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CORPORATE GOVERNANCE Corporate Governance in Japan from the Viewpoints of Management, Accounting,.Pdf N. Demise, Y. Miwa, M. Nakabayashi, Y. Nakoshi Corporate Governance in Japan From the Viewpoints of Management, Accounting, and the Market N. Demise, Y. Miwa, M. Nakabayashi, Y. Nakoshi Corporate Governance in Japan From the Viewpoints of Management, Accounting, and the Market Nobuyuki Demise, Ph.D. Professor, Meiji University School of Commerce 1-1 Kanda-Surugadai, Chiyoda-ku, Tokyo 101-8301, Japan Yumiko Miwa, Ph.D. Professor, Meiji University School of Commerce 1-1 Kanda-Surugadai, Chiyoda-ku, Tokyo 101-8301, Japan Mariko Nakabayashi, Ph.D. Associate Professor, Meiji University School of Commerce 1-1 Kanda-Surugadai, Chiyoda-ku, Tokyo 101-8301, Japan Yoko Nakoshi Professor, Meiji University School of Commerce 1-1 Kanda-Surugadai, Chiyoda-ku, Tokyo 101-8301, Japan ISBN-10 4-431-30919-5 Springer-Verlag Tokyo Berlin Heidelberg New York ISBN-13 978-4-431-30919-2 Springer-Verlag Tokyo Berlin Heidelberg New York This book is published as a volume in the Institute of Social Sciences, Meiji University Book Series. Library of Congress Control Number: 2006925429 Printed on acid-free paper © Nobuyuki Demise, Yumiko Miwa, Mariko Nakabayashi, Yoko Nakoshi 2006 Printed in Japan This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broad- casting, reproduction on microfilms or in other ways, and storage in data banks. The use of registered names, trademarks, etc, in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Springer is a part of Springer Science+Business Media springer.com Typesetting: SNP Best-set Typesetter Ltd., Hong Kong Printing and binding: Shinano Inc., Japan Foreword In Japan, the problem of corporate governance has been cogently argued in the field of social science for the past decade, and the issue has also been taken up separately in law, business administration, and accounting. This book, however, is the first to take a general overview of corporate governance with respect to management, risk management, accounting, and the capital markets. Corporate governance in the broad sense must include stakeholders with various interests while taking into consideration the sometimes unscrupulous affairs of companies and bankruptcies of big businesses, along with today’s increasing numbers of mergers and acquisitions. Both the company manager and the institutional investor have begun to be more concerned about corporate social responsibility (CSR) and socially responsible investment. After 2003, the issue of CSR began to be taken up more frequently by the media in Japan, and study meetings and committees associated with the Ministry of Economy, Trade and Industry, Ministry of the Environment, and the Ministry of Health, Labour and Welfare were established. These trends are evidence of significant changes in Japanese corporate governance. The study presented here proposes that a company should play a social role to bring about a sustainable society. Kouhei Yamada General Manager Institute of Social Science Meiji University Tokyo V Preface In 2002, we began our international comparative study of corporate governance, setting out to study the multidimensional aspects of corporate governance: the institutional investor, the board of directors, compliance, moral hazards, obser- vance of an accountability contract, stock options, and corporate information dis- closure. This book is the result of that 3-year-long study. Recently, corporate governance in the broad sense, including corporate social responsibility (CSR) in particular, has attracted attention. Incidents in which Japanese companies have been disgraced have occurred one after another. Mean- while, hostile buyouts are becoming a reality in Japan. One might reasonably wonder: Is stockholder value creation the one and only aim of corporate activity? Management itself became a topic of consideration following the cases of Enron and WorldCom in 2001.The belief that a manager should not simply create profit to be able to hold it for stockholders began to acquire some currency. In an environment in which recognition of CSR is being reawakened, risk man- agement of a company has become more important to managers. A study of reform in corporate governance and an approach to the accounting system, with concrete disclosure of managerial rewards, have been based on a critical view of whether the accounting system supports such reform. From the viewpoint of risk management, we examined errors of “goodwill” in management judgment as an element of corporate governance, viewing them as judgmental hazards as well as moral hazards faced by a manager in a complex environment. This book is divided into three parts. In Part 1, we discuss corporate gover- nance from four approaches: management, moral hazards, accounting, and capital markets. Chapter 1 is a general approach to management. In Chapter 2, we examine moral hazards and the problem of corporate governance. Chapter 3 deals with accounting and corporate governance. In Chapter 4, we discuss cor- porate governance from the viewpoint of the institutional investor. Part 2 examines the trend in corporate governance in Japan of recent years in several areas. In Chapter 5, we clarify the situation regarding the exercise of voting rights by Japanese institutional investors. In Chapter 6, we focus on the structure of the Japanese board of directors. Disclosure of rewards is an integral VII VIII Preface part of corporate governance, and, as discussed in Chapter 7, the movement from disclosure to expense recognition in accounting is part of corporate governance, especially with regard to stocks and related rewards such as stock options. With Chapter 8, we take the Japanese automobile insurance industry as a concrete example from the viewpoint of management judgment and risk management.We examine an ideal method of corporate governance of an individual company by management judgment over a low-cost strategy in that automobile insurance market. In Part 3, we consider the issue of corporate governance in situations of global economic development. With Chapter 9, we clarify the influence that the “stock- holder first” principle of institutional investors (in the United States in particu- lar) has had on the Japanese financial system and on corporate governance. In Chapter 10, we examine the OECD Principles of Corporate Governance, revised in 2004, which has become an international standard of corporate governance and has exerted considerable influence in Japan. We are deeply grateful for the grant received from the Institution of Social Science, Meiji University, which supported our study and the publication of this book. Nobuyuki Demise Yumiko Miwa Mariko Nakabayashi Yoko Nakoshi Contents Foreword . V Preface . VII Part I Four Approaches to Corporate Governance 1. Management and Corporate Governance N. Demise . 3 2. Moral Hazard in Corporate Governance M. Nakabayashi . 15 3. Accounting and Corporate Governance Y. Nakoshi . 25 4. Institutional Investors and Corporate Governance Y. Miwa . 31 Part II Corporate Governance in Japan 5. Institutional Investors Exercising Shareholder Voting Rights in Japan Y. Miwa . 41 6. Board of Directors N. Demise . 59 7. Accounting and Disclosure in Japan Y. Nakoshi . 67 8. Managerial Judgment Hazard in Corporate Governance M. Nakabayshi . 75 IX X Contents Part III Corporate Governance in Global Economy 9. The Effect of Global Shareholder Activism on the Japanese Financial System and the Japanese Corporation Y. Miwa . 93 10. OECD Principles of Corporate Governance N. Demise . 109 Index . 119 Part I Four Approaches to Corporate Governance 1 Management and Corporate Governance Nobuyuki Demise 1. Introduction This chapter is intended as an exploration of the historical formation between the management and corporate governance relationship. The first section describes the process of separation of ownership and management. In modern corporations, the management is separated from the ownership, creating a need for professional managers. The second section describes the nature of profes- sional managers, and how they may change the purpose of the corporation. According to Jensen, at the heart of the corporate governance debate there is a stark division of opinion about the fundamental purpose of the corporation.1 The third section discusses the issues of the purpose of the corporation, and is related to corporate social responsibility. The last section presents the characteristics of business ethics and corporate social responsibility in Japan. 2. Separation of Ownership and Management The founder took part in the management of his company at first. In due time, his company was listed on the stock exchange and the founder decreased his holdings relatively. Later his company grew and formed a “company group.” After many years, he and his family left the post of his company. At the begin- ning of the 20th century, there were four gigantic financial combines, or zaibatsu, Mitsui, Mitsubishi, Sumitomo, and Yasuda. At the center of every zaibatsu was the holding company. Zaibatsu families controlled the holding companies and were the directors of the main companies. However, after World War II GHQ (the General Headquarters of the Allied Powers) broke up the Japanese zaibatsu and compelled zaibatsu families to dispose of all company shares. GHQ directed the
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