What Does Japanese Corporate Governance Reform Mean?

Abstract

In Japan, since 2013, Japanese corporate governance reform has been developed by Japanese Government initiatives. This paper provides a theoretical framework for understanding what Japanese corporate governance reform means for Japanese companies by an application of agency theory. Corporate governance is a structure which determines how shareholders delegate corporate control to managers and monitor managers’ business executions. Debates on corporate governance finally end in how we should resolve agency problems which decide what is the best measures to maximize corporate value by reducing agency costs deriving from an agency relationship between shareholders and managers. New Japanese reform further develops previously introduced measures for improving corporate governance in order to reduce agency costs. Now some changes in corporate financial results are recognized in stewardship reports by institutional investors. This reform is facilitated by an introduction of Japanese Stewardship Code and leveraged by a collaboration between Corporate Governance Code and Japanese Stewardship Code to seek a long-term corporate growth. Key to success to a corporate governance reform is a synchronized collaboration between these two codes, which puts burdens of execution on institutional investors who take stewardship activities effectuating a governance reform. Agency theory focused on principal costs provides us with interpretation of the reform and implication of possible changes in corporate governance and their solutions. One possible hint for solutions is disclosure of stewardship activities including engagement activities by institutional investors.