1. Corporate governance reforms in Japan Toru Umeda Professor Reitaku University, Japan

2. Main features of the Japanese corporate model in the 1980s Cross-holding of shares among businesses Strong government-business ties: ‘ convoy capitalism ’ No distinction between execution and supervision Debt finance preferred to equity finance Seniority and life time employment system

3. Cross-shareholding among industrial groupings called ‘ keiretsu ’ - made equity markets illiquid - provided a business with a good defense against hostile takeovers - rendered shareholders passive owners As a result, corporate management became indifferent to shareholders interest

4. No clear distinction between supervision and execution Few outside directors adopted: the lack of effective control on the president ’ s power Board meeting infrequent, decisions rubber-stamped Board size tended to be too large for an effective decision-making These represented the dysfunction of the board in controlling management

5. Changes taking place in the last decade Shareholdings of banks fell: from 21 percent in 1990 to 5.7 percent in 2003 Foreign ownership has grown: from 7.3 percent in 1990 to 20.3 percent in 2004 Shareholders have become more vocal, visible and active than before Shareholder activism: dialogue, proposals, proxy voting, and litigation SRI movements have been a topic of concern Management is increasingly aware of the importance of enhancing shareholder value

6. Reforms regarding the separation of control and management Legislative amendment efforts made to strengthen control management: Outside auditors, and attempted to mandate outside directors, but impacts limited A breakthrough: May 2002 amendments to the Commercial Code, enforced in April 2004 Paved the way for a large company to opt for an American style of corporate governance

7. Under the ‘ Committee system ’ A large company is to - do away with corporate auditors - instead establish the three committees for nomination, compensation and audit, each consisting of three directors and more with the majority being outside persons - introduce the new office of executing officers separate from the board, responsible for the execution of business operations, distinguishing control and management.

8. But in practice Only a limited number of companies have shifted to the new system: 1.2 % Under the conventional auditor system more companies introducing a new non-statutory corporate officers post, - delegating some execution power to such officers, - slashing the number of directors A third, mixed type with no statutory base seems gaining force “ One-size-fits-all ” approach not adopted

9. Growing CSR concern focusing various stakeholders consumers, customers, employees, local communities, and future generations Relative positioning: the shareholder is part of a group of stakeholders A survey shows corporate managers put more weight on customers than before Corporate management is expected to respond to stakeholders ’ interest Should the concept of shareholder primacy be declared dead?

10. The ‘ shareholder primacy ’ concept continues to play an important role CSR: a strategy for a business to gain reputation and trust from its stakeholders Corporate efforts to respond to demands of the other stakeholders serve in theory the interest of the shareholder CSR efforts will lead to reputation hike, making the company more sustainable, which ought to serve the interest of the shareholder in the long run

11. Warning ! When prompted by short-term profitability or when combined with greed, shareholder primacy practices could undermine the interest of the other stakeholders - cutting corners only to jeopardize the safety and welfare of employees, consumers - degrading the environmental integrity This is why shareholder primacy needs to be circumscribed What should be praised is ‘ enlightened shareholder primacy ’, not greed-driven one

12. No optimism: enlightened shareholder primacy becoming common Market realities: short-term greedy players tend to prevail, preying on long-term players Markets unequipped with mechanisms to deter short-term profit seekers from snatching fruits which long-term players would share in their hands in the long run This is the very field where ethical values should play critical roles integrity, trust and self-restraint

13. Shareholders ’ interest diversified The rise of social investors demanding corporate management to address social issues: including human rights practices, effective implementation of labor standards, and environmental concerns, by sometimes resorting to SRI strategies Shareholders ’ interest used to be associated only with the financial bottom line It now extends to cover the so-called ‘ triple bottom lines ’ This can be called ‘ enlightened shareholder interest ’

14. A main concern of corporate governance is: the sustainability or long-term profitability of a company, not a short-term maximization of shareholder value This is where corporate governance concerns meet with CSR concerns

15. END