Evaluating Abe's Third Arrow: How Significant are Japan's Recent Corporate Governance Reforms?

Abstract

Structural reform, the “third arrow” of the Abe administration’s policy for revitalizing the Japanese economy, centers on corporate governance reform. In recent years, Japan has adopted a Stewardship Code in the hopes of invigorating institutional investor engagement, a Corporate Governance Code recommending that Japanese firms have at least two independent directors, and amendments to the Companies Act to create a new board structure option, the so-called Company with an Audit and Supervisory Committee. In this essay, I take preliminary, impressionistic stock of these reforms. First, I comment on the voluntary “comply or explain” and menu-driven approaches adopted in these reforms. While this approach is politically expedient and avoids one-size-fits-all solutions, it has a status-quo bias, particularly if market forces are insufficient to compel Japanese firms to adopt efficient governance structures. Substantively, I suggest that board composition and enhancement of the “monitoring board” – focal points of the reform effort – are not well suited to address the problems of low profitability, cash hoarding, and loss of global market leadership afflicting Japanese firms. While the recent reform package is well intentioned and may produce some improvements at the margins, transformative change will require more fundamental changes to Japanese capitalist institutions, including most prominently the employment system, the labor market, and incentive structures within firms. Corporate governance reflects, rather than determines, a country’s variety of capitalism. Rather than focusing on details such as the number of independent directors a company should have, a bold revitalization policy would address larger questions about what type of corporate capitalism Japan needs and finds acceptable for the twenty-first century.