DIJ Working Paper: “Research on the Corporate Governance of Listed Stock Companies in Japan”

By Franz Waldenberger. Excerpt:
5.2 Governance reform as growth strategy
The high number of Japanese companies listed on domestic stock exchanges, the high degree of ownership dispersion and the moderate pay levels of top executives suggest Japan’s system of corporate governance to function well.

Japan’s corporate sector makes extensive use of the benefits of market based equity financing and risk diversification while effectively containing the income aspirations of top executives.

However, the hoarding of cash accompanied by a low level of return on equity (Aoyagi and Ganelli 2014, OECD 2015: 25), the low degree of internationalization (Waldenberger 2008) and the persistently low productivity growth (Kalantzis et al 2012, Fukao 2013) suggest that the resources at the disposition of Japan’s large corporations are not managed in the most productive way. This combines with and is partly caused by a low propensity to take on risk, slow decision making processes due to strong consensus orientation, lack of cross-company mobility of resources and lack of diversity in management teams and boards.

Although there is no directly visible deficiency in Japan’s corporate governance hampering the functioning of stock markets, policy makers have increasingly come to perceive corporate governance reform as a means to change the way Japanese corporations are managed and to tap yet unexploited potentials of productivity growth. As a result,corporate governance reform has become one of the main pillars of the so-called new growth strategy, the “third arrow of Abenomics”. The key word is “growth oriented” governance.16 The Corporate Governance Code finalized in March 2015 forms a central element. Whereas corporate governance reform in other countries has greatly been driven by the need to constrain excessive risk taking, the Japanese code explicitly states that it “does not place excessive emphasis on avoiding and limiting risk or the prevention of corporate scandals. Rather, its primary purpose is to stimulate healthy corporate entrepreneurship, support sustainable corporate growth and increase corporate value over the mid- to long-term.”17

Whether the Code can fulfil these expectations will to a large extent depend on the engagement of shareholders, especially institutional investors. They will need to actively incorporate the principles in their interaction with boards and top management as envisaged by the Stewardship Code released in February 2014. Another, more structural condition are the still persisting in-house careers that have so far formed the backbone of Japanese governance structures and management styles. Will lifelong in-house careers stand in the way of any fundamental reform, will they fall victim to such a reform or will they be able to accommodate with a new, more entrepreneurial and risk friendly governance structure? These are important questions that will have to be addressed by future research.


The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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