Chapter 9. Changing Japanese Corporate Governance

As it moved into the new millenium, Japan experienced a corporate governance crisis. Suddenly, the issue of corporate governance was transformed from an obscure concern of financial economists and legal experts into front-page news. The mass media blamed corporate misbehavior and economic doldrums on a lack of concern for shareholders, cozy cross-shareholding relationships between firms and banks, boards of directors that looked more like "old boys' clubs" than responsible monitors, and executive compensation packages that gave CEOs little incentive to improve the bottom line. Foreign institutional investors traveled to Japan to promote governance reforms. Some managers of large Japanese multinationals complained that existing governance practices hindered efforts to compete globally. Reforms in financial accounting regulations, sales of cross-held shares, increased foreign investment, and ongoing negotiations for a revision of the Japanese Commercial Code all transformed the political and economic institutions that had previously supported a distinctive Japanese system of corporate governance.