Why do companies exist in society? In other words, what function should companies fulfill in society?
I am sure there are many views on this issue. But if we simplify the matter to the function of companies, I believe that society tolerates the existence of companies because they fulfill the function of utilizing the limited resources in society in the most effective way possible and provide society with wealth. In other words, if this is not done effectively, then companies are not needed. It is indeed because of their usefulness in creating wealth through the most effective utilization of limited resources that companies are allowed to exist in society.
If this is the case, the issue of corporate governance - how to guarantee the governance of companies, which have such a function - can be put into simpler terms. In other words, how should we govern corporations as organizations that guarantee a continuous input of wealth into society by putting together the management resources it is given in the most effective way, while never losing to the competition?
Second, if capital is the most basic component of corporate activity, I believe that corporate governance under capitalism exists with the effectiveness of capital as an axis. In this age of globalization, so long as we are talking about capitalist corporate activity, some form of international coordination is needed in accounting and trading rules. From this perspective, some fundamentals of corporate governance are, in a sense, held in common internationally. In other words, I feel that a universal basic framework under which a governance system is to supervise management's execution of corporate activities. However, how each country adopts this scheme may differ somewhat depending on such matters as that nation's unique culture, commercial code and business practices, but I believe the basic idea is the same.
For example, the role of an independent board member within the executive board can be highly universal within the corporate governance framework. However, when it comes to the issue of whether independent members should comprise the majority of the board, there is sufficient basis for the argument that this is not necessary. For example, when we think of Japanese culture, it is very possible for corporate governance to be effective even where there is only one independent board member, if that person is highly respected. In other words, I think it is easier for individual countries to embrace the corporate governance system if specifics regarding corporate organization are appropriately changed to meet the circumstances of each nation. I feel it is difficult to accept the argument that a very rigid framework should be introduced unilaterally worldwide.
In Japan's case, the concept of corporate governance was introduced less than a decade ago, and it is still in the developing stage. Therefore, it may seem that we are now in the process of gradually creating a style that fits Japan. However, as such moves continue for three years, five years, 10 years, the foundations of corporate governance themselves can greatly change. That is what is happening in Japan today.
But we have not yet reached the stage where we can present one clear model for Japanese-style corporate governance. The reality is that for most corporate managers the new concept of corporate governance is not exactly pleasant, and they are reluctant to accept it because they have a great aversion to having their actions supervised and monitored.
I think the current trend in Japan lacks one thing to make it understood that corporate governance is something necessary and something corporate managers must accept. That is, there is not much shareholder pressure on management. In other words, Japan's institutional investors have not yet reached the stage where they place weight on corporate governance when making investment decisions, or use it as a means to ensure the safety of their investments. Company management is gradually beginning to deal with the issue of corporate governance. If institutional and other investors show greater awareness, corporate governance in Japan has the potential to progress in leaps and bounds.
March 3,2003
* This text is an abridged version of a lecture given at the RIETI policy seminar "Corporate Governance from an International Perspective: Diversity or Convergence," held on January 10, 2003 at the United Nations University in Tokyo. The event was co-sponsored Japan Association of Corporate Executives and the Japan Association of Corporate Directors.
