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TheCorporateGovernanceModelofJapan:ShareholdersarenotRulersFranklinAllenUniversityofPennsylvaniaandMengxinZhaoBentleyCollegeMay13,2007AbstractIntheU.S.andU.K.corporategovernanceisconcernedwiththenarrowgoalofensuringthatfirmsmaximizethewealthofshareholders.InJapanandsomeothercountries,firmsareconcernedwithabroadergroupofstakeholders,includingemployees,suppliers,customersandothersaswellasshareholders.ThisarticlecontraststheAnglo-AmericansystemofcorporategovernancewiththatinJapanandelsewhere.Ifmarketsandinstitutionsarewelldevelopedandcompetitive,Anglo-Americancorporategovernanceensuresanefficientallocationofresources.Inothercircumstances,focusingonawiderrangeofstakeholdersastheJapanesedocanbemoreefficient.1IntheU.S.andU.K.corporategovernanceisconcernedwithensuringthefirmisrunintheinterestsofshareholdersanditsobjectiveistocreatewealthforthem.UnderlyingthisviewofcorporategovernanceisAdamSmith'snotionoftheinvisiblehandofthemarketthathelaidoutinhisseminalbookTheWealthofNations.Iffirmsmaximizethewealthoftheirshareholdersandindividualspursuetheirownintereststhentheallocationofresourcesisefficientinthesensethatnobodycanbemadebetteroffwithoutmakingsomebodyelseworseoff.Inthisviewoftheworldtheroleofthefirminsocietyispreciselytocreatewealthforshareholders.ThisfundamentalideaisembodiedinthelegalframeworkintheU.S.andU.K.Inthesecountriesmanagershaveafiduciary(i.e.verystrong)dutytoactintheinterestsofshareholders.MuchofresearchineconomicsinthemorethantwocenturiessincethepublicationofTheWealthofNationsin1776hasbeenconcernedwithunderstandingwhentheinvisiblehandofthemarketworksandwhenitdoesnot.Therequirementsforittoworkarestrong.Theseincludeperfectandcompletemarketssothattherearenotransactionscostsorothersimilarfrictions.Theremustbenomissingmarketsorexternalitiessuchasthosearisingfrompollution.Everybodymusthavethesameinformationsothatnobodyhasanunfairadvantageoverothers.Marketsmustbeperfectlycompetitive.Thesearestrongrequirementsandareunlikelytoholdinmosteconomies.Thekeyquestioniswhethersuchdeviationsaresufficienttoinvalidatethebasicinsightoftheinvisiblehandofthemarket.IntheU.S.andU.K.itiswidelyagreedthatthisisnotthecaseanditisacceptedthatfirms’objectiveshouldbetocreatewealthforshareholders.2Inmanyothercountriesthereisnosuchconsensus.Japanisperhapsthemostextremeexample.Insteadoffocusingonthenarrowviewthatfirms’shouldconcentrateoncreatingwealthfortheirowners,corporategovernancehastraditionallybeenconcernedwithabroaderview.Onewayofarticulatingthisviewisthatcorporategovernanceisconcernedwithensuringthatfirmsareruninsuchawaythatsociety’sresourcesareusedefficientlybytakingintoaccountarangeofstakeholderssuchasemployees,suppliers,andcustomers,inadditiontoshareholders.Withimperfectmarketsthisbroadobjectivecanpotentiallymakeeverybodybetteroffcomparedtojustfocusingontheshareholders’interests(seeAllenandGale,2000).Forexample,ifthereareexternalitiessuchaspollutionthenmaximizingthevalueofthefirmiswellknowntocauseamisallocationofresources.Iffirmswereinsteadtousethebroaderviewabove,theywouldchangetheirbehaviorandproducethesociallyoptimallevelofpollution.Ingeneral,althoughitmaynotbepossibletoobtainefficiencyitmaybepossibletoachieveabetterallocationofresourceswiththebroadviewthanwiththenarrowone(seeAllenandGale,2000,andAllen,2005)..IncountriessuchasJapan,GermanyandFrance,itisthisbroadviewthatisoftenstressed.Ratherthanbeingconcernedonlywithshareholdersawidersetofstakeholdersincludingemployeesandcustomersaswellasshareholdersareconsidered.InfactinGermanythelegalsystemisquiteexplicitthatfirmsdonothaveasoledutytopursuetheinterestsofshareholders.Thisisthesystemofcodetermination.Inlargecorporationsemployeeshaveanequalnumberofseatsonthesupervisoryboardofthecompanywhichisultimatelyresponsibleforthestrategicdecisionsofthecompany.InJapan,managersdonothaveafiduciaryresponsibilitytoshareholders.Thelegalobligationofdirectorsis3suchthattheymaybeliableforgrossnegligenceinperformanceoftheirduties,includingthedutytosupervise(Scott,1998).Inpracticeitiswidelyacceptedthattheypursuetheinterestsofavarietyofstakeholders(see,forexample,AllenandGale,2000).ExamplesofCorporatePhilosophiesinJapanTable1containsatypicalstatementofcorporatephilosophyforaJapanesefirm.ItisforAsahiBreweries,awell-knownJapanesefirm.Verylittleattentionispaidtoshareholders.InfacttheyarenotevenmentioneduntilSection6andthenonlybriefly:“WeatAsahi,throughsecuringandexpandingthebaseofouroperations,desiretofulfillourresponsibilitiestostockholdersandthelocalcommunitiesinwhichweoperate.”Table1illustratestheperspectiveontheroleofthecorporationinsocietythatunderliesthebroaddefinitionofcorporategovernancegivenabove.TheJapanesecompanyToyotaprovidesanevenstrongerillustrationoftheideathatifcompaniespursuetheinterestsofallstakeholdersthenasuperiorallocationofresourcescanbeachieved.OnAugust1,2001theFinancialTimesreporteddetailsoftheannualmeetingoftheInternationalCorporateGovernanceNetworkwhichwasheldinTokyothatyear.“HiroshiOkuda,chairmanofToyotaMotorCorporationandoftheJapanFederationofEmployers'Associations,toldthe