CORPORATEGOVERNANCEINJAPAN This page intentionally left blank Corporate Governance in Japan Institutional Change and Organizational Diversity Edited by MASAHIKO AOKI GREGORY JACKSON HIDEAKI MIYAJIMA 1 3 Great Clarendon Street, Oxford ox2 6dp Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With oYces in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York ß Oxford University Press, 2007 The moral rights of the authors have been asserted Database right Oxford University Press (maker) First published 2007 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available Typeset by SPI Publisher Services, Pondicherry, India Printed in Great Britain on acid-free paper by Biddles Ltd., King’s Lynn, Norfolk ISBN 978–0–19–928451–1 13579108642 Contents Preface vii 1. Introduction: The Diversity and Change of Corporate Governance in Japan 1 Gregory Jackson and Hideaki Miyajima PART I: CHANGES IN OWNERSHIP AND FINANCE 2. Relationship Banking in Post-Bubble Japan: Coexistence of Soft- and Hard-Budget Constraints 51 Yasuhiro Arikawa and Hideaki Miyajima 3. The Unwinding of Cross-Shareholding in Japan: Causes, EVects, and Implications 79 Hideaki Miyajima and Fumiaki Kuroki 4. Foreign Investors and Corporate Governance in Japan 125 Christina Ahmadjian 5. Venture Capital and its Governance: The Emergence of Equity Financing Conduits in Japan 151 Nobuyuki Hata, Haruhiko Ando, and Yoshiaki Ishii 6. Corporate Governance in Financial Distress: The New Role of Bankruptcy 179 Peng Xu 7. The Rise of Bank-Related Corporate Revival Funds 205 Noriyuki Yanagawa PART II: CHANGES IN ORGANIZATION, EMPLOYMENT, AND CORPORATE BOARDS 8. Business Portfolio Restructuring of Japanese Firms in the 1990s: Entry and Exit Analysis 227 Tatsuya Kikutani, Hideshi Itoh, and Osamu Hayashida 9. Corporate Finance and Human Resource Management in Japan 257 Masahiro Abe and Takeo Hoshi 10. Employment Adjustment and Distributional ConXict in Japanese Firms 282 Gregory Jackson vi Contents 11. The Turnaround of 1997: Changes in Japanese Corporate Law and Governance 310 Zenichi Shishido 12. The Performance EVects and Determinants of Corporate Governance Reform 330 Hideaki Miyajima 13. Insider Management and Board Reform: For Whose BeneWt? 370 Ronald Dore PART III: DIVERSITY AND INSTITUTIONAL CHANGE 14. Organizational Diversity and Institutional Change: Evidence from Financial and Labor Markets in Japan 399 Mari Sako 15. Conclusion: Whither Japan’s Corporate Governance? 427 Masahiko Aoki Index 449 Preface This volume grew out of a study group on corporate governance at the Research Institute of Economy, Trade and Industry (RIETI) in 2002. The project was motivated by a concern to take stock of the changes underway in corporate governance in Japan. Our feeling was that the conventional understanding about the Japanese Wrm was increasingly becoming outdated. At the same time, both popular and academic commentators seemed all too often to either over claim that little had changed in Japan, or to portray those changes in terms of an inevitable process of convergence toward the model of ‘‘shareholder value’’ found in the United States. To bring this debate forward, we felt that a third perspective was needed that was both empirically comprehensive and theore- tically grounded. While some of this empirical work was becoming available in Japanese language publications, our secondary goal was to bring together these contributions and Wll out the picture of contemporary Japanese business in a single English-language volume. This type of long-term and inter-disciplinary project would not have been possible without the unique support of RIETI. Founded in 2001 by the Ministry of Economy, Trade and Industry (METI), RIETI has established a unique position to facilitate lively exchange between independent social science research and the formulation of public policy in Japan. RIETI was also able to host inter- national scholars such as Mari Sako and Ronald Dore as visiting fellows to support their contributions to this book. For this, we are very grateful and hope this volume reXects the aim of bringing academic research to bear on contemporary policy issues. This publication has taken a long time to realize, having outlived our study group in Tokyo and turning into a collaborative eVort across diVerent continents. Gregory Jackson took a new position at King’s College London in August 2004. Hideaki Miyajima spent time as a fellow of the Reischauer Institute at Harvard University from April 2004 to August 2005, and Masahiko Aoki returned to Stanford after ending his tenure as President and Chief Research OYcer of RIETI in March 2004. We must thank all those involved for their patience and belief that the project would come to fruition. We would like to thank the participants in the RIETI Policy Symposium in October 2004 for useful comments and suggestions, especially Yuji Hosoya, Hideshi Itoh, Juro Teranishi, and Masaru Yoshitomi. We are also grateful to a number of people who kindly provided useful comments and suggestions on various drafts of individual chapters: Kee Hong Bae, Simon Chadwick, Jenny Corbett, Katsuyuki Kubo, Curtis Milhaupt, Mitsuharu Miyamato, Masao Naka- mura, Hiroshi Osano, Han Shin, and Yishay Yafeh. Special thanks must be extended to Hirohiko Nakahara from METI and Hiroyuki Yanai from the Japan Association of Corporate Directors, both of whom were ongoing members of our viii Preface study group and brought important practical and intellectual insights to this project. We thank Jennifer Wilkinson and Andrew Schuller at Oxford University Press for their support and patience throughout the project. Gregory Jackson would like to thank all the past and present staV at RIETI for their support. Their patience and friendship during my stay at RIETI from 2002 to 2004 was beyond the call of duty and made it an unforgettable experience. Special thanks go to Yukiko Yamazaki, for her excellent research assistance, talented translation, and friendship throughout this project. My original interest in Japan (and in corporate governance for that matter) was inspired by my experience of working for Ronald Dore back in 1992, and it’s a particular honour to complete this circle by including his contribution in this book. Turning this interest into actual research in Japan would have not been possible without the strong personal encouragement of Masahiko Aoki and Kozo Yamamura to whom I owe my immense personal gratitude. Most of all, I would like to thank Nicola, Henri, and Ella for their loving support. It’s been an adventure! Hideaki Miyajima would like to thank Michael Cutler for his intensive help for editing several chapters. Michael suggested various points to make the chapters much more readable. Thanks go to Fumiaki Kuroki and Keisuke Nitta, who were instrumental in helping to construct the micro databases of Japanese Wrms used in parts of this book. Yurie Otsu provided excellent research support. Finally, special thanks also go to Susan Pharr, Mary Brinton, and other members of Reischauer Institute for Japanese Studies and US–Japan programs at Harvard University. I beneWted a lot from their comments and, more generally, the intellectual atmosphere at Harvard during the Wnal phase of writing and editing this book. Finally Masahiko Aoki would like to thank my co-editors, Gregory Jackson and Hideaki Miyajima. Although the project was initially conceived and organ- ized by myself at the inception of RIETI, the actual development and manage- ment of the project in all aspects and throughout the period are mainly due to them, as I was compelled to be occupied with many other duties as President of RIETI between 2001 and 2004 and in other capacities thereafter. However, my interests in corporate governance institution in general, and that in Japan in particular, has remained acute and I am particularly happy that our initial, intuitive beliefs in the ‘‘third perspective’’ has now been theoretically and empirically shaped in tangible form as presented in this volume for academic and public scrutiny. For this I am extremely thankful for all the contributors of this volume. I would like to note my personal gratitude to two institutions: the Economics Department of Stanford and the Graduate School of International Corporate Strategy of Hitotsubashi University. The former