4 - MATSUNAKA (DO NOT DELETE) 5/25/2018 8:56 PM Politics of Japanese Corporate Governance Reform: Politicians do Matter Manabu Matsunaka† Part I: Introduction .................................................................................. 155 Part II: Recent Discussions by Political Scientists .................................. 156 A. Coalition Theory ..................................................................... 157 B. Center-left Parties Initiating Pro-Shareholder Reforms .......... 158 C. Quiet Politics .......................................................................... 159 Part III: 2014 Amendments of Companies Act ....................................... 162 A. Background of the 2014 Amendment on Outside Directors ... 165 B. The Process of the 2014 Amendment of Companies Act ....... 166 C. An Intervention by the LDP .................................................... 168 Part IV: Roles of Politicians in the 2014 Reform ................................... 170 A. Can Coalition Theory Explain the 2014 Amendment? ........... 171 B. Involvement of Politicians ...................................................... 172 Part V: How Politicians have been Involved in Corporate Governance Reforms: A Historical Perspective .............................................. 174 A. Politicians Reacting to Exogenous Shocks ............................. 175 B. Managers and the LDP Working Hand-in-Hand .................... 178 C. Shareholder-Oriented Interventions by the LDP .................... 181 D. Do the Differences Among Politicians’ Involvements Matter? ............................................................................................. 182 E. Why Have the Mechanisms Changed Recently? .................... 183 Part VI: Conclusions ............................................................................... 184 Copyright © 2018 Regents of the University of California † Associate Professor, Nagoya University Graduate School of Law. I thank participants of US-Asia Com- parative Corporate Governance Workshop (Feb. 24-25, 2017), especially Martin Gelter, Sang Yop Kang, Curtis Milhaupt and Dan W. Puchniak for their comments. I also would like to thank Berkeley Law School, National University of Singapore Faculty of Law and Singapore Management University School of Law for the opportunity to participate in the conference. I received many useful comments from Gen Goto, Zenichi Shishido and other participants of Enterprise Law Seminar on the previous version of this paper. This work is funded by JSPS Kakenhi Grant No. 15H03300 & 15K0320. 154 4 - MATSUNAKA (DO NOT DELETE) 5/25/2018 8:56 PM Politics of Japanese Corporate Governance Reform PART I: INTRODUCTION What causes or drives changes in corporate law? By examining reforms in Japan, this paper insists that politicians matter. Specifically, a ruling party’s in- terest in corporate governance is an important factor in changes of corporate law.1 Traditional views on economic rulemaking politics in Japan tend to focus on bureaucracy. In addition, there is a widespread belief that managers of large firms and business elites dominate the rulemaking process. Recently, political scientists have offered more sophisticated perspectives on the question of what drives changes in corporate law.2 Each of them focuses on political actors instead of political institutions as decisive factors of change in corporate governance. This paper focuses on two arguments: 1) Culpepper’s re- search,3 which shows that an issue’s salience—the extent to which a political issue draws the electorate’s attention—determines whether politicians are will- ing to intervene in corporate governance rulemaking, and 2) Cioffi and Höpner’s discussions,4 which insist that center-left parties play a critical role in pro-share- holder reforms and examine the mechanism of taking initiatives in corporate gov- ernance reforms. In Japan, until the most recent reform in 2014, most changes in corporate governance have been consistent with Culpepper’s theory. Before the 1997 re- form, patterns of reforms clearly fit the theory: politicians only intervened in the rulemaking of corporate law when an issue’s salience rose due to scandals or other exogenous shocks.5 From the late 1990s, the governing party (the Liberal Democratic Party, or the “LDP”) cooperated with business leaders in liberalizing corporate law under the longstanding economic stagnation following the collapse 1. In this paper, I will not step into whether each seemingly “pro-shareholder” or “shareholder ori- ented” reform truly promotes the interests of shareholders. A “pro-shareholder” or “shareholder oriented” reform in this paper refers to a reform that aims to enhance the interests of shareholder although managers resist to it. This can be a questionable definition for a corporate law academics, but since most of debates in political science seem to paraphrase such a reform as a pro-shareholder or shareholder oriented one, I follow the trend in this paper. 2. For an overview of research by political scientists and researchers in other related fields, see Peter Gourevitch, Explaining Corporate Governance Systems: Alternative Approaches, in THE TRANSITIONAL POLITICS OF CORPORATE GOVERNANCE REGULATION 27 (Henk Overbeek, Bastian van Apeldoorn & An- reas Nölke eds., 2007); Ruth V. Aguilera & Gregory Jackson, Comparative and International Corporate Governance, 4 ACAD. OF MGMT. ANNALS 485 (2010); Michel Goyer, Corporate Governance, in THE OXFORD HANDBOOK OF COMPARATIVE INSTITUTIONAL ANALYSIS 423, 442 (Glenn Morgan et al. eds., 2010). 3. PEPPER D. CULPEPPER, QUIET POLITICS AND BUSINESS POWER CORPORATE CONTROL IN EUROPE AND JAPAN (2011). 4. John W. Cioffi & Martin Höpner, The Political Paradox of Finance Capitalism: Interests, Pref- erences, and Center-Left Party Politics in Corporate Governance Reform, 34 POL. SOC'Y 463 (2006); JOHN W. CIOFFI, PUBLIC LAW AND PRIVATE POWER: CORPORATE GOVERNANCE REFORM IN THE AGE OF FINANCE CAPITALISM 34 (2010). 5. See infra Part V.A. 155 4 - MATSUNAKA (DO NOT DELETE) 5/25/2018 8:56 PM Berkeley Business Law Journal Vol. 15:1, 2018 of the bubble economy. Neither Culpepper or Cioffi and Höpner’s theories ex- plicitly discuss a type of politics during this period. While Culpepper’s theory is that politicians are disinterested in corporate law issues during a low salience time, Cioffi and Höpner’s theory emphasizes initiatives of center parties in pro shareholder reforms. However, the politics during this time also do not contradict these two theories.6 The most recent amendment of The Companies Act in Japan offers a good example that cannot be explained by existing theories without modifications: in the 2014 Amendment, conservative ruling party (the LDP) intervened against strong resistance by managers of firms without scandals or other exogenous shocks. Even after the amendment, the LDP continued with further reforms. This phenomenon is clearly against Culpepper’s theory. It also does not fit the discus- sion by Höpner and Cioffi, since the LDP is conservative, not center-left.7 The LDP’s movement from a simple reaction to high salience to its continued interests in corporate governance is the key to understanding the recent reforms. Further research is necessary to determine why the LDP has become interested in corporate governance. This paper offers a tentative explanation that the LDP raised the priority of shareholder interests because of the LDP’s focus on eco- nomic growth, as well as other factors that weakened the LDP’s ties with strong interest groups. The next part summarizes political scientists’ prior discussions. Part III briefly introduces the process of the 2014 Amendments of The Companies Act in Japan, focusing mainly on whether to mandate public firms to appoint at least one outside director to their boards. Part IV shows that politicians played a crit- ical role in the 2014 Amendment. Part V discusses how politicians become in- terested in corporate governance reforms. The last part provides brief conclu- sions. PART II: RECENT DISCUSSIONS BY POLITICAL SCIENTISTS Traditionally, political scientists debated whether political institutions or po- litical actors are more important to changes of laws and policies. However, it is usually difficult to attribute relatively short-term changes in corporate law to a change in political institution, since political institutions do not change so fre- quently.8 Therefore, recent studies have focused more on political actors than on political institutions. 6. See infra Part V.B. 7. However, their arguments offer rich insights concerning in what circumstances politicians get in- terested in corporate governance reforms. See infra Parts II.B, V.E. 8. See Goyer, supra note 2, at 442. In contrast to a short-term change, diversities of corporate gov- ernance and related laws among different countries might be explained by the differences in political institutions. See, e.g., MARK J. ROE, POLITICAL DETERMINANTS OF CORPORATE GOVERNANCE (2003). 156 4 - MATSUNAKA (DO NOT DELETE) 5/25/2018 8:56 PM Politics of Japanese Corporate Governance Reform A. Coalition Theory One discussion political scientists have centered around is Gourevitch and Shinn’s coalition theory.9 In their model: (1) political factors produce economic policies, including laws on corporate governance, (2) the economic policies af- fect shareholder structures, and (3) the shareholder structures give feedback to political factors10 This paper focuses on the first step, where changes in political factors lead to