Corporate Ownership and Governance Reforms in Japan - Essay Example

As corporate activity spread across the world, scholarship has gradually started to focus on institutional and functional differences. Broadly speaking, the analysis of this divergence has been conducted through how corporate governance converted and persisted. While convergence optimists claim dominance toward the U.S.-type shareholder-centered model, the ownership structure and unique characteristics of corporate ownership and governance remain significant. The persistence of this divergence is analyzed through the theory of complementarity in each corporate governance system. It is true that the global corporate governance system certainly seems to be unified both functionally and formally, despite persisting differences. However, as seen in the example of Japan in this paper, corporate ownership and governance are shaped by historical path-dependence, and the social norms of each country still play an important role in corporate governance.

The reformation of corporate ownership and governance in Japan after the collapse of the so-called bubble economy in 1990 is a prime example of corporate governance convergence and persistence. Corporate ownership in Japan had been characterized by reciprocal cross-shareholdings among corporations and banks. Also, corporate governance in Japan has a unique character where the main bank and employee interests play a central role with insider-oriented boards. As we will see in the following chapter, this structure experienced significant change after the 1990s through dissolving cross-ownership and adopting some shareholder-oriented, Anglo-American rules of governance. While these reformations can be considered as a corporate conversion caused by globalization, many Japanese corporations still retain unique governance characteristics and adopt U.S-style rules and practices, causing conflict and tension among Japanese businesses and legal practitioners.

Cross-shareholding, where a substantial block of shares is held by corporations and financial institutions, has played an important role in Japanese corporate governance. The keiretu, the Japanese corporate group that holds a small portion of shares, and the banking system have also contributed to supporting and monitoring Japanese management. Under this structure, management turnover occurs only inside a company, and public shareholders only have access to minority interests, rendering them essentially irrelevant to corporate governance.

This cross-shareholding structure underwent dramatic changes after the 1990s, as the Japanese economy experienced a long-term economic recession. Figure 1 presents the ratio of cross-owned shares divided by the total share value and the total number of shares in the market. Figure 2 presents a distribution percent of market value owned by different types of shareholders. These data indicate that cross-owned shares once held by banks or large business corporations have been largely diffused to institutional or foreign investors after the 1990s.

In Japan, cross-owned shareholders used to be in the long-term interests of firms and were part of a broader relationship of managing businesses and financial transactions. This interconnected and complementary relationship between firms and banks contributed to forming of Japanese-type corporate systems, such as stakeholder-oriented governance and long-term employment. On the other hand, institutional investors and foreign investors do not usually share these interests, as their primary motivation for holding shares is to gain a return from their equity investment. In the United States, foreign investors and institutional investors used to be associated with upsurges in shareholder activism. Thus, a simple question emerged from this corporate ownership change: does this ownership structure change mean that Japanese corporate governance converges into American style shareholder-oriented corporate governance, such as shareholder activism or outsider-oriented board structures?