Understanding Japanese Corporate Governance

Abstract

Corporate governance can be defined as the way the management of a firm is influenced by many stakeholders. Depending on which stakeholders are involved, we can identify five aspects of corporate governance. Those aspects address the agency problems between (i) shareholders and managers, (ii) creditors and managers, (iii) workers and managers, (iv) suppliers and customers, and (v) government and firms. The mechanisms used to address each of these aspects differentiate various systems of corporate governance. Other institutional features, such as (a) human resource management, (b) managerial labor market, (c) competitive product markets, and (d) corporate laws also influence the system of corporate governance. The paper characterizes the Japanese corporate governance, relying on the past empirical studies on those various aspects of corporate governance. Consistency between various aspects of Japanese corporate governance is examined. Consistency between Japanese corporate governance and the four institutional features is also discussed. The paper also examines the benefits and costs of the Japanese system relative to an alternative system. The Japanese system seems to do better for an economy characterized by (1) substantial noise in the financial markets, (2) high cost of developing markets, (3) an important role of relation-specific capital in production, (4) low monitoring cost, (5) low adversarial incentive effects of possible contract renegotiation, (6) the government's interest aligned with social welfare, and (7) low cost of concentrated political power.

JEL Classification: G34