Corporate Governance in Japan

Abstract

The Japanese corporate governance system underwent drastic changes since the last two or three decades. Prior to the country’s financial meltdown in the 1980s, Japan’s corporate governance model was praised by many as a model worthy of imitation around the world. The admirers argued that the model provides close sharing of information between the firms and their shareholders, inter-firm cooperation, and employment stability. Such a perception has changed for at least two main reasons: (i) a string of corporate scandals — from the sales of tainted milk by Snow Brand, the hiding of product liability claims by Mitsubishi Motors, the cover up of massive stock trading losses at Daiwa Bank, and (ii) the participation of foreign investors in the Japanese stock market. Japan corporate governance is still navigating between the keiretsu type1and the market-based model. That is because Japan’s economy still bears the traces of the ‘zaibatsu’, a group of family-run businesses that emerged as early as the s century. Japanese firms were traditionally financed by big banks, which perform as supervisory boards to the managing team. Recently, Japanese firms are adopting some controversial corporate governance practices long associated with the US, such as the stock options portion of the executive remuneration, small sized boards, and independent directors. Despite the publicity orchestrated with these new elements, the reality on the ground is different. The Japanese corporate governance structure remains close to the continental European style rather than the US. That is because Japanese corporations are still either owned by big families or financed by big banks.