Creative Norm Destruction: The Evolution of Nonlegal Rules in Japanese Corporate Governance

Abstract

This paper analyzes the origins, persistence, and current evolution of a series of non-legal rules (or “norms”) that have played an important role in Japanese corporate governance. The four central features of the governance environment examined here include: 1) the main bank system, in which banks voluntarily restructure loans to some distressed borrowers, 2) a social distaste for hostile takeovers, 3) implicit promises of employment stability, and 4) belief systems about the proper role and structure of the board of directors. I show that, despite virtually ubiquitous claims to the contrary, these norms do not enjoy a long history of practice in Japan, but rather emerged only in the immediate postwar period. I hypothesize that they emerged for two reasons: First, they served as a low-cost substitute for a troubled formal institutional environment beset by the “transplant effect” that imperils legal reform in transition economies today. Second, they provided private benefits to the small number of interest groups that emerged intact from World War II. The flow of private benefits to norm adherents explains the persistence of the norms despite clear evidence of their inefficiency over the past decade. I demonstrate that current models of norm reform, which emphasize the role of exogenous shocks, the workings of norm entrepreneurs, and increased information, explain why the norms of Japanese corporate governance are currently evolving. Finally, extrapolating from Japan’s experience, I suggest how norm analysis can contribute to the two most pressing questions in comparative corporate governance today: whether law matters to corporate governance, and whether diverse systems of corporate governance are converging toward the AngloAmerican model. As to both questions, I suggest that closer attention to norms reveals shortcomings in the existing literature. * Fuyo Professor of Law and Director, Center for Japanese Legal Studies, Columbia Law School. This paper was prepared for a symposium on Norms and Corporate Law at the University of Pennsylvania School of Law, December 8-9, 2000. The paper grew out of a series of interviews I held in Tokyo with approximately 25 government officials, lawyers, investment bankers, and corporate managers in June of 2000. Since several interviewees requested anonymity, I have cited to my interview transcripts without disclosing the identity of the interviewee. Interested (or skeptical) readers may review redacted transcripts upon request. I owe my interviewees a large debt of gratitude. Prior drafts were improved by comments from Robert Ellickson, Hugh Patrick, Mark West, my symposium commentator Reinier Kraakman, and symposium or workshop participants at Columbia, Vanderbilt, and the University of Pennsylvania Law Schools. I also benefited from discussions with Melvin Eisenberg.