The puzzling divergence of corporate law: evidence and explanations from Japan and the United States.

• Author: West, Mark D.

The Model Business Corporation Act and the modern Japanese Commercial Code were both created in 1950 and based on the Illinois Business Corporation Act of 1933. This little-known historical quirk allows an empirical test of theories of corporate law development and convergence that have recently gained prominence in the literature. Using a fifty-year historical database of nearly 30,000 corporate law data points, I find that despite globalization pressures, these corporate laws have diverged over time. I also find that the common provisions among jurisdictions appear largely to be limited to less significant enabling (non-mandatory) rules, which may further structural diversity.

The finding of divergence between the corporate laws of Japan and the United States is especially interesting given the similar economic status of the countries, their extensive interaction, and similar corporate and securities law starting points that evolution-toward-efficiency and path-dependence theories suggest would foster similar patterns of statutory development. This Article attempts to identify precisely which institutions lead to such divergence. Through an archeological study of the development of Japanese corporate law, I argue that a likely explanation for this divergence is the tendency of the Japanese system to rely on exogenous shocks to stimulate statutory change. A substantial explanation for Japan's reliance on exogenous shocks lies in Japan's institutions--particularly in those institutions that lack jurisdictional competition and contemplate a limited role for lawyers. Continued institutional differences suggest persistent corporate law divergence despite globalization pressures.

INTRODUCTION

For some researchers, the dream experiment is the study of identical twins separated at birth and raised in dramatically different environments. If the twins turn out similarly, nature may be more important than nurture. If they turn out differently, nurture may be the more dominant force.

The results of a similar experiment for corporate law could be fascinating. Imagine if a researcher could "raise" a corporate law system from infancy in two different institutional settings. Fifty years later, the researcher could check the development of the systems to determine whether corporate law is, as Robert Clark puts it in a slightly different legal context, "determined by a set of genes fixed in its infancy" or responds instead "to the shifting pressures of a changing environment." (1) Through such a study, we might gain a better understanding of one of the central debates in corporate law today: whether globalization is leading to the convergence of corporate law and governance systems, or whether national and systemic differences will result in continued diversity.

This Article identifies and conducts such a corporate law experiment. Due to a series of historical quirks, the Japanese Commercial Code and the Revised Model Business Corporation Act (the "MBCA"), on which most state corporate statutes are based, (2) are both based on the Illinois Business Corporation Act of 1933, a statute often described as the first "modern" United States corporate code. (3) I compare the development of these three corporate law sources by examining a hand-collected historical database of nearly 30,000 observations covering the period from 1950 to 2000. This database, which uses the MBCA as a baseline due to its widespread adoption and standardized use in previous studies, is the most comprehensive one assembled to date for investigating corporate law convergence. Through an analysis of these data, this Article presents and attempts to explain a corporate and comparative law puzzle of what factors influence statutory development. Although I rely particularly on the u.s.-Japan comparison for explanations, the separated-at-birth quirk suggests more widely applicable conclusions.

Three additional reasons make Japan a particularly good candidate for comparative analysis in this context. First, Japan is the world's second largest economy and perhaps the single most economically significant corporate law jurisdiction in the world. Second, the Japanese system has a relatively public revision process, and to the extent that its details are private, prominent participants in the revision process often reveal them, either in published memoirs or in interviews that I conducted from 1998 to 2000. Finally, although a considerable literature has developed regarding the political economy of various Japanese corporate governance institutions, (4) and although some of those studies place particular reliance on general principles of Japanese corporate law, (5) there is virtually no literature in English that focuses on Japanese corporate law as a body of law. This gap in the literature fuels a common misperception among many academics that law in Japan is unimportant. (6) Due at least in part to this misperception, the bulk of scholarship on the important questions of comparative corporate governance and international jurisdictional competition has proceeded with little knowledge--and a largely superficial discussion--of the corporate law that governs the affairs of many of the world's largest and most powerful corporations. (7) This Article attempts to narrow that gap while telling--for the first time--the archaeological story of the evolution of Japanese corporate law. (8)

Although some scholars have argued that corporate law on the books is unimportant, (9) a detailed analysis of corporate law development may nevertheless yield important insights. There seems to be emerging a general consensus, based largely on recent empirical studies by financial economists, that corporate law plays an important role in the development of corporate governance structures, as suggested by the close correlation between capital market success and legal system characteristics, (10) The triviality thesis also may not apply at all to developing economies, (11) a label that applies to much of the history of Japan discussed herein. Recent empirical work further suggests that corporate law can add value even in developed economies, (12) and law in a civil regime such as Japan may play a more important, less "trivial" role.

Moreover, proponents of the triviality thesis have yet to articulate a theory of corporate law that encompasses the subject of this Article: change. If corporate law does not matter, why does it change? A response that focuses on interest groups and political economy merely raises a further question: Why has so much energy been expended over so many years in an effort to change that which is merely trivial? Without a theory that accounts for corporate law change, the phenomena discussed in this Article may present a greater challenge to the triviality thesis than the triviality thesis presents to the subject of this Article.

My argument has three primary components. First, this Article adds empirical evidence to the comparative corporate governance debate by showing that despite a growing literature on the convergence of corporate law and governance structures, (13) the corporate law regimes of Japan and the United States appear to have diverged, not converged, over time. Divergence is an especially interesting discovery in this context, as it appears to have occurred despite the similarities between the two largest economies in the world, despite the high level of interaction between the countries, and despite similar corporate and securities regulation (14) starting points--at least as of 1950--that might be expected to foster path-dependent constraints. Although Japan and the United States of course have differing institutional structures, if there is one place that theory would predict statutory convergence, this might be it. Convergence has not occurred, however. In fact, the evidence tentatively suggests that to the limited extent that common provisions exist, the provisions are not mandatory rules but enabling rules, which may lead to even further diversity in corporate structures. The limited convergence of corporate structures. The limited convergence of such diversity-facilitating rules helps elucidate recent claims in the theoretical literature that convergence of rules may not necessarily lead to convergence of corporate structures. (15)

Second, one observable phenomenon that fits the divergence data is the reliance of the Japanese system on exogenous shocks. Establishing a bright line between the endogenous and the exogenous is difficult. (16) In this Article, I use "exogenous" to refer to such factors as scandal, international competition, and foreign pressure, each of which is not directly internally generated. Japan relies on each of these factors to jump-start its legal development. By contrast, changes in U.S. corporate legal regimes tend to result from a combination of stimuli. Some U.S. stimuli are exogenous, such as scandal and reaction to judicial decisions. Others are endogenous, such as interest group pressures and state competition for charters, neither of which necessarily requires the "Jump-start" of exogenous shock. Changes enacted in direct response to exogenous stimuli tend to occur on different corporate law provisions than those enacted in response to endogenous factors. The reliance on exogenous stimuli and the exclusion of other factors that may influence policy may thus lead to different patterns of corporate law development (but not necessarily fewer corporate law modifications) despite similar starting points and also suggests continued divergence despite increasing internationalization pressures.

Third and finally, I find that a potential explanation for the differing degrees to which U.S. and Japanese corporate legal regimes rely on exogenous shocks can be found in the institutions that create regulatory competition among jurisdictions. Systems in which the state creates a monopoly for corporate charters are more...