2003 Reports

Evolving corporate governance in Japan

Patrick, Hugh T.

Like the United States, managers of Japan's large companies since the early 1950s have had great autonomy because shareholding is dispersed. However, most Japanese companies have a significant portion of their shares stably held by other friendly financial institutions and businesses, a significant component of the integrated, synergistic "postwar economic system" embodied in the permanent employment system of industrial relations, the main bank system, and management independence. Employees rather than shareholders are the main potential constraint, so managers have given strong priority to employee interests. Japan's mediocre economic performance since 1991, and a range of publicized corporate scandals, are now undermining this system. Government policies and public pressure have improved corporate disclosure and transparency, and have made corporate governance through capital markets feasible. While managers in the future will place greater weight on shareholder interests, only a few companies are likely to adopt the Anglo-American corporate governance model. More likely is the gradual development of a hybrid approach in which management retains considerable autonomy and employee interests remain important.