DePaul Business and Commercial Law Journal Volume 15 Issue 1 Fall 2016 Article 2 Corporate Governance Models: the Japanese Experience in Context Maria Lucia Passador Harvard University Follow this and additional works at: https://via.library.depaul.edu/bclj Recommended Citation 15 DePaul Bus. & Com. L.J. 25 This Article is brought to you for free and open access by the College of Law at Via Sapientiae. It has been accepted for inclusion in DePaul Business and Commercial Law Journal by an authorized editor of Via Sapientiae. For more information, please contact [email protected]. \\jciprod01\productn\D\DPB\15-1\DPB102.txt unknown Seq: 1 1-MAY-17 15:21 Corporate Governance Models: the Japanese Experience in Context Maria Lucia Passador* Avoid the crowd. Do your own thinking independently. Be the chess player, not the chess piece. —Ralph Charell INTRODUCTION: JAPANESE CORPORATE LAW AND ITS REFORM This Article aims to assess the claim that three countries – Italy, Japan and Portugal – present a tripartite,1 Latin, classic,2 and hybrid,3 model of corporate governance. In general, Japanese law seems an “exotic variation of Roman-Ger- manic models,” affected by United States legal models transplanted after World War II, while at the same time, presenting original fea- tures related to the history, evolution, and economic and social legacy of both Buddhist and Confucian philosophies.4 * PhD Candidate in Legal Studies - Business and Social Law, Bocconi University Law School, Milan, Italy; Visiting Researcher, Harvard Law School, Cambridge, MA, U.S.A. I am grateful to prof. Piergaetano Marchetti for his valuable, constant guidance and advice, and to prof. Mark Roe for helpful comparative teachings and discussions. 1. This model can be renamed as “tripartite”, since it is characterized by (1) the general share- holders’ meeting, (2) the board of directors, (3) and the board of auditors. It is also defined as traditional or Latin although these adjectives are less effective, as observed in Giuseppe Bene- detto Portale, La Corporate Governance delle Societ`a Bancarie [The Corporate Governance of Banking Companies], 61 RIVISTA DELLE SOCIETA` 48, 48–63 (2016) (It.) 2. Paolo Ferro-Luzzi, L’esercizio D’impresa tra Amministrazione e Controllo [The Exercise of Company Management and Control], 12 ANALISI GIURIDICA DELL’ECONOMIA 231, 241 (2007) (It.). 3. The empirical analysis, based on the sample of OECD countries, as well as Argentina, Brazil, China, Hong Kong, Saudi Arabia, and Singapore, is mentioned both in Simone Alvaro et al., Modelli di amministrazione e controllo nelle societ`a quotate: Aspetti comparatistici e linee evolutive [Corporate Governance Alternative Systems in Italian Listed Companies: Comparative Aspects and Trends] 86 (May 9, 2015), http://papers.ssrn.com/abstract=2630561 (It.) and Guido Ferrarini, Professore Ordinario di Diritto Commerciale, Universita ` degli Studi di Genova, Quali modelli di amministrazione e controllo per le aziende italiane? [Which are the best Management and Control Models for Italian Companies?] at the European House Ambrosetti L’Osservatorio sull’eccellenza dei Sistemi di Governo in Italia - Workshop: Le aree di fontiera della corporate governance (Nov. 17, 2015) (It.)). 4. Andrea Ortolani, Giappone (Diritto Moderno) [Japan (Modern Law)], in DIGESTO DELLE DISCIPLINE PRIVATISTICHE SEZIONE CIVILE [DIGEST OF PRIVATE LAW DISCIPLINES CIVIL DIVI- 25 \\jciprod01\productn\D\DPB\15-1\DPB102.txt unknown Seq: 2 1-MAY-17 15:21 26 DEPAUL BUSINESS & COMMERCIAL LAW JOURNAL [Vol. 15:25 In 1899, the Commercial Code was drafted and extensively drew from the Allgemeines Deutsches Handelsgesetzbuch – drafted in 1861. Then, following World War II,5 numerous scandals, frauds, tensions, and problems casted doubt on Japanese corporate governance and, thus, led to several reforms in the Japanese economy in recent years.6 Important reform were influenced7 by Anglo-Saxon techniques, espe- cially in 2002-2003, 2004 (regarding the Code of Corporate Govern- ance), 2006 (the year in which the Corporate Law Reform was elaborated)8 and, recently,9 in the 2014-2015 periods.10 SION] 435 (R. Sacco ed., 4th ed. 2011) (It.); Charles R. Stevens, Japanese Law and the Japanese Legal System: Perspectives for the American Business Lawyer, 27 BUS. L.1259 (1972). 5. Takaya Seki & Thomas Clarke, The Evolution of Corporate Governance in Japan: The Con- tinuing Relevance of Berle and Means, 37 SEATTLE U. L. REV. 717, 722 (2014). 6. Mark D. West, Why Shareholders Sue: The Evidence from Japan, 30 J. LEGAL STUD. 351–82 (2001). Since the burst of the economic “bubble” in the early 1990s, the situation in Japan has been changing. The influence of main banks in corporate finance has declined, and sparked substantial unwinding of stable cross-shareholdings since the mid-1990s. Gregory Jackson, Toward a Com- parative Perspective on Corporate Governance and Labour Management: Enterprise Coalitions and National Trajectories 5, 18 (Research Inst. of Econ., Trade & Indus., RIETI Policy Discus- sion Paper Series, Paper No. 04-E-023, 2005), http://www.rieti.go.jp/jp/publications/dp/04e023 .pdf. Cross-border mergers and acquisitions have also risen. Japan reformed corporate govern- ance rules several times and promoted the role of outside directors and company auditors, so that its corporate governance gradually became more shareholder-oriented, notwithstanding the fact that such changes provoked conflicts with employees. Julen Esteban-Pretel et al., Changes in Japan’s Labor Market Flows due to the Lost Decade 12 (Research Inst. of Econ., Trade & Indus., RIETI Policy Discussion Paper Series, Paper No. 11-E-039, 2011), http://www.rieti.go.jp/ jp/publications/dp/11e039.pdf; Jackson, supra note 6, at 19. 7. “The lack of universal solutions for management problems does not mean that countries cannot learn from each other. Looking over de borders is one of the most effective ways of getting ideas for management. But their application calls for prudence and judgment.” Willem J. L. Calkoen, The One-Tier Board in the Changing and Converging World of Corporate Govern- ance: A Comparative Study of Boards in the UK, the US and the Netherlands 14 (Oct. 10, 2011) (unpublished doctoral thesis, Erasmus Universiteit Rotterdam) (on file with Erasmus Univer- siteit Rotterdam). 8. See mainly as to shareholder protections and national security concerns, Further Revision of M&A Legislation is Needed, NIPPON KEIDANREN [JAPAN BUSINESS FEDERATION] (Dec. 12, 2006), https://www.keidanren.or.jp/english/policy/2006/085.html; Reasonable Defense Measures against Takeovers Detrimental to Corporate Value Are Needed, NIPPON KEIDANREN [JAPAN BUS- INESS FEDERATION] (Nov. 16, 2004), https://www.keidanren.or.jp/english/policy/2004/085.html; Kenichi Osugi, Transplanting Poison Pills in Foreign Soil: Japan’s Experiment, in TRANSFORM- ING CORPORATE GOVERNANCE IN EAST ASIA 36 (Hideki Kanada et al. eds., 2008); Esteban- Pretel et al., supra note 6, at 51; Curtis J. Milhaupt, In the Shadow of Delaware? The Rise of Hostile Takeovers in Japan, 105 COLUM. L. REV. 2171 (2005). 9. In the meantime, in May 2012, the Research Institute of Economy Trade and Industry, one of the leading Japanese policy think tanks, conducted comprehensive “questionnaire research regarding corporate governance of Japanese companies.” Questionnaire on Corporate Govern- ance of Japanese Companies, Research Inst. of Econ., Trade & Indus. (RIETI), http://www.rieti .go.jp/jp/projects/research_activity/governance/data/survey_results.pdf (last visited Feb. 5, 2017). The results indicated the reality of the weak aspects of governance, including the compensation of directors, the personnel affairs of representative directors, and the role of outside director. Id. \\jciprod01\productn\D\DPB\15-1\DPB102.txt unknown Seq: 3 1-MAY-17 15:21 2016] CORPORATE GOVERNANCE MODELS 27 Beginning in 2003, corporations could opt for different structures:11 (i) Gomei Gaisha (general partnerships); (ii) Goshi Gaisha (limited partnerships); (iii) Yugen Gaisha (limited liability companies, accord- ing to the model of the German GmbH, with more than 50 stakehold- ers and minimum registered capital of 3 million Yen, divided into stocks, managed by a Board of Directors (even if composed by sole director) and with auditors); and (iv) Kabushiki Gaisha (joint-stock companies, with a minimum share capital of 10 million Yen). Japa- nese corporate law experienced a far-reaching, substantial change, in- tended to allow companies to opt for a system of governance “with committees.”12 However, more than ten years after its introduction, such models have not offer the desired results, as seen among one-tier and two-tier models, such as in the Italian context. The following year, conforming to international best practices,13 the Tokyo Stock Exchange (TSE) introduced “Principles of Corporate Governance for Listed Companies,” revised in 2009, and again in 2015. For corporations listed in the first and second segments of the TSE, they are required to explain their decision not to apply these principles. For corporations listed in the JASDAQ Securities Ex- 10. In November 2013, the reform bill of the Japanese Companies Act was finally approved in a Cabinet meeting and submitted to the ordinary Diet Session, therefore satisfying the requests by institutional investors, who often criticized the weakness of corporate governance of listed Japanese companies in relation to the fact that the number of outside directors is quite small compared to listed companies in other developed countries. See ACGA Statement on Corporate Governance Reform in Japan, ASIAN CORP. GOVERNANCE ASS’N (2009), http://www.acga-asia .org/public/files/ACGA_Japan_Statement_2009_Dec15_English.pdf. 11. It is the first time for Japanese corporate law to permit companies to choose their govern- ance system. The major reasons for reluctance of Japanese companies in choosing the new model are (i) the resistance against independent directors’ strong power on the appointment of direc- tors under the new model; (ii) the lack of resources of independent directors. 12. Ronald J. Gilson & Curtis J. Milhaupt, Choice as Regulatory Reform: The Case of Japa- nese Corporate Governance, 53 AM.