Historical Dynamics of the Development of the Corporate Governance in Japan

Abstract

Japan has developed a unique corporate governance structure over centuries, often in response to changes or crises in history. Recently, the loss and scandals have pushed the defects of the existing corporate governance mechanism into the spotlight. To answer whether the Japanese model will and should change, I need to understand how this system came into being and what has made a great impact on its development. Arguably, legal, political and cultural systems have promoted and shaped the Japanese model of corporate governance in particular ways. First, this essay finds that the Japanese corporate governance was historically heavily influenced by its legal origin, which has not been taken as a direct reason but an indirect reason. The courts in Civil Law countries could not resist governments' power and therefore gave politics opportunities to influence the development of the Japanese corporate governance directly. Second, the strong political forces favored financial institutions in corporate governance finance and employees during the war years and occupation but currently, these political influences are weak or have disappeared and central planning structure is discredited. It is time for Japan to make certain changes. Third, Japan has undertaken massive reforms of the corporate governance mechanism from the 1990s but it could not drop everything that is deeply rooted in its traditional culture. Hence, it is proposed that the keiretsu system and the lifetime employment should not disappear in the future albeit certain reforms are necessary in Japan. The corporate governance system in Japan has evolved over centuries, often in response to changes or crises in history. The first well-known change is World War II. Prior to the militarization of Japan in the 1930s, there were different patterns of corporate governance including broadly-held joint-stock companies, the state ownership of enterprise and a limited partnership holding company structure where family owners controlled diversified networks of publicly-quoted enterprises, run by professional management known as zaibasu. As Japan rebuilt its economy in the years following World War II, it developed a unique corporate governance structure. The Japanese model was quite distinct from the German model and the U.S. model and led to Japan becoming the second largest economy in the world by the 1980s. It was thus fashionable to ask whether other countries should be adopting Japan's model. Despite the Japanese model of corporate governance enjoyed a reputation for serving the needs in the 1980s, this ran into trouble in the early 1990s. The second important change that influenced the evolution of Japanese model of corporate governance was the economic crisis in the 1990s arising from globalization. Japan is no longer a developing country, so the old model no longer fits with environmental conditions and many of its strengths have become weaknesses in the face of global competition. The resulting loss and scandals push the defects of the existing corporate governance mechanism into the spotlight. To some observers, Japan should drop everything that characterized its unique corporate governance so that the Japanese corporate governance could become more international. The arguments advanced by these scholars and the debates they have generated are highly simulating but are largely unresolved. To answer whether the Japanese model will and should change, I need to understand how this system came into being and what has made a great impact on its development. Arguably, there are several institutional factors behind the evolution, such as legal, political and cultural systems. These historical dynamics account for the emergence and evolution of the corporate governance in Japan over time. First, LLSV (Note 1)'s argument does a good of job of establishing a correlation between legal traditions and the development of the corporate governance regime, albeit their argument becomes questionable in light of the historical evolution of corporate governance (Note 2) in Japan. Second, Mark Roe argues most prominently for the importance of political factors in the emergence of distinctive corporate governance regimes. At last but not the least, the social embeddedness (i.e. culture) is a third factor in path dependence, which determines the development of the corporate governance. In short, these historical factors are constraints, which promote or shape the corporate governance in particular ways.