Understanding the Development of Japanese Companies: Redesigning corporate governance arrangements after the crisis

         
Author Name MIYAJIMA Hideaki  (Faculty Fellow, RIETI)
Creation Date/NO. March 2011 11-P-009
Research Project The Frontier of Corporate Governance Analysis: Evolution of the corporate system in Japan and the impact of the world financial crisis
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Abstract

The Lehman crisis, which began in September 2008, provided a crucial opportunity to reconsider deregulations and the increasing role of capital markets, which have advanced for three decades since the early 1980s. Excessive capital market pressure was cited as an issue. The criticisms that increasing the number of foreign investors encouraged shortsighted corporate management and that excessive dividends and compensation are paid at the expense of employment are often voiced. On the other hand, some are calling for a series of institutional reforms, including the prohibition of listed subsidiaries, the mandatory introduction of outside directors, and the elimination of cross shareholdings, claiming that delays by Japanese companies in adopting international corporate governance standards are prompting foreign investors to avoid the Japanese market. Neither argument is supported by the accurate recognition of the current situation or sufficient analysis of the effects of institutional changes. To redesign corporate governance arrangements following Lehman’s failure, we would need to keenly understand what factors have changed at Japanese companies following the banking crisis, to what extent the companies have changed, and what impact Lehman’s failure has had on the development of Japanese companies. Our challenge in this paper is to analyze changes in the corporate governance of Japanese companies after the banking crisis as comprehensively as possible, based on an awareness of the challenges. Section 2 presents an overview of the development of corporate governance arrangements in Japan. In section 3, we show how to understand corporate governance in Japan after the banking crisis, focusing on diversified and hybrid corporate governance arrangements. Section 4 analyzes the relationship between changes in corporate governance and organization architecture, and corporate behavior and performance. In section 5, we present our hypothetical understanding about the costs associated with the hybrid corporate governance arrangements of Japanese companies in recent years. Section 6 describes an agenda for redesigning corporate government arrangements after the crisis.