Research Handbooks in Corporate Law and Governance series
Edited by Jennifer G. Hill and Randall S. Thomas
Chapter 25: The future of Japanese corporate governance: Japan’s internal governance and development of Japanese-style external governance through engagement
Many Western observers, especially investors, have expressed uneasiness about the way Japanese public companies are governed. For these observers, shareholders are the company’s owners. Japanese public companies are heretical because they do not appear to be run for the interests of their shareholders, but rather for the interests of their managers and employees. The chronically low level of returns on equity in Japanese companies is taken as evidence for the scant concern that management has for shareholders’ interests. Consequently, Western observers call for reform. However, there is a puzzle to solve before we hastily take any definitive action. We need to first ask ourselves why Japanese public companies are run differently from the Western standard. Since many Japanese public companies have existed for half a century, or even longer, and have been successful, it is not rational to assume that they have been wrong since their inception. Considering their success, there must be some valid reasons why Japanese public companies are governed the way they are. Indeed, until the mid-1980s—just before the period of the asset-inflation bubble—Japanese corporate governance seems to have worked well. What went wrong after that? Will we need a complete revamping of the system? Where is Japanese corporate governance headed? Can we keep the essential elements of Japanese corporate governance while fixing other parts to strengthen it? These are the questions that are the focus of this chapter.
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