[ANJeL Program Convenor Prof Souichirou Kozuka and I have written a shorter chapter on Japan for the 5th edition of Principles of Contemporary Corporate Governance (by Jean Jacques du Plessis, Anil Hargovan and Jason Harris): see our longer manuscript version reproduced here for the 4th edition published by Cambridge University Press in 2018). As indicated in the introduction below, we pay particular attention to the hot topic internationally of ESG (environmental, social and governance) factors in corporate activity and investment, highlighting changes and (mostly) continuities in the corporate governance system behind Japan’s rapid uptake of ESG and sustainable or responsible investment.]
Japan developed vibrant commercial activity domestically towards the end of the Tokugawa Shogunate era (1603-1867), when it largely closed itself off to the world. As the country re-opened and expanded industrialisation over the Meiji Era (1868-1912), codifications and legal institutions were introduced following the European civil law tradition. Stock exchanges were established and investment grew into often family-owned companies, resulting in considerable emphasis on shareholder primacy before World War II.
However, after the US-led Allied Occupation (1946-51) until at least the 1980s, Japan became renowned for its stakeholder approach to corporate governance. More emphasis was placed on the interests and roles of employees (especially those in “lifelong employment”), creditors (especially “main banks”) and key suppliers or corporate customers (including in “keiretsu” corporate groups, and/or involving significant cross-shareholdings). These three practices influencing corporate governance, only loosely underpinned by relevant legislation, started to unravel after an asset bubble collapsed and Japan entered a “lost decade” of economic stagnation from the 1990s. Growing foreign investment into the Japanese stock market also supported a “gradual transformation” toward more shareholder primacy. This has involved some more protection for minority shareholders, and partial shifts towards a “monitoring” rather than executive board especially in listed companies (as elaborated in Part 11.2 of our new chapter).
The transformation since the 1990s has been reinforced by the creation of a new legislative regime (Part 11.3) and more recent “soft law” Codes for corporate governance and engagement or stewardship by institutional investors (Part II.4). Japan has experienced three major waves in the development of corporate law, at roughly half-century intervals. The Meiji-era Commercial Code enacted around the turn of the 20th century was followed by US-inspired reforms during the post-war Occupation, then much more wide-ranging reforms from around the turn of the 21st century prompted by Japan’s economic slowdown. Even in terms of formal legislative changes, the trajectory has not been one of straightforward ‘Americanisation’, and the overall position now reached is also very different from US law, as evidenced by the partial persistence of the statutory auditor governance structure inspired by German law. Also evident are some influences from – or at least parallels with – aspects of English law. These are epitomised recently in listing requirements, including a ‘comply or explain’ Corporate Governance Code since 2015, and an earlier tendency in takeover regulation to give priority to decisions of shareholders over those of directors. The impact of German law, filtered sometimes nowadays through EU law, remains important too. Japan’s complex corporate law landscape is also influenced by the three distinctive features of post-War corporate governance practice mentioned above, even though they too have been undergoing gradual transformations.
Much discussion has emerged recently also around ESG issues for investors and managers in Japan, as in many other jurisdictions with large securities markets (Part II.5). A key question is whether this means even-greater shareholder primacy, as foreign institutional investors in particular pushed for further ESG initiatives from Japanese firms, or whether it marks their return towards more stakeholder-based corporate governance. The answer is important for predicting likely future directions (Part II.6).