Taking a Horse to Water? Prospects for the Japanese Corporate Governance Code

In 2014-15 Japan implemented a series of reforms to its corporate governance regime. The principal measures adopted were the country’s first Corporate Governance Code, revisions to its Companies Law, and a Stewardship Code, together with a report (the Ito Review) on corporate competitiveness and incentives for growth. In this paper we analyse the objectives of these reforms and make an assessment of their likely success, drawing on interviews with key actors in Japanese government, finance and industry. We firstly frame our analysis by a consideration of what institutional theory has to say about the relationship between formal and informal norms and practices, and about the feasibility of using regulatory mechanisms of different types to alter embedded routines. We then consider the historical evolution of Japanese corporate governance since the early 20th century and explore the causes of its current embeddedness and apparent resistance to change, noting pressures in the past which in some cases have changed it greatly while in others have had little effect. We then examine the manner in which the current reforms were devised and implemented, their content, and the influences that shaped them. We then discuss the methods used to conduct our primary interview research, which was carried out in 2016-17 with policy makers, corporate managers, investors and other interested parties. We use our interviews to identify how the reforms were formulated and how they have been received. We then present our assessment. We suggest that despite a pattern of embedded institutions resisting regulatory pressures for change in recent years, Japanese corporate governance may now have reached one of its historical turning points. The introduction into Japan of the 'comply or explain' approach, the major innovation that distinguishes this reform exercise, is a significant moment. The existence of a corporate 'compliance machine' of administrative officers below board level, whose role is to interpret regulation and present it in executable form to their boards of directors, improves the Code’s chances of implementation at large, listed companies. The Stewardship Code, meanwhile, has the potential to co-opt institutional investors' interests to the economic reform agenda of the political class. These politicians have shown an unusual degree of commitment to the reform process and continue to give it their strong support. At the same time, there are potential obstacles to unqualified adoption of the Corporate Governance Code, especially for smaller companies that lack administrative resources, and the 2018 revision of the Code has introduced some doctrinaire elements which seem at odds with the realities of governance in most Japanese companies. Moreover, some doubt remains regarding the ability of corporate governance reforms to deliver the kind of economic revival that politicians are seeking, at least in the short to medium term. Thus the question of whether the Corporate Governance Code will bring about lasting change in Japanese corporate practice remains an open one. The Code has clear advantages over previous attempts at reform but we compare this process to the proverbial 'taking a horse to water', because no amount of formal exhortation will succeed if the horse chooses not to drink.