Corporate Governance and Managerial Reform in Japan (review)

Hugh Whittaker and Simon Deakin begin this volume by saying that the chapters collected here address the state of Japanese corporate governance and managerial practice at a critical moment (a short time prior to the global financial crisis of 2008). Topics discussed in the chapters include the consequences of Japan's corporate governance reforms that began in the 1990s. Though some aspects of the reforms, including changes in the relevant laws (such as the new company law incorporating the revised commercial code) and institutional settings, are still under way and some firms are still trying to figure out how to take advantage of the new corporate governance rules, the fruit (or the lack thereof) of Japan's corporate governance reform is clearly emerging. This book helps the reader to see what has been realized.

The focus on managerial issues as they relate to Japan's ongoing corporate governance reform is timely and useful. Among post-World War II Japanese firms, employment practices and industrial organization based on keiretsu have been characterized by their long-term nature. These management practices were and still are consistent with Japan's postwar bank-based corporate governance practices. But they are not fully consistent with the interests of independent investors who seek maximum returns in external capital markets. This inconsistency was thought to be the primary cause of the poor performance of the Japanese economy in the postbubble recession in the 1990s. Serious effort was made by the government, businesses, and the public to move to a more market-oriented and robust U.S.-style corporate governance system. Such a shift requires not just legal and institutional corporate governance reforms but also associated changes in management practices. This is particularly important for Japan where the majority of managers and workers still support long-term employment contracts and, even though bank-based keiretsu groups have become less important in general (except for the Mitsubishi group), the use of vertical keiretsu suppliers continues. Discussions presented in the chapters of this book help further our understanding of why corporate governance reform might not lead to Japan's full acceptance of a U.S.-style shareholder-value-maximization principle and management practices that are fully consistent with that principle. This might also be interpreted as evidence against the so-called convergence hypothesis that predicts that Anglo-American corporate governance systems will eventually be universally accepted.

Two main practices are considered in various chapters of the book. The first is how Japanese corporations reacted to the new flexibility in Japan's company law allowing them to adopt, or not, new U.S.-style practices such as the use of more outside directors and a corporate board structure based on an executive committee (chapters 2, 4, 7, 9). The second is how corporations reacted to the new legal and institutional environment designed to facilitate mergers and acquisitions (M&A), especially including hostile takeovers (chapters 2, 3, 5) and associated management issues related to corporate governance reform (chapters 6, 8, 9). Much of the discussion in these chapters is based on fieldwork in large Japanese corporations and on interviews with investors, civil servants, and policymakers. Corporate governance mechanisms, long-term employment and supplier relationships, and management practices including cooperation within keiretsu tend to be closely intertwined in Japan. Thus, it is useful to consider how Japanese management practices responded to Japan's corporate governance reform.

The book contains ten chapters, including an introduction and conclusion by the editors (chapters 1 and 10). Chapters 2 and 3 focus on the uncertainties and ambiguities surrounding the key legal reforms of the first decade of the twenty-first century. Chapters 4 through 9 are devoted to trying to understand why the effects of the reforms have not been more clear cut. Contextual factors in the wider corporate governance environment are a central focus of this discussion (p. 15). Chapter 2 by John Buchanan and Simon Deakin, "In the Shadow of Corporate Governance Reform: Change and...