Reconsidering the Importance of Law in Japanese Corporate Governance: Evidence from the Daiwa Bank Shareholder Derivative Case

Abstract

This article contributes to a reassessment of the role of law in Japanese corporate governance by focusing on the landmark Daiwa Bank shareholder derivative case. In September 2000 the Osaka district court ordered 11 current and former directors of Daiwa Bank to pay a record $775 million in damages in two cases related to the bank's well-known trading loss scandal of 1995. The court's ruling dismissed the bank's informal consultations with the government and emphasized the legal fiduciary duties of board members. The resulting "Daiwa shock" had a far-reaching effect in Japan similar to the combined impact in the U.S. of the leading Delaware cases of Van Gorkom and Caremark. The aftermath includes important substantive legal doctrine, a seemingly more activist role for courts, the increased importance of preventive legal advice, a breakdown in the market for directors' liability insurance and new legislation to limit directors' liability and address issues of corporate governance. Despite the attention-grabbing drama of the Daiwa case, this study finds important antecedents to the Daiwa decision and its aftermath. It views the court's decision as accelerating and expanding a poorly recognized underlying trend in the 1990's which saw a gradually increasing role for the formal legal system in Japanese corporate governance. It also suggests that the literature on convergence theory, with its utilization of simplified, static models of corporate governance, may be of less value in understanding the process of change in Japan than traditional notions of legal borrowing. It concludes that the popular model of Japanese corporate governance, with its assumption of a strong Japanese preference for informality over law, must be reconsidered in order to account for the increasing importance of the role of law in Japanese corporate governance.

Keywords: corporate governance, Japan, comparative law

JEL Classification: K22