Japanese Corporate Governance Research Articles

The role of Japanese corporate governance features in explaining rating differences between global and Japanese rating agencies

Many Japanese bond issuers believe that global credit rating agencies (CRAs)—Moody's and S&P—do not consider the unique corporate governance structure in Japan and assign lower credit ratings even though the “main bank” relationship in Japan can significantly reduce the default risk of these companies. Using 5,814 rated corporate bonds issued by 558 non-financial firms in Japan from 2003 to 2021, we find that local CRAs (R&I and JCR) weigh unique Japanese corporate governance features more heavily and assign higher ratings to Japanese corporate bonds relative to global CRAs. Our results further suggest that the degree of rating differences between local and global CRAs for individual issuers results from systematically different assessments of company-specific risk by these CRAs. Our data also reveal that the importance of main bank ties in Japanese corporate governance remains intact in more recent years, contrary to previous findings.

Independent Directors and Team Production in Japanese Corporate Governance

AbstractIndependent directors (IDs) in listed Japanese companies have gradually increased with the transplant of the Western model of the monitoring board. In practice, however, IDs act more like the mediating hierarch in team production theory than the agent of the shareholders, albeit with a number of differences from Blair and Stout’s seminal model. Japanese IDs mediate formally and informally, resolving vertical disputes between groups of executives as they contest control of the company. Given the norm of lifetime employment, such vertical disputes are common in Japanese companies and are economically significant, since failure to resolve them can result in destruction of firm-specific human capital. The article explores the scope for mediating hierarchy in Japanese law and corporate governance practice, then develops three case-studies which highlight the role played by IDs. Their practice is shaped by and supports social norms that emphasize the importance of continuity in team production.

Unnatural selection of outside directors: Consequences of Japanese corporate governance reforms

AbstractWe examine how Japanese listed companies increase the number of outside directors to comply with corporate governance reforms. We find that, after the reforms, there has been an increase in the number of cases in which former company auditors (kansayaku) become outside directors in the same company. This trend is more pronounced for hitherto noncompliant firms with insufficient outside directors before the reforms. Moreover, the firms appointing company auditors as outside directors tend to change their corporate structures to maintain existing practices and minimize compliance costs. Our findings imply that Japanese reforms have increased the unnatural selection of outside directors.

The dawn of Japanese corporate governance in the Yamato era

Background: The subject of the study is Japanese corporate governance during the formation of the centralised Yamato state and the development of its specific features. Little has been written about the structures and characteristics of governance in ancient Japan. Thus, the article may contribute to reducing the gap that exists in this field in the Polish literature.
 Research purpose: The aim is to try to show Japanese corporate governance in Yamato (until 645) and to identify those unique features and their roots that have not lost their relevance to this day. The paper verifies the thesis that the model of corporate governance developed in the Yamato period is a product of uji traditions and customs, as well as the hybridisation of culture and rights of the Japanese clans and Chinese Empire.
 Methods: The analysis is carried out at macro and microeconomic levels based on a review of the literature on the history of Japan and corporate governance. The most important political, social, and economic events in the early Yamato are presented in building the centralised state, its governance, control, and incentive structures. The uji, the be, and the uji-kabane system are shown as mechanisms of governance.
 Conclusions: The analysis confirmed the thesis that the Yamato corporate governance model is the result of the hybridisation of cultures and the laws of Yamato and China and that it created the foundations of Japan’s unique contemporary model of corporate governance

Introducing sustainability into the Japanese corporate governance: the shift to the “new capitalism” or the continued gradual transformation?

Introducing sustainability into the Japanese corporate governance: the shift to the “new capitalism” or the continued gradual transformation?

The Future of Japanese Corporate Governance: Participation, Sustainability, and Technology

The Future of Japanese Corporate Governance: Participation, Sustainability, and Technology

ダイナミック・ケイパビリティ・ベースのコーポレートガバナンス ― 日本版コーポレートガバナンス・コードにおける取締役の役割に着目して ―

ダイナミック・ケイパビリティ・ベースのコーポレートガバナンス ― 日本版コーポレートガバナンス・コードにおける取締役の役割に着目して ―

Corporate Social Responsibility, Firm Value and Corporate Governance Code Revisions: The Asian Evidence*

The present study examines the relationship between corporate social responsibility (CSR) and firm value, and the effects of corporate governance code revisions on the relationship. We examine this relationship for: (i) a high‐income country, Japan; (ii) middle‐income countries China, Malaysia and Thailand; and (iii) low‐income countries India and Indonesia. We use the Heckman two‐stage sample selection bias approach for the empirical analysis. We find that Japanese stakeholder CSR and environmental CSR have a smaller positive effect on firm value compared to the middle‐income countries, but we do not find any statistically significant association for the low‐income countries. In addition, we find that only Japanese corporate governance code revisions significantly contribute to the positive relationship between CSR and firm value, which concurs with the new recommendations documented in the revised codes of corporate governance. The present study reveals that foreign major shareholders matter to the value creation of CSR in Japan and the middle‐income countries of China, Malaysia and Thailand.

Stewardship Activities and Agency Problems after Japanese Corporate Governance Reform

Japanese corporate governance reform is implemented by an introduction of corporate governance code and stewardship code, in which stewardship activities by institutional investors play an important role in terms of reduction of agency cost. In this report, stewardship activities are focused based upon the idea that agency theory, newly introduced as principal cost theory, could support a conceptual framework of governance reform and analyzed that as an important function for agency cost reduction. In order to make governance reform more effective, I make several proposals, cost sharing of stewardship activities by asset owners and full disclosure of those activities based on investment strategies, such as actively managed strategies and/or passively managed ones, for stewardship activities of both engagement and proxy voting, especially by index fund managers.

The board as an example of Japanese corporate governance system hybridization: An outline of the problem

The board as an example of Japanese corporate governance system hybridization: An outline of the problem

Unnatural Selection of Outside Directors: Consequences of Japanese Corporate Governance Reforms

This study focuses on a rapid increase in outside directors in Japanese listed and examines whether firm compliance with the corporate governance reforms is associated with enhanced effectiveness of corporate governance. We find that, after implementation of the governance reforms, there is an increase in cases in which the former company auditors (Kansayaku) become new outside directors for the same company. We also report that non-compliant firms (those that did not meet the reform suggestions to appoint more than one outside director before the implementation) are more likely to appoint former company auditors as new outside directors. Moreover, we find no evidence that the appointment of company auditors as outside directors among non-compliant firms relates to future performance. Overall, our findings imply that the Japanese CG reforms increase the unnatural selection of outside directors and that non-compliant firms are more likely to comply in form than in substance.

COVID-19 and Japanese shareholder activism: brief respite for Japan’s self-healing concrete

Extrapolating from modern international understanding of corporate Japan’s distinct form of managerial capitalism, we elaborate on the growing momentum of shareholder activism in Japan leading up to the COVID-19 health crisis, so as to inform the subsequent discussion on the relevant primary considerations that belie the future direction of shareholder activism in Japan post-COVID-19. On an initial logical extrapolation, it appears probable that COVID-19 could mark the peak of Japanese activism. However, it is crucial to acknowledge that the success of Japan’s managerial capitalism have also declined, which poses a question on to which direction Japanese corporate governance may be shifting. Finally, we point out how corporate Japan’s impeding market developments will provide a useful case-study for global financial discourse.

What Does Japanese Corporate Governance Reform Mean?

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.

The evolution of the monitoring board in Japan: how the board performs monitoring function in Japanese corporate governance

PurposeThe purpose of this paper is to trace a legal evolution of the monitoring board and to reveal what brought the evolution and what is expected to emerge. The paper points to unique complementarities in Japanese corporate governance institutions and norms which will affect how the monitoring board performs its functions.Design/Methodology/ApproachAnalysis is based on texts on corporate governance legislations in Japan from the revision of Commercial Code in 1950 to the revision of Companies Act in 2014. Other sources include Tokyo Stock Exchange regulations, White Paper on Corporate Governance and other academic literatures on Japanese corporate governance.FindingsChanges of non-legal institutions and norms in Japanese corporate governance necessitated legal reforms toward the monitoring board. Persisting institutions and norms, in particular lifetime employment, influences how the monitoring board performs its functions in Japan.Originality/ValueThis paper explains how the evolution of the monitoring board in Japan emerged and what will cause different expected functions of the monitoring board in Japan and other jurisdictions.

Main bank relationship and accounting conservatism: evidence from Japan

In a market-oriented economy like the USA, the process of monitoring through lending mitigates lenders’ demand for accounting conservatism. Japanese corporate governance is characterized as a bank-dominated or relationship-oriented system. Under bank-dominated systems, main banks are expected to be effective monitors. In our model, main banks play the role of reducing the lenders’ demand for accounting conservatism by reducing information asymmetry. We find that main banks can reduce the demand for accounting conservatism. Our findings help understand accounting conservatism vis-a-vis agency problems. We provide empirical evidence to contribute to literature on banking, specifically to fields such as relationship banking.

Corporate Ownership and Governance Reforms in Japan: Influence of Globalization and U.S. Practice

This paper is a brief summary and discussion on the recent reforms of Japanese corporations in regards to ownership and board structure. The paper will examine the dissolving of traditional ownership models and legal reform of board structure through reviewing its influence such as recent shareholder activism, hostile takeover, the latest corporate scandal, and further reforms in the regulative environment of Japanese corporate governance in the past few years. Above all, the paper will delve into the conflicts and tensions created by the adoption of US-style shareholder activism or board structures in the corporate world among the Japanese business and legal practices in both country and firm level. The paper provides an analysis from both legal and social perspective, with a view of company as a decision-making group, and focuses on group cohesiveness of Japanese company derived from its ownership and employment structure. The analysis of recent ownership and board reform suggests that while ownership and board structure certainly converge toward Anglo-American style through the reform, the influence of the reforms on corporate governance is still limited or varies by firms, due to the high cohesiveness and conformity of Japanese companies derived from strong ties among their constituencies.

IPO underpricing and ownership monitoring in Japan

We examine how Japanese corporate governance characteristics affect IPO underpricing. The results show that parent ownership does not affect underpricing in IPO firms. We also find that greater CEO ownership is expected to cause principal–principal conflicts and to exacerbate underpricing in IPO firms. Our empirical results also reveal that bank ties mitigate underpricing and function as effective monitoring mechanisms. Furthermore, the positive correlation between CEO ownership and IPO firm underpricing is moderated by the parent–subsidiary relationship. Finally, independent venture capital firms do not mitigate underpricing of IPO firms with parent–subsidiary relationships.

Diversity in Japanese Companies’ Boardroom: Sign of Shifts in the Japanese Model or Corporate Governance Reform as a Fashion?

This paper discusses the gender diversity of the board in Japanese public companies. Its implications are analysed against the background of the recent reform of corporate governance in Japan. During the post-war period, the Japanese corporation has been the “insiders’ community”: the employees committed to a single company for almost throughout their career, and the board members were chosen from senior employees. Recently, however, the focus has shifted to changing the board from executive organ to monitoring mechanism, facilitated by the reform to increase independent (outside) directors. The female participation in the board could be another driver for the orientation towards the monitoring board, radically changing the traditional “insiders’ community.” Alternatively, in a company that still appoints most board members from among the senior employees, the increased female directors could serve as the role model for female employees, facilitating the gender diversity in the workplace, but reforming the board structure only gradually.

Auditors in the Japanese model of corporate governance

Japanese auditors have a unique position and power that varies depending on the governance structure chosen by corporations. In Japan, large corporations can have one of three governance structures: a board of statutory auditors that cooperates with the board of directors, a board of directors that has three committees (audit, nomination and remuneration) and a board of directors with a supervisory committee. The research problem assessed in this paper is how the relative position, power and obligations of auditors varies in each of the three corporate governance structures, taking account of the hierarchical nature of corporate culture in Japan. The paper begins by explaining how the introduction of new laws led to auditors acquiring specialist qualifications and playing a more important role in corporations. It then analyses the provisions of relevant legal acts and the literature on Japanese corporate governance and auditors. The position and power of auditors in each structure is assessed, and attention is paid to the difficulties encoun-tered by the adoption of U.S.-style regulations in this area. The comparative analysis shows that in each of these structures there has been a strengthening of the status of auditors, which has increased their influence. The paper contributes to a reduction of the cognitive gap existing in the Polish literature concerning Japa-nese auditors.

Japan’s Ambivalent Pursuit of Shareholder Capitalism

Could international financial capital impose shareholder sovereignty on Japan, the ultimate bastion of stakeholder capitalism? As the Japanese economy descended from boom to bust in the early 1990s, government and industry leaders called for a decisive move toward US-style shareholder capitalism, and increasing foreign share ownership exerted strong pressure to adapt corporate governance practices to Anglo-American norms. In practice, however, the government gave firms more options for restructuring but did not make them more beholden to shareholders. Firms on their part favored superficial adjustments to prop up share prices rather than fundamental changes, because they sought to preserve the strengths of their traditional business models. This article explains how marketplace developments, domestic political dynamics, and corporate strategies combined to produce the distinctive pattern of Japanese corporate governance reforms since the 1990s. It concludes with an assessment of the consequences of these reforms for managers, workers, shareholders, and the general public.