Japanese Corporate Governance from the Perspective of Family Firms

Abstract

Corporate governance has been a hot issue across the world, especially since the Enron scandal and the Lehman shock. The Anglo-Saxon model (A-form), which focuses on monitoring management to maximize shareholder value through mechanisms such as hostile takeovers and independent directors, is often criticized as either malfunctioning or short-sighted.

The Japanese model (J-form) differs markedly from the Anglo-Saxon model: there is stronger capacity for internal governance, there exist mechanisms such as “lifetime” employment to incentivize human capital providers, there is greater internal promotion, and shareholder intervention can be limited through cross-shareholding practices. These differences were once cited to explain Japan’s economic miracle, but were also cited as a major factor behind the lost decades of the 1990s and 2000s.

In fact, after the bubble economy of the mid-1980s, the ROAs of Japanese companies declined and were lower than that of Anglo-Saxon companies. Interestingly, Japanese family (J-family) firms have performed better than ordinary J-form firms, particularly after the economic bubble.

This paper attempts to answer the questions: why have the performances of J-form firms deteriorated since the Japanese economic bubble in the mid-1980s, and why have J-family firms generally outperformed non-family firms? The paper will analyze and compare J-form and J-family firms on general issues of corporate governance, including internal and external governance, internal promotion rules, long-run reward systems, and incentive mechanisms.

Keywords: family firm, corproate governance, Japan

JEL Classification: C32, C34