Observations on the Current State of Corporate Governance in Japan

This paper discusses recent positive and negative developments related to Japanese corporate governance. It first offers the good news in the M&A market and makes note of some general improvements in Japanese corporate governance, including a reduction in the size of boards, different terms of office for board members, and better transparency, reporting, and accounting. Further, it is noted that recent corporate scandals have increased awareness of the need for internal risk management controls and systems, though Japanese corporations still must distinguish more clearly between corporate governance and internal risk controls. Activist investors will stimulate and challenge management, but Japanese companies must develop better strategies for responding to them. Three activist cases are discussed to elucidate recent trends. Finally, a number of worrisome trends are analyzed. They include triangular mergers, Japan’s diminished status as a global financial center, the number of defensive measure proposals, evidence of “MBO bad behavior,” and the Nikko Cordial delisting. Japanese corporations still must do much more to integrate outside directors and allow them to perform their function efficiently. *This paper does not necessarily represent the views of White and Case LLP Introduction There have been numerous regulatory reforms in Japan over the past several years which have affected the behavior of Japanese managements, from tax code changes to revisions in the Commercial Code to changes in the takeover rules, and numerous others. At the same time, the erosion of the traditional system of cross-shareholdings has allowed the rise of activist investors and private equity firms. In addition, the demise of the administrative guidance system has left corporate managers scrambling to replace the traditional role of bureaucrats as corporate risk managers with their own risk management and compliance systems. It should come as no surprise that these changes have been met with confusion, resentment, and resistance by those who perceive their own interests threatened, while being heartily embraced by those who see in these developments the possibilities of positive change and opportunity. Below, I examine the opposing forces at work as Japan adjusts to the new realities that its business leaders face in the ongoing globalization of the economy. My views represent an international perspective, reflecting my position as a non-Japanese but long-term resident of the country involved for the past 25 years in assisting both domestic and foreign companies in understanding the expectations and directions of the other. There is good news and bad news on the Japanese M&A market, so I will discuss both. I. The M&A market in Japan: The good news A. Market trends 1. Strong transaction flow and healthy domestic development First, the market itself is very active. It is very stable. Every year, we are seeing a significant increase in the number of M&A transactions in Japan. In the 1990s, cross-border M&As