The Olympus Scandal and Corporate Governance Reform: Can Japan Find a Middle Ground between the Board Monitoring Model and Management Model?
UCLA Pacific Basin Law Journal, Vol. 30, No. 1, Pp. 93-148 (2012)
29 Pages Posted: 4 Dec 2012 Last revised: 28 Nov 2013
Date Written: December 4, 2012
Since the 1990s global institutional investors have strongly advocated the widespread use of independent directors in accordance with the U.S.-derived board monitoring model. Japan is the country that has displayed the greatest resistance to this prescription for reform.
The fallout from the scandal over financial reporting at Olympus Corporation provides a new opportunity to reconsider both theoretical and practical issues related to corporate governance reform. This article proposes that the deadlocked debate in Japan over independent directors be expanded in three ways.
First is a “back to basics” re-examination of the fundamental goals of corporate governance and functioning of the board of directors. The goals should include consideration of conflicts of interests and risk management rather than focusing primarily on improving business performance.
Second, the debate in Japan should also focus on improving the operating environment for independent monitors to make any potential monitor of management more effective. In the U.S. system, this includes good information disclosure, strong enforcement, particularly through private litigation, and an active role for gatekeepers such as external audit firms.
Third is to pay closer attention to the ongoing experimentation at a number of leading Japanese companies to develop a mixed governance system that seeks a “middle ground” between Japan’s traditional management board model and the monitoring model, and to consider means to spread this mixed model more broadly among Japanese companies.
Although current proposals and experimentation in Japan have the potential to achieve significant corporate governance reform, it is too early to judge whether the post-Olympus ferment will, in fact, lead to the incorporation of an effective management monitoring function into the traditional Japanese corporate structure.
Keywords: corporate governance, Japan, comparative law, independent director, monitoring model, management model
JEL Classification: K22
Suggested Citation: Suggested Citation