Japanese Corporate Governance: The Hidden Problems of the Corporate Law and Their Solutions

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As published in the Delaware Journal of Corporate Law, Vol. 25, No. 2, Pp. 189-233, 2000

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Zenichi Shishido
paper description
It has long been said that Japanese corporate governance does not pay sufficient attention to shareholders as the owners of the corporation. Despite this seeming lack of shareholder ownership, Japanese firms have performed quite well until recently. This article seeks to solve this conundrum by demonstrating the "Company Community" concept as a positive model of the Japanese corporate governance. This model illustrates how the Japanese system of corporate governance solves the hidden problems of corporate law. These hidden problems are common to all developed economies and consist of the dual challenge of balancing monitoring with the need for managerial autonomy and also balancing the trade off between money capital and human capital. The Company Community concept solves these problems through an intricate three level system of monitoring. The first level is the in-house monitoring of management as a participant in the community by core employees who are quasi-residual claimants. The second level is the monitoring by cross-shareholders in the firm, particularly the main bank. Cross-shareholding has also had the effect of stabilizing the management position against outside control. The third level is the monitoring by exit of the outside shareholders. These multiple levels of monitoring stabilize management and uphold shareholder ownership as the end game norm.