Changes in the macroeconomic environment, combined with rapid advances in deregulation and institutional reforms since the second half of the 1990s, are causing large-scale shifts in the governance structures of Japanese corporations. In light of these developments, RIETI and the Center for Economic Policy Research (CEPR), one of Europe's leading economic research institutions, are hosting the RIETI-CEPR Conference on September 13 and 14, 2005. The purpose of the conference is to better understand the state of Japan's corporate governance system, to assess changes to this system, and to examine the future direction of reform based on a comparison with EU countries. Ahead of the conference, RIETI interviewed Professor Colin Mayer, one of the keynote speakers, about his current research, factors behind the use of codes of conduct in Europe, and the issue of investor protection for Japanese corporations.
Professor Mayer is Peter Moores Professor of Management Studies at the Saïd Business School and director of the Oxford Financial Research Centre, University of Oxford. Professor Mayer has written widely on corporate finance, taxation and corporate governance, and on the regulation of financial markets. He was previously director of the European Science Foundation Network in Financial Markets and the Financial Economics Programme of the Centre for Economic Policy Research (CEPR). In addition to having held visiting fellowships at Stanford, Massachusetts Institute of Technology (MIT) and Brussels University (ULB), he is chairman of Oxford Economic Research Associates (OXERA). He has worked at HM Treasury (UK), the City University Business School, where he was director of the Centre for the Study of Financial Institutions, and at Warwick University, where he was professor of Economics and Finance. Professor Mayer's major publications include "Financing the New Economy: Financial Institutions and Corporate Governance," Information Economics and Policy; and "Governance as a Source Managerial Disciplining," Journal of Applied Corporate Finance, 2001.
RIETI: Please tell us about your current research.
Mayer: I am currently engaged in four major research projects. The first is an analysis of the evolution of the ownership and control of firms since the end of the 19th century. This study looks at how capital markets and corporate ownership have changed over a one hundred year period. It contrasts developments in Japan, Germany, the UK and the U.S. We are particularly interested in how financial markets developed in the absence of strong investor protection.
The second project is on corporate governance and the mobility of firms between different legal jurisdictions. In the U.S., firms are able to choose their state of incorporation. In Europe, there have been a number of legal judgments that have emphasized the rights of companies to determine their country of incorporation irrespective of where they undertake their activities. This is encouraging competition between countries in legal systems and regulation, and it has raised questions about the merits or deficiencies in such competition.
The third area of research concerns foreign direct investment and the relevance of foreign ownership to the activities in which firms are engaged. I am particularly interested in whether foreign ownership affects the investment behavior of firms. There is one view that regards globalization as injecting foreign capital into firms to the benefit of domestic economies. There is another that suggests that foreign ownership makes domestic economies more vulnerable to withdrawal of capital during adverse economic conditions. My co-authors and I are trying to unravel these contrasting views.
The fourth area of research is on the financing of firms. It is well known that the main source of finance used by companies is their own internal capital from profits. However, during periods of substantial new investment and during periods of financial difficulties, firms raise substantial amounts of external finance. The question that arises is in what form do firms raise external finance and what role do stock markets play in meeting the financing needs of firms.
RIETI: In the last couple of years, the EU and many European countries have developed new corporate governance codes such as the Combined Code in the UK and the Cromme Code in Germany. Why did European reformers opt for code-writing instead of imposing strict rules like the Sarbanes-Oxley Act?
Mayer: The importance of codes in Europe stems from two factors. The first is that, while in the U.S., shareholders' rights are typically upheld through the courts, this is less prevalent in Europe. Instead, there is a greater reliance on companies abiding by codes of conduct that, if they fail to adhere to, may result in their exclusion from capital markets in the future. Second, there is a greater diversity in ownership structures in Europe that makes the imposition of common legal rules difficult. An example of this is the problem that the European Commission encountered in introducing a takeover directive that imposed common rules for conducting takeovers in Europe. Governance codes, particularly those of the "comply or explain" form, permit of a greater degree of variety of conduct than laws.
RIETI: In your paper, "The Origins of the German Corporation - Finance, Ownership and Control," you analyze the financing and ownership of German corporations. Given the similarities in ownership structure between German and Japanese corporations, what measures Japan can take to strengthen investor protection?
Mayer: While there are some similarities in the structure of German and Japanese corporate sectors, and while they have common origins, the similarities should not be overstated. The ownership and financing of firms is quite different. The size of shareholdings, the nature of shareholdings, and in particular the role of families is very different between the two countries. And while both Germany and Japan are described as bank-oriented financial systems, their differences are as pronounced as their similarities. For example, German banks have played a much more important role in the functioning of stock markets than in the direct financing of firms, which has been an important feature of Japan.
Care should therefore be taken in trying to draw conclusions about the relevance of policies to protect investors in Germany for those in Japan. A critical question that Japan needs to address as it moves away from its traditional system of bank monitoring is who will play the main monitoring role of companies in the future that banks have played in the past. Will it, as it has been in the UK and U.S., other financial institutions such as pension funds and life insurance firms? If so, is it envisaged that a takeover market will emerge, as exists in the UK and U.S., to discipline bad management and restructure poorly performing firms. Or are large blocks expected to accumulate in the hands of individual and family investors as they have done in many Continental European and Far Eastern countries? Or is it the case that banks will be expected to play the type of custodianship function that they perform in Germany? Identifying who will be performing active corporate governance is the critical issue that Japan will need to address going forward.
Interview conducted by Takako Kimura, online editor, on September 8, 2005
