Corporate Governance in the 21st Century: Japan's Gradual Transformation (review)

The decade from 1995 to 2005 was an exciting time for researchers in corporate governance in Japan. Revisions in company law and deregulation changed the institutional framework in which firms operate. Restructuring, mergers and acquisitions, and increasingly global strategies forced firms to reconsider relationships with longstanding stakeholders. Foreign share ownership increased and foreign institutional investors demanded that Japanese firms adopt a "global standard" of corporate governance. Researchers engaged in a hotly contested debate on whether Japan was on the verge of adopting "American-style" governance practices or was maintaining its own distinct system.

Corporate Governance in the 21st Century: Japan's Gradual Transformation arrives on the scene after much of the dust from this debate has settled. An edited volume, it features ten chapters on various topics related to corporate governance, provides a useful overview of what has changed and what has not in areas ranging from labor to foreign direct investment, and offers the beginnings of a framework to make sense of the sources of this "gradual transformation." The contributors make it clear that Japan has neither adopted "American-style" governance nor remained completely the same. Rather, there has been a slow-moving yet extensive and deep transformation in Japanese corporate governance, the result of a mixture of legal reforms, policy decisions, and firm-level practices. While the contributors are largely law professors and lawyers, the emphasis on legal issues complements but does not obscure other important business and economic issues, and the book is accessible and interesting to readers without a strong grounding or interest in legal studies.

Coeditor Luke Nottage sets the stage with a chapter outlining a framework for comparative studies of Japanese corporate governance. He reviews the debate on whether Japanese corporate governance will converge with a global standard or remain distinct and then offers the beginnings of a more nuanced view of institutional change. He argues that comparative studies of institutional change must consider the timing of the cases, the specific objects of comparison, law versus socioeconomic context, normative preferences of the readers, and processes as well as outcomes.

Nottage's chapter lays out a promising framework for further studies of Japanese corporate governance that go beyond the "convergence or no change" dichotomy of much existing research. Unfortunately, the themes raised in this chapter reemerge only faintly in subsequent chapters. As a consequence, the chapters, while interesting and filled with useful information, lack a common theoretical thread. A concluding chapter that summarized and linked the chapters through Nottage's framework would have been particularly useful. Nevertheless, a number of themes implicitly run through the chapters and bring insight into the complex and often unanticipated unfolding of Japanese corporate governance reforms.

A clear theme is the decoupling of governance reforms and existing laws, practices, and norms. In a chapter on the market for corporate control, Geread Dooley shows that the adoption of various defensive measures has not been accompanied by an increase in independent directors who would be best able to assess the merits of a takeover bid. In a chapter on reforms in boards of directors, Peter Lawley argues that the newly introduced board-with-committees structure has not lived up to its potential because outside directors are often not independent and firms have not clearly distinguished between monitoring and execution functions of board members.

Other chapters demonstrate how institutional change is not necessarily equivalent to reform and how changes in laws, norms, and practices can strengthen the existing system and actually hinder reform. Mitsuhiro Kamiya and Tokutaka Ito present a clear and detailed account of the Steel Partners versus Bulldog Sauce case, in which the Japanese Supreme Court upheld Bulldog Sauce's decision to issue a poison pill giving existing shareholders the right to acquire shares to dilute Steel Partners' holdings. They show how the Supreme Court based its support of Bulldog Sauce's position on the fact that other shareholders all supported the...