The Story Behind Japan’s Corporate Governance Reforms

Frequent visitors to our blog are likely aware of Japan’s major corporate governance reforms, but not everyone is familiar with the story behind how these reforms were crafted. The eminent Steven K. Vogel (Professor of Political Science at the University of California, Berkeley), recently wrote a concise and easy-to-follow history of the major reforms to Japanese corporate governance practices since the 1990s, describing how and why they came to pass.

Vogel explains how “in the early 1990s, government and industry leaders called for a decisive move toward U.S.-style shareholder capitalism” and how “increasing foreign share ownership exerted strong pressure” to move towards reform. Yet there was a tendency for firms to favor “superficial adjustments” while government ministries acquiesced to making incremental changes “designed to give firms more options for restructuring.”

It was Acting Chairman of the LDP’s Policy Research Council Yasuhisa Shiozaki’s “personal passion for corporate governance reform” working with our own Nicholas Benes who together pushed Japan’s FSA and TSE to form a joint council of experts and to follow specific recommendations leading to the creation of the Japanese corporate governance code we have today. These reforms aim “to improve decision-making procedures and to enhance the accountability of managers” and allow opportunities “to find win-win solutions that benefit both shareholders and the broader spectrum of stakeholders.”

To read the entire well-written paper, you may download it directly at:

Japan’s Ambivalent Pursuit of Shareholder Capitalism by Steven K. Vogel 2019

(Excerpt, p 8 bottom)
“Yasuhisa Shiozaki, the Acting Chairman of the LDP’s Policy Research Council, played the leading role in the corporate governance reform. Shiozaki was a former Bank of Japan official known for his expertise in financial affairs, who had served as Chief Cabinet Secretary in the first Abe administration (2006-07). Benes, the American reform advocate, advised Shiozaki to stick with the comply or explain framework rather than to push for a statutory requirement for outside directors. The business community had already accepted the comply or explain concept under the DPJ, Benes figured, so Shiozaki would be best off to accept that and then press for results through a detailed “soft law” corporate governance code. Shiozaki recalls the subtle negotiations over how to structure the deliberations: 

‘I engaged in an intensive back-and-forth exchange of drafts with the Financial Services Agency by e-mail. I wanted the FSA to handle the corporate governance code because the TSE is a private company and the listed companies are its clients, so it cannot push through things those clients do not want. Eventually we agreed that the FSA and TSE would jointly organize the council of experts. So this was a government proposal, with the council delegated to work out the details.31 ‘

The FSA did not want to handle the corporate governance code because it would be vulnerable to pressure for concessions from politicians (other than Shiozaki). Thus the TSE was vulnerable to pressure from industry, and the FSA was vulnerable to pressure from politicians. “Each side has a weak point,” explains one central participant in the negotiations. “So if the FSA and TSE work together, then that should work.” In May 2014 the party issued its economic revitalization plan.33 Shiozaki drafted many of the sections related to corporate governance, with some help from Shibayama. Shiozaki also conferred with his party colleagues, but he only compromised with a few specific edits to appease the most persistent ones: 

‘When we had a draft of our report, I presented it at an LDP meeting. Some colleagues registered objections but I only listened to the ones who stayed after, not to those who left partway through. We revised specific language in response to this input.34’

For example, Shiozaki softened the language regarding reforms to the commodity derivative market to appease a leader of the party group on economic and industry issues (keisanzoku). And he revised a clause on the regulation of electronic bank transfers in response to a Diet member representing bank interests. He had hoped to go beyond a recommendation that banks reduce their industrial holdings to specify a requirement, but a cabinet member shot down that proposal. “

29 Author’s interview, May 27, 2014.
30 Benes interview; Nicholas Benes, “ How Japan’s Corporate Governance Code Was Born,” Board Director Training Institute blog, 2015; online at .
31 Author’s interview, May 29, 2014.
32 Author’s interview, May 29, 2014.
33 Liberal Democratic Party, “Nihon saisei bijon” [Japan Revitalization Vision] (Tokyo: LDP, May 23, 2014).
34 Author’s interview, May 29, 2014.

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