The Economics of Corporate Governance in Japan
Posted: 18 Jul 1997
Date Written: May 1997
Discussions of today's Japanese economy is full of misconcptions, upon which not only political debates but also academic works heavily depend. Most of these misconceptions prevailed in the 1960s, and survive even today, often with only cosmetic changes, like keiretsu loans to main bank relationships. Discussion of corporate governance in Japanese firms is no exception, particularly influenced by such misconceptions as dominance of large firms, dominance of corporate groups, importance of main bank relationships, undeveloped capital market, the important role of cross-shareholdings among firms, and closed nature either of individual groups or of Japan's economy. Taking the nexus of contract view of a firm, this paper argues as follows: employees are the most important stakeholder in most Japanese firms, which means that the controlling group is the body of employees. In such firms, the directors and managers are selected from among employees, and can almost always expect strong support from the majority of employees, as long as their decision making is generally consistent with employees' interest. From this we can draw three conclusions all of which are contrary to the conventional view of the Japanese economy. (1) The friendly shareholders are selected because they are supposed to be friendly to the present directors and managers; (2) Sources of corporate funds, including banks, are selected on the basis of the lender's support of the present body of directors; (3) Members of the board of directors and top managers are selected on the basis of their support of the present directors and managers.
JEL Classification: G34
Suggested Citation: Suggested Citation