The Evolution of Corporate Governance in Japan: the Continuing Relevance of Berle and Means

• Publication year: 2013

SEATTLE UNIVERSITY LAW REVIEWVolume 37, No. 2, Winter 2014

The Evolution of Corporate Governance in Japan: The Continuing Relevance of Berle and Means

Takaya Seki & Thomas Clarke(fn*)

I. Introduction ...................................................................................... 717

II. The Changing Roles of Boards and Directors in Japan .................... 718

III. The Impact of the Changing Structure of Shareholdings in Japanese Corporations ......................................................................................... 725

IV. Current Issues of Corporate Governance in Japan .......................... 729

V. Recent Government Initiatives to Revise Company Law ................. 733

VI. The Underlying Concept of Corporate Governance in Japan ......... 736

VII. The Continuing Relevance of Berle and Means ............................ 739

VIII. The Ongoing Governance Debate in Japan .................................. 743

IX. Conclusion ..................................................................................... 746

I. INTRODUCTION

The evolution of corporate governance in Japan towards international standards continues, though at a gradual pace that often concerns outsiders.(fn1) The substance of Japanese corporate governance is often questioned due to a lack of understanding of the unique elements of the Japanese institutional system. Japanese companies are under a sustained assault from overseas investors to introduce a greater number of independent directors on boards, improve accountability, and enhance trans-parency.(fn2) The majority of Japanese companies have taken what they regard as significant steps in this direction of accountability. In Japan, however, there is a different conception of the role of the board, the function of corporate governance, and the purpose of the corporation.(fn3) This Article will argue that significant changes in these enduring Japanese corporate values and practices can only be accomplished if a more convincing theory and model of the corporation is proposed. In important respects, the contemporary evolution of corporate governance in Japan reflects the fundamental dilemmas inherent in defining corporate purpose first recognized by Berle and Means.

II. THE CHANGING ROLES OF BOARDS AND DIRECTORS IN JAPAN

External perceptions of Japanese corporate governance often focus on a lack of board independence with few outside directors, insufficient disclosure, prevalent cross-shareholdings, and persistent instances of corporate fraud and scandals. On the contrary, the duties of directors were tested in Japan as the structure of share ownership changed and governance reforms were introduced: significant corporate disclosure is now occurring and independent directors are being appointed. The future of corporate governance in Japan lies in how the relationships between companies and shareholders develop, the role of directors and investors are conceived, and the ultimate purpose of the corporation defined.

In addition to full board members, Japanese companies also appoint kansayakus who are Audit and Supervisory Board Members performing a role similar to audit committees and are becoming more outspoken.(fn4) Table 1 shows a comparison of the composition of board membership in companies from the Tokyo Stock Exchange in the Nikkei 225 Index between 1998 and 2013.(fn5) While the number of directors is decreasing, the proportion of outside directors is increasing, as is the number of independent outside kansayakus. This is a reflection of the changing role of boards in Japan, which were traditionally regarded as a managerial bodies rather than supervisory organs.

Table 1: Board Membership of Nikkei 225 Index(fn6)

	1998	2001	2004	2007	2010	2013
Directors	25.1	1 7 .9	13.6	12.1	11.4	10.9
Of Whom Are Outside Directors	0.2	0.7	1.0	1.4	1.9	2.3
Kansayakus	4.2	4.2	4.1	4.3	4.3	4.2
Of Whom Are Outside Kansayakus	1.3	2.1	2.3	2.5	2.6	2.6
Ratio of Outside Board Members (%)	5.3	12.9	18.5	24.3	28.7	32.5

Table 2: Professional Background of Outside Directors(fn7)

	Directors/Kansayakus
From Other Companies	62.6 %
Attorney-at-Law	16.1%
CPA / Tax Accountant	13.6%
Academic and Others	7.7%
From Major Shareholders	19.2%
From Banks	11.1%
From Government Bureaus	1.9%

While Japanese company boards remain heavily dominated by inside executive directors, the number of outside directors is increasing in a process of professionalization. As Table 2 reveals, Japanese companies are assembling significant numbers of lawyers, accountants, and academics as board members, most of whom are drawn from the ranks of major shareholders, banks, and government bureaus. A critical mass of external directors is gathering, who are reinforced by kansayakus. In addition, the kansayakus, while remaining non-voting board members, are becoming increasingly active and visible.

To analyze the recent development of corporate governance in Japan, we would like to explore the series of amendments to Japanese commercial law by focusing on the revision of the roles of directors and kansayakus.(fn8) Japanese commercial law was first introduced at the end of the nineteenth century and was modeled after German stock corporation law. The underlying concepts of Japanese corporate law are similar to those in other major industrial economies, including the independence and separation implicit in corporate personality. Shareholders own the securitized assets of the company in shares and have a residual claim in the company. Directors are appointed by the shareholders to look after the company's assets and serve the best interest of the company. Duties of directors are interpreted similarly to Western corporate practice in a duty of care, duty to avoid conflicts of interest, and duty of loyalty. A series of corporate scandals, fraud cases, and the increasing litigation from shareholders recently tested these duties because of tensions over responsibilities for financial statements and internal control in the development of hostile bid and takeover defense measures.(fn9)

Figure 1: Corporate Governance in Japan

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A century after the implementation of the essential elements that constitute Japanese company law, the law still maintains some German characteristics, such as the appointment of corporate auditors or supervisors in addition to directors. For larger companies listed on the stock exchange, shareholders elect an average of four kansayakus who form a board of kansayakus, officially translated as an Audit and Supervisory board (Figure 1). Kansayakus can serve up to four years, after which they can be re-elected. Their primary duties include supervising board members and auditing financial statements alongside the independent auditor. They attend board meetings and are encouraged to speak. Unlike their director colleagues, however, kansayakus have no voting rights for decisions at the board meetings. Because of the existence of kansayakus, directors can concentrate on daily management and execution of business matters.

Central elements of Japanese company law underwent major changes after 1945 when, under U.S. direction, attempts were made to enhance the role of the board of directors with the introduction of a duty of loyalty. In Japan, however, because of the inherited German dual-board concept, the function of the board of directors essentially remained the performance of executive duties. Directors were expected to be engaged full time in company affairs and participate in daily business conduct. Although they were liable by law to monitor each other, in reality, it is unlikely that they would ever express negative views on their "bosses" who were by law defined as "representative directors." The board itself contained the pyramidal hierarchical structure, which was regarded as an impediment to the monitoring function it was expected to perform. With the strong postwar recovery and growth of the Japanese economy, the voice of the board of directors became increasingly powerful, while the role of the corporate auditor-supervisory board remained weak.

After the Second World War, the Germans were under pressure to democratize their major corporations; they amended their own stock corporation law by the mid-twentieth century to empower the supervisory board together with the introduction of workers' representation. The Japanese, however, did not follow suit. The strong postwar performance by Japanese companies was often overshadowed by a series of corporate scandals and wrongdoings. Examples include illegal pollution and an avoidable major nuclear accident due to poor risk management;(fn10) bribery of politicians and...