Politics of Japanese Corporate Governance Reform: Politicians do Matter

Abstract

What causes or drives changes in corporate law? By examining reforms in Japan, this paper insists that politicians matter. Specifically, a ruling party’s interest in corporate governance is an important factor in changes of corporate law.

Traditional views on economic rulemaking politics in Japan tend to focus on bureaucracy. In addition, there is a widespread belief that managers of large firms and business elites dominate the rulemaking process.

Recently, political scientists have offered more sophisticated perspectives on the question of what drives changes in corporate law. Each of them focuses on political actors instead of political institutions as decisive factors of change in corporate governance. This paper focuses on two arguments: 1) Culpepper’s research, which shows that an issue’s salience — the extent to which a political issue draws the electorate’s attention — determines whether politicians are willing to intervene in corporate governance rulemaking, and 2) Cioffi and Höpner’s discussions, which insist that center-left parties play a critical role in pro-shareholder reforms and examine the mechanism of taking initiatives in corporate governance reforms.

Until the most recent reform in 2014, most changes in corporate governance have been consistent with Culpepper’s theory. Before the 1997 reform, patterns of reforms clearly fit the Culpepper's theory.

From the late 1990s, the governing party (the Liberal Democratic Party, or the “LDP”) cooperated with business leaders in liberalizing corporate law under the longstanding economic stagnation following the collapse of the bubble economy. Neither Culpepper or Cioffi and Höpner’s theories explicitly discuss a type of politics during this period. Still, the politics during this time also do not contradict Culpepper's theory.

However, the LDP intervened at the last minute of the 2014 amendment to tighten the rule for urging listed firms to appoint outside director(s). This was done in a period of low salience, which shows that this case is against Culpepper's theory. Deriving implications from Cioffi and Höpner's research, I argue that the LDP has become interested in corporate governance reform regardless of this topic's salience. Further, I argue that the mechanism behind this changes is common with center-left parties in Cioffi and Höpner's research, although the LDP is far from center-left in an ideological aspect.

Keywords: Corporate Governance, Japanese Corporate Law, Politics of Corporate Governance, Corporate Governance Reform in Japan

JEL Classification: K22, K40