A Perspective for Corporate Governance Reforms: Toward fine tuning the hybrid form of governance and overcoming a low governance equilibrium

Author Name MIYAJIMA Hideaki  (Faculty Fellow, RIETI)
Creation Date/NO. June 2015 15-P-011
Research Project Frontiers of Analysis on Corporate Governance: Growth, value creation and corporate governance
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There are increasing concerns about corporate governance in Japan as a part of the growth strategy of Abenomics. Corporate governance reform is expected to improve the financial policy of firms as well as corporate performance, which, in turn, brings about a more active capital market, dynamic corporate financing, and increasing mergers and acquisitions through attracting foreign capital. The Companies Act was amended last year (2014) to encourage the introduction of independent outside directors. Japan's Stewardship Code was already implemented to encourage the engagement of institutional investors with firms as well as the mutual communication between them. In June 2015, Japan's Corporate Governance Code was also implemented, and listed firms are busily considering their policy's correspondence with the code. This paper highlights the focal points on the current corporate governance reforms, based on the recent empirical works. First, I summarize the changing corporate governance arrangement since the banking crisis in 1997 from international perspectives. I suggest that the crucial challenge of Japanese firms in their corporate governance reform is to rebalance stakeholders' interests in the direction toward strongly enhancing the interest of shareholders, keeping the institutional arrangements to facilitate the commitment of employees to firms. Second, I summarize the relationship between the improvements of corporate governance and performance, based on existing literature. In particular, I overview the mutual relationship between the ownership structure, board reform, corporate policies, and their performance, considering the reverse causality. Lastly, I suggest perspectives on current corporate governance reforms, mainly focusing on the role of institutional investors, the regulation of cross-shareholding, and the design of boards.