No. 27 — July 14, 2000

 

Weekly Review

JAPANESE CORPORATE GOVERNANCE CONTINUES TO EVOLVE
--- by Jon Choy

Even though this year the great majority of Japan's publicly traded companies followed traditional practice and held their annual shareholder meetings the same day, evidence is mounting that attitudes toward corporate governance and shareholder rights are evolving at a faster pace. Besides changing the structure and the duties of executive boards and top managers, companies are paying greater attention to investor relations. Such shifts are having a major impact on corporate strategies. Observers agree, however, that the process has limits and that Japan is not likely to adopt without reservation U.S. corporate governance structures and practices.

According to the National Police Agency, about 7,800 officers provided security at the 2,161 stockholder meetings held June 29, including 3,300 police mobilized to cover the 950 gatherings held in Tokyo alone. NPA says that only 43 sokaiya (corporate extortionists) attended 31 meetings this year, down from 86 known racketeers present at 46 sessions in 1999. Of the 43, just 10 actually made statements or quizzed management.

Most firms decided to hold their annual shareholder meetings the same day and at roughly the same time in order to limit the participation of sokaiya. These squeeze artists generally threaten to ask embarrassing questions or otherwise disrupt a company's meeting unless they are paid off. Executives find such disruptions so distasteful that they usually acquiesce to the extortionists' demands.

A series of scandals in the early 1980s made these cozy relationships public, leading in 1982 to an amendment to the Commercial Code that banned dealings with sokaiya. The law was toughened in 1997. The kinds of relationships that are illegal were clarified, and a maximum fine of ¥3 million ($27,300 at ¥110=$12.00) and a jail sentence of up to three years were set. Law enforcement authorities also began to crack down on corporate extortion, going after both sokaiya and complicitous executives (see JEI Report No. 3A, January 23, 1998).

The tougher stance failed to stamp out the problem, however. In early 1999, a former president and several executives of Nomura Securities Co., Ltd., Japan's top brokerage house, were given suspended sentences for making payoffs worth trillions of yen to a corporate racketeer. The scandal affected nearly all of the country's major securities companies since executives at many other firms also admitted to dealings with sokaiya. The issue was revived in early July of this year when top executives at farm machinery maker Kubota Corp. were charged with paying off corporate extortionists. These cases highlighted the lack of checks and balances in Japan's business world and its inadequate transparency.

The sokaiya issue is just one of many factors pressuring Japan's business community to change its corporate governance practices. Others are:

In response to these forces, corporations have begun restructuring their boards of directors and their executive hierarchies. In the traditional Japanese system, the distinction between a company's board and senior management is small; the two jointly set strategy and operate the company. Under the American system, in contrast, the board of directors' main duty is to monitor the performance and the activities of top executives and to safeguard the overall interests of the firm. Japanese businesses are starting to adopt a hybrid approach — the corporate executive officer system — in which the board of directors decides the firm's direction and monitors implementation. Executive managers, who are chosen by the board, are responsible for running the company and following the board's strategic plan (see JEI Report No. 28A, July 23, 1999).

While the new system appears to be a step in the right direction, observers agree that many issues related to corporate governance still must be clarified. To do this, however, the Commercial Code has to be reworked, a massive undertaking that is supposed to be completed within the next two years. The gigantic scale of the overhaul, the diversity of views on the required changes and the uncertain political strength of the new government of Prime Minister Yoshiro Mori (see previous article) make it likely that this timetable will have to be extended.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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