits most closely with the neo-mercantilist, communitarian and social democrat views. The reformers who were responsible for the recent changes in the Shouhou represent the neoliberal view.
How to keep managers honest?
All that is about ends, values, managers' "missions," about which stakeholders they should primarily serve. But whatever view one takes on that score, nobody wants managers who are concerned only with secretly feathering their own nests. All systems need checks on dishonesty. And the way a society provides those checks varies greatly according to the social resources available. (My second source of variation in governance structures: see above.)
The standard solution which fills the corporate governance literature of Anglo-Saxon societies is about providing managers with adequate sticks and carrots.
The major form of carrot, designed to align managers' self-interest with those of shareholders, is the stock option, now much under suspicion after the Enron debacle has shown how the lure of such rewards can promote unscrupulous dishonesty.Such luminaries as Paul Volcker are now of the opinion that stock options should be banned for all except small venture firms. (*1)
As for the sticks, the main remedies considered in the corporate governance literature are almost exclusively external and punitive - accounting transparency to improve the accuracy of stock market valuations, regulatory pursuit of fraud, facilitating critical review of management at the shareholders' general meeting, "disciplinary" take-overs to oust inefficient management, legal requirements for the appointment of "external" directors with no executive function, dominance of those external directors on audit and compensation committees, and so on. In these external mechanisms, as usually prescribed, the role of the stock market is crucial. It works, supposedly as follows. Transparent accounting allows shareholders to judge when they should desert a company. When things look bad, the share price goes down, thus producing a wake-up call to managers. If they do not respond and get people buying their shares again, a depressed share price, one possibly that puts the stock market valuation below the real value of the assets, makes the company ripe for take-over and the arrival of a better management that throws the incompetents out.
Forget about how accurate a picture this is of what happens in America. In Japan, with no takeovers and an inefficient stock market, rife with insider-trading, stock market discipline clearly meant nothing. So what did Japan have? The standard economists' (mostly American economists') answer was: monitoring by the main bank.
Market and Organisation: External disciplines, internal disciplines
The foundation for this notion seems to have been the basic assumption that shirking or self-enrichment by management can only be prevented by external discipline, and since Japanese managements seem to have been relatively diligent and honest there must have been some other sort of external control - which must have been their creditors.
The argument ignores the possibility that, in countries which have community-like corporations, the effective mechanisms which impose discipline on those who manage corporations can be not external at all, but internal. Paul Krugman has recently argued that even in the Anglo-Saxon economies internal constraints on management are actually as important as external. (*2) The shift over 30 years from CEO salaries 39 times average wages to over a thousand times cannot be explained. He suggests, except by reference to a shift in social norms, from the restraints on self-enrichment which society enjoined on the "technostructure" celebrated by Galbraith in the 1960s to the "anything goes" managerial culture of today. (*3) (And game theory microeconomics, filtered through business school gurus contributed, he suggests, to this drift.)
In countries where internal controls are more obviously important, those which cannot be missed are the formal ones legislated in company law - the legally sanctioned role of unions or employee representatives in German co-determination, for example. Japan has a legally unsanctioned, but conventionally widespread system of management-union consultation "constitutionalised" in management-union contracts. It may be that the primary role of such arrangements is to ensure that the interests of workers are not neglected, but Japanese unions, for instance, (Okuma Machine Tools is a well-known example) have been known to engineer the dismissal of CEOs, not because they were bad for union members but because they were bad for "the firm."
But in firms with a "community-like" structure and managerial career patterns which produce "home-grown" top management, the most important internal controls may be entirely informal-the personal pressures of subordinates and peers on decision-takers. At a recent seminar in Japan, a corporate lawyer cited a case in which an incompetent CEO was sacked. The beginning of his downfall was a loss of confidence among the middle managers rather than among the investors who were only subsequently persuaded to add their pressure on the CEO to move on.
How do these internal controls work? First, one has to rid oneself of the simple notion that the typical organisational "organigram" with vertical lines which show who has authority over whom, who "answers" to whom, tells the whole story. Subordinates sometimes "suggest" as well as answer.There are, if you like, "capillary controls" over their immediate superiors of younger enthusiastic junior managers who have to do the detailed work of preparing the papers for important decisions their superiors have to take. (In an employment system such as Japan's, the junior managers are tomorrow's senior managers and are in muted-competition for faster-than-average promotion to senior positions.) Sometimes in Japan, there have been more formal and collective forms of this otherwise "capillary" control, when junior managers set up their own informal study groups and write memoranda for senior management remonstrating against what they consider to be strategic mistakes.
In Japan, again, an important mechanism is the Board of Directors almost entirely composed of top executives - insiders. They are often very large - up to 50 members in some firms. One reason is to give as many people as possible the career incentive of making it on to the Board. Such boards are the object of derision among many corporate governance experts - how can such unwieldy bodies make strategic decisions? Of course they do not. Generally speaking these boards merely apply a rubber-stamp at their formal meetings, the real discussions of business strategy take place in informal groups of top managers with such consultation of other managers on or off the Board as may be necessary. But the boards do play an important role as a sort of parliament of the firm, reflecting the morale, the "public opinion" of employees, providing confidence-building support, or admonitory warnings to the top executives.
The Anglo-Saxon system of external controls works to keep managers honest and efficient by threatening punishment - punishment through take-over as a result of the impersonal workings of the stock market, or punishment through dismissal by a Board of Directors, dominated by External Directors whose job is explicitly defined as representing the interests of capital-providing owners. The Japanese system of internal controls works - through face-to-face, not impersonal, arm's length relationships - by exerting moral pressure on managers' consciences.
Clearly the crucial thing is the sensitivity of those consciences. What determines that? Cultural traditions cannot be ignored - the ramifying implications of Christian doctrines of original sin and of Confucian doctrines of original good - the one seeing punitive correction as inevitable, the other suggesting that one can get by with trained consciences and moral blackmail. But clearly of the greatest importance are employment patterns and the way they structure life chances. There is no external labour market offering Japanese managers an alternative job, hopefully with better pay and stock options. For their working life the firm has been their social world. A reputation for negligence, dishonesty or incompetence would destroy the network of friendships and mutual respect on which, together with what their society counts as a "fair" pension, they depend for a satisfying retirement.
Highly mobile executive labour markets and the whole paraphernalia of external disciplines go together. So does lifetime employment and the workings of conscience. Japan still draws advantage from the latter.
February 13,2003
