What drives changes in corporate law? Certainly, corporate law tends to change toward increasing economic efficiency. In fact, corporate laws all over the world have converged in many important aspects. However, corporate law, like other law, is also formed politically. Political actors, such as politicians, bureaucrats, and interest parties, move to obtain favourable rule-making for them or their constituency. Political institutions, typically election system and choice of agenda, set the rule for political actors. Impact of political factors is overt when corporate law is modified against efficiency, such as anti-takeover provisions. However, even in a seemingly more efficiency-driven reform, political factors have impact on the content and timing of law developments.
Recently, political scientists have offered sophisticated perspectives on political factors that change corporate law. Culpepper argues in his book Quiet Politics and Business Power: Corporate Control in Europe and Japan that salience of an issue (the extent to which a political issue draws the electorate's attention) determines whether politicians intervene in corporate law making When the salience of an issue is high, politicians act. Otherwise, they leave the issue to specialists. On the other hand, Cioffi and Höpner argue that center-left parties play a critical role in pro-shareholder reforms in their paper and in Cioffi’s monograph.
In my paper, ‘Politics of Japanese Corporate Governance Reform: Politicians do Matter’, I examine what has driven corporate governance reforms in Japan, mainly focusing on the 2014 reform. Can the above two theories explain reforms in Japan or is there a different story for Japan?
What I found is that 1) politicians are important in corporate governance reform and 2) the 2014 reform involved new mechanism that cannot be explained by the existing theories without modifications. In the 2014 reform, politicians of a conservative governing party (Liberal Democratic Party, LDP) played active roles toward a pro-shareholder reform, even when topics in corporate governance issues were not attracting much public attention. Before the 1997 reform, patterns of reform clearly fit the model of Culpepper: politicians cut in to the manager's interest only when corporate scandals were revealed. In the late 1990's, from the 1997 reform, some politicians of then governing party (LDP) cooperated with business leaders in liberalizing corporate law. This trend continued until the 2005 reform.
Then, in the 2014 reform, the mechanism changed. One of the most fiercely debated topic during the process of the reform was whether to mandate listed companies to appoint at least one outside director. Managers strongly resisted, recognizing that this will be a slippery slope toward reforms depriving their autonomy more severely. At the Legislative Council, where basic ideas of the reform had been discussed by specialists and representatives from interest parties including managers, a version of ‘comply or explain’ rule had been adopted as a compromise. If a listed firm does not have an outside director, it must explain the reason why it would be ‘inappropriate’ for them to appoint any in the company's annual business report. At the last minute of the drafting stage, the LDP government added a new article in the bill for amending the Companies Act to strengthen the ‘comply or explain’ rule proposed by the Legislative Council. Intervening at this timing is quite rare in corporate law reform in Japan.
This intervention was based on the several reports publicized by the LDP just before the intervention. These reports insisted on making pro-shareholder reforms not only encouraging listed firms to appoint outside directors, but also reforms that might incur much stronger resistance by managers, such as dissolving cross shareholdings among firms. The intervention and the publishing of underlying reports were done when corporate governance issue was not so salient (the salience of topics on outside director was as low as during the period just after the great earthquake in 2011). Rather, these activities by the LDP drew public attention to corporate governance. This is clearly at odds with the model suggested by Culpepper.
Why did the LDP has begun cutting into manager's interest? Although the LDP is not a center left party in many aspects, it faced a very similar situation as center left parties in the research by Cioffi and Höpner did. Japan has faced long-term economic stagnation, fiscal limitation, and globalization of economics as their sample countries have. Especially, the globalization of financial markets has increased the shareholding by foreign institutional shareholders and influential investors have criticized Japanese style of corporate governance. Furthermore, as center-left parties in their research, the LDP has committed to economic growth to retain public support, but policy options were limited by fiscal limitation and other factors. As a result, the LDP turned to corporate governance reform as a method to stimulate economic growth through improving low rate of return on equity of Japanese listed firms. Interestingly, the Democratic Party Japan, which had been the main governing party when the deliberation of the 2014 reform had begun, had not seriously had any consideration on corporate governance, although it was more like center-left parties in other countries from the ideological perspective. Consequently, what matters is not an ideological position of a governing party, but rather the extent of commitment to economic growth and whether there are available policy options more effective than corporate governance reform.
What has been happening in Japan since my paper was published seems to be consistent with my argument. The LDP government's economic policies have not been as effective as expected, and they are making more reforms on corporate governance.
Manabu Matsunaka is a Professor of Law at the Nagoya University Graduate School of Law.