Recherche FFJ Research Statement Hideaki MIYAJIMA


The Global Financial Crisis and the Evolution of Corporate Governance in Japan

Hideaki MIYAJIMA (Waseda University / WIAS / RIETI)


Japanese corporate governance practices were not a direct cause of the current financial crisis, which was triggered by the subprime loan problem as exogenous shocks. However, the global financial crisis is expected to have a significant impact on the evolution of corporate governance.
The Evolution and Increasing Diversity of Japanese Corporations before the global crisis

Against a backdrop of globalization and deregulation, Japan’s once largely uniform corporate governance system has undergone major changes, giving rise to a lively debate around the future of the Japanese model. In this context, Aoki, Jackson and Miyajima (2007) have shown that Japanese firms have grown increasingly diverse. They neither converge on the U.S. model nor continue the traditional system. Instead, they are opting for hybrid approaches which combine the two different modes of a market-based system and a relationship-based system. More precisely, they can be classified into three groups.
The first group (Type I Hybrid) is comprised of corporations which combine two different modes – market-based financing and long-term employment practices. These firms (which include Toyota and Canon) have made attempts to modify the long-term employment practices, while also taking active steps to reform their boards. Only 23% of all firms fall into the Type I Hybrid category, but they account for 67% of total employment. They earn comparatively high profits and occupy a predominant position among Japanese firms.
The second group (Type II Hybrid) is comprised of firms that have managed to combine relational financing and market-based employment practices. They are, in other words, the inverse of Type I Hybrid firms. Most of these firms are newly established and led by founders. They account for 21% of all firms, and 10% of total employment, and also record relatively high levels of performance. Therefore, despite their prominence in the media, these new firms still account for only a tiny fraction of the Japanese economy.
The third group encompasses traditional Japanese firms that combine relational financing with long-term employment practices. Most firms in this group rely on banks for financing, have inside ownership, fill their boards with insider directors, and offer lifetime employment– in short, the firms in this category conform to the idealized image of traditional Japanese corporations. In 2002, such firms accounted for 26% of all firms, and 11% of the workforce.
How did the global crisis affect these different types of firms?
The Reconfiguring of Governance for Traditional Japanese Corporations

Of the three groups, the group that includes traditional Japanese corporations has been dealt the harshest blow by the recent global turmoil. Rapid sales declines have brought the problems posed by their excessive levels of debt to the fore, and forced these firms to take active steps to restructure. Their corporate governance systems are expected to evolve in the following two ways.
First, the government and government-affiliated financial institutions will assume a greater role in their corporate governance. JAL is representative of this case. Second, the recent crisis may allow the banking sector to once again emerge as the bedrock of Japanese corporate governance. More precisely, in the wake of the current crisis, the banks will be expected to pull the trigger to oust managers when the need arises, and to take the initiative in developing restructuring plans.

Redesigning governance for Type II Hybrids as New Companies

Companies that actively adopted fixed-term employment schemes, performance-based wages, and stock options began to appear for the first time in Japan in the late 1990s, and helped to lend a fresh face to the Japanese business community. The current crisis has dealt a blow that is primarily financial in nature to the Type II Hybrids, and impacts two aspects of the evolution of their corporate governance arrangements.
First, the crisis has forced Type II Hybrids to reconfigure their financial strategies because they are finding it difficult to raise funds in capital markets. Second, over the longer term, the financial crisis may shape the overall strategies of Type II Hybrids. The most probable scenario is that firms in this category may continue to cling to relational-based financing and employment practices gradually converged on relation based one.

Fine-tuning the Governance Arrangements for Type I Hybrids:

Type I Hybrid firms sustained the export-led recovery from 2002 to 2007, and have come to play a central role in innovation and to occupy a predominant position among listed firms. The current crisis has brought considerable suffering to these firms, however, and will influence the evolution of their corporate governance arrangements.
In particular, Type I Hybrids will also have to take steps to manage their relations with outside investors after the crisis abates. These firms depend on the discipline of capital markets including the exercise of voting rights by institutional investors, even as they attempt to maintain their lifetime employment systems. Because Type I Hybrids integrate two opposing business approaches or modes, the inherent tensions contradictions could present challenges that turn into sources of instability.
Against the backdrop of stock market crashes triggered by the global financial crisis, overseas institutional investors, prompted primarily by financial concerns, have sold off shares in Type I Hybrid firms, amplifying the decline in their share prices. As the Type I Hybrids experience wild gyrations in their share prices, they will face an important decision with regard to their choice of approach to corporate governance: whether to continue to introduce outsiders to their boards and to implement other board reforms in order to converge on the American model, or to resort once again to practices that will help stabilize shareholding.

Future of Corporate Governance in Japan

Global financial crisis has major impact on the evolution of corporate governance in Japan. The institutions that were drivers of changes from insider system to outside system in corporate governance for a decade (institutional investors, hedge funds, private equity) may not continue to be so. On the contrary, the global crisis has led to the re-emergence of two key actors, the government and the banks. All happened in Japan is discontinuous changes from pre-crisis. Probably, the landscape of corporate governance in the after crisis may look very different from the pre-crisis.