Document Text Contents
Page 150
(pp. 361–2). Certainly the fact that a number of Japanese companies have
voluntarily appointed outside directors, and that several did so before the
committee system reform was introduced, suggests a growing understanding
of a need to protect interests other than those usually advanced by manage-
ment (Komiyama and Masaoka, 2002). Sony, which has of its own accord
appointed a majority of outside directors to its board, is an ideal example of
this trend (Sony Global, 2006). Moreover, other recent corporate law reforms
indicate a growing concern for the protection of shareholders’ interests, espe-
cially those of minority shareholders (Milhaupt, 2006).
2.2 Corporate Groups
If a company intends to appoint only grey outside directors, which it can do
under the statutory auditor system, another reason must exist for adopting the
committee system. An alternative rationale for adopting the committee system
put forward by Gilson and Milhaupt is to use it as a means of organising
corporate groups, in other words, using grey outside directors to strengthen the
bonds between group companies and enhance organisational flexibility
(Gilson and Milhaupt, 2005, pp. 364–5). Indeed, as these scholars (p. 362) and
others (Yanai, 2003) point out, the Hitachi and Nomura groups cited achiev-
ing stronger group cohesion as one reason for adopting the committee system.
The extent to which a corporate group will benefit from adopting the commit-
tee system, however, is likely to vary according to whether it is a vertically-
aligned corporate group with a parent company and subsidiaries or a more
horizontally-aligned keiretsu.
A vertical group can achieve stronger group cohesion by adopting the
committee system because the loose definition of outside director effectively
gives the parent company the power to appoint the outside directors for its
subsidiaries. Although the major shareholder of a statutory auditor company
also has the power to appoint directors, the committee system allows a parent
company to gain effective control of a subsidiary board’s committees by
appointing as few as two outside directors. The ability to control the nomina-
tion committee, in particular, gives the parent of a company with the commit-
tee system a considerable flexibility advantage compared with the parent of a
statutory auditor company. Although the maximum amount of power a parent
can obtain over a subsidiary is the same both for companies with the commit-
tee system and for statutory auditor companies, effective control is easier to
achieve under the committee system. Of course, the outside directors
appointed for this purpose are grey outside directors, so there is a risk that the
goal of stronger group cohesion could instead result in stakeholder tunnelling.
Indeed, it could be argued that appointing outside directors for the purpose of
achieving stronger group cohesion is stakeholder tunnelling.
Panacea or placebo? 137
Page 151
It would be more difficult for a keiretsuto achieve stronger group cohesion
under the committee system if there were not a single controlling company, or
small clique of controlling companies, that had significant control over the
other companies in the keiretsu. Without a controlling company or companies,
stronger cohesion could only be achieved within a keiretsuunder the commit-
tee system if the member companies were able to coordinate effective appoint-
ment of outside directors among themselves. However, if such a keiretsuwere
to achieve stronger cohesion in this way, it would not be a result of the
committee system but of the capacity for cooperation within the group.
Thus, it is the existence of a controlling company (or companies) that
makes the objective of stronger group cohesion possible. The flexibility
advantage the committee system offers to corporate groups can only be
exploited if there is a controlling company with the power to appoint outside
directors of its choosing to subsidiary boards.
2.3 Industry
In a well-known article on the structure of Japanese companies written almost
two decades ago, Aoki (1990) argued that the substantive characteristics of
Japanese production determine the structure of Japanese companies. Thus, the
traditional Japanese corporate governance mechanisms grew up in industries
characterised by slow, linear change. Building upon AokiÕs theory, Gilson and
Milhaupt argue that a companyÕs decision to move to the committee system
may be driven by its particular circumstances. Specifically, the committee
system may be suitable for companies that (a) are engaged in industries with
particular characteristics, or (b) have large foreign investment or are listed on
a foreign exchange (Gilson and Milhaupt, 2005, pp. 362—4).
Gilson and Milhaupt identify electronics as a fast-moving industry that
requires a flexible governance structure able to respond quickly to market
changes. They suggest that the committee system is suited to the electronics
industry because outside directors, without a Ôlifetime investment in a
companyÕs particular infrastructureÕ, are faster at responding to changes
(Gilson and Milhaupt, 2005, pp. 362—3). By definition, grey directors do not
fit this description, so the validity of this argument depends upon an individ-
ual companyÕs use of outside directors. However, other elements of the
committee system might contribute to managerial flexibility. The separation of
the executive from the board of directors, for example, might give executive
officers the managerial freedom to respond quickly and effectively to the
market. Furthermore, the improved monitoring mechanisms of the committee
system may also make it suitable for companies in industries, such as the
finance industry, that require strict regulation. On the other hand, a companyÕs
ability to perform well in a particular industry may be unrelated to its corpo-
138 Corporate governance in the 21st century
Page 300
value principles 135, 148, 164,
210—11, 225
voice 30, 117, 163, 196
voting rights 17, 189, 193, 210—12
shareholdings
caps on 224
cross-shareholding 159, 178, 234—5
disclosure of 8—9, 13, 42
major, trends in Top 40 companies
234—5
shares
blockholding 47—9
buy-back 112, 116, 213, 223—4, 235
call options 16, 235
class voting 17
exchange/ transfer 15, 112
golden 125, 187, 210—11, 219, 222
prices 24, 98—9, 122, 134, 146—8, 223
shikko-yaku seeexecutive officers
Shimizutani, Satoshi 31, 68, 70—71
shingikai(reform councils) 35
Shinn, James 47—9, 203—4, 225
Shinsei Bank 102, 133, 139
shinsha sarariiman(ÔnewÕ white-collar
workers) 67
Shiozaki, Yasuhisa 215—16
Shishido, Zenichi 34, 110
ShohoseeCommercial Code
shunto(spring offensive) 40
Shuwa v. Chujitsuya/ Shuwa v. Imageya
183
Small and Medium Enterprise Agency
(SMEA) 109, 114
small and medium-sized enterprises
(SMEs) 7
Social Democratic Party 199
Sony 27, 133, 137, 143, 159, 181
Soskice, David 43
sovereign funds 218
special interests theory 50
Special Law on the Corporate
Governance of Stock Corporations
(No. 22 of 1974) 111
Special Measures to Promote New
Businesses by Small and Medium
Companies Law (No. 47 of 1995)
117
stakeholders 56 see alsobanks;
employees
governance by 23—5, 56
influence of, shifts in 28—37
non-governmental organisations
(NGOs) 3, 29
tunnelling 135—7, 149—50
statutory reserve fund 16
Steel Partners v. Bulldog Sauce189—96
stock
options 14, 16—17
purchase/ repurchase, deregulation of
13—14, 16
super voting 210
warrants 36, 158, 184—5, 188—9
stock exchanges 16, 40, 125, 182
Streeck, Wolfgang 38—41, 79
suboptimal schemes seeinstitutional
incentives perverse
subordinate debt 99, 102
Sumitomo 232, 241
sunset clauses 188
suppliers 29, 204—5, 209—10
Sweden 48, 89—90
Tagaki, Shokichi 99
Takeovers Panel
in Australia 8—9, 156, 165—71, 176—7,
243
in Japan 171—7
in United Kingdom 8—9, 36, 243
takeovers see alsoTakeovers Panel
advantages of 157
hostile 7—10, 22, 33, 202 (see also
Bulldog Sauce;Delaware;
Livedoor;Murakami)
abusive acquirers 191—2, 222—3
advance warning system 178,
188—9, 210
Corporate Value Standard on
defensive measures 186—9
MoJ guidelines on 155—6, 160—62,
174—7
poison pill defence 155—6, 162—3,
174, 176—7, 188—9, 210—13
tests, primary/ proper purpose
125—6, 183—4, 243
warrants 36, 158, 184—5, 188—9
judicial involvement in 7—9, 36—7,
125, 128, 163, 165, 171,
173—4, 185—6
legislation on 19
reasons for development of 159—60
target management 9, 162
trends in Top 40 companies 243—4
Index 287
Page 301
taxes
deferred 99–100
incentives 225–6
used to support banks 102–3
tender offers 13
Thelan, Kathleen Ann 38–41, 79
Tokyo Kohtetsu 202
Tokyo Stock Exchange 108, 210
Mothers 40, 125
Tokyo University 32, 210
Toshiba 202, 215, 239
Toyota 27, 131–2, 159, 210, 239
trade unions 31–2
trading losses, compensation for 13
transformation, socio-economic
gradual 1–3, 21–3, 38–41, 197–8
comparing theories on 41–52
modes of 39–41
trends in Top 40 companies
229–45
layering 1, 7, 40, 79
treasury stock 16, 235
triangular mergers 19
UNCTAD (United Nations Conference
on Trade and Development) 201
unemployment 79, 97, 205, 207
unfair dismissal 75–7
Uniform Companies Act 1961
(Australia) 166
United Kingdom
City Code on Takeovers/ Takeovers
Panel 8–9, 36
FDI inflows 201
United States 48 see also Delaware
takeovers model
bilateral relationships with Japan
215–16
capital ‘crunch’ 96
corporate governance scandals 41–2
FDI inflows 201
Great Depression 90
Japanese influence on 42–3
market model 24, 228
poison pill defence 162–3
University of Tokyo 210
Unocal Corp. v. Mesa Petroleum Co. 36,
181–3, 185
venture capital 32, 40, 58
Vodafone 201, 232
Vogel, S. K. 33, 40
voting rights 17, 189, 193, 210–12
wages see pay
warrants 36, 158, 184–5, 188–9
West, Mark D. 22, 32–3, 37, 45, 49, 172
Whistleblowers Protection Law (No. 122
of 2004) 77
women 58–60, 77
Worker Dispatching Law (No. 88 of
1985) 78
yen carry trade 217
Yomiuri Shimbun 67, 217, 218–19
Yosano, Kaoru 210
Yoshikawa, Toru 70–71
yugen kaisha see closely-held companies
under companies
Yumeshin Holding v. Japan Engineering
Consultants 185
‘zombies’ 102
288 Index
(pp. 361–2). Certainly the fact that a number of Japanese companies have
voluntarily appointed outside directors, and that several did so before the
committee system reform was introduced, suggests a growing understanding
of a need to protect interests other than those usually advanced by manage-
ment (Komiyama and Masaoka, 2002). Sony, which has of its own accord
appointed a majority of outside directors to its board, is an ideal example of
this trend (Sony Global, 2006). Moreover, other recent corporate law reforms
indicate a growing concern for the protection of shareholders’ interests, espe-
cially those of minority shareholders (Milhaupt, 2006).
2.2 Corporate Groups
If a company intends to appoint only grey outside directors, which it can do
under the statutory auditor system, another reason must exist for adopting the
committee system. An alternative rationale for adopting the committee system
put forward by Gilson and Milhaupt is to use it as a means of organising
corporate groups, in other words, using grey outside directors to strengthen the
bonds between group companies and enhance organisational flexibility
(Gilson and Milhaupt, 2005, pp. 364–5). Indeed, as these scholars (p. 362) and
others (Yanai, 2003) point out, the Hitachi and Nomura groups cited achiev-
ing stronger group cohesion as one reason for adopting the committee system.
The extent to which a corporate group will benefit from adopting the commit-
tee system, however, is likely to vary according to whether it is a vertically-
aligned corporate group with a parent company and subsidiaries or a more
horizontally-aligned keiretsu.
A vertical group can achieve stronger group cohesion by adopting the
committee system because the loose definition of outside director effectively
gives the parent company the power to appoint the outside directors for its
subsidiaries. Although the major shareholder of a statutory auditor company
also has the power to appoint directors, the committee system allows a parent
company to gain effective control of a subsidiary board’s committees by
appointing as few as two outside directors. The ability to control the nomina-
tion committee, in particular, gives the parent of a company with the commit-
tee system a considerable flexibility advantage compared with the parent of a
statutory auditor company. Although the maximum amount of power a parent
can obtain over a subsidiary is the same both for companies with the commit-
tee system and for statutory auditor companies, effective control is easier to
achieve under the committee system. Of course, the outside directors
appointed for this purpose are grey outside directors, so there is a risk that the
goal of stronger group cohesion could instead result in stakeholder tunnelling.
Indeed, it could be argued that appointing outside directors for the purpose of
achieving stronger group cohesion is stakeholder tunnelling.
Panacea or placebo? 137
Page 151
It would be more difficult for a keiretsuto achieve stronger group cohesion
under the committee system if there were not a single controlling company, or
small clique of controlling companies, that had significant control over the
other companies in the keiretsu. Without a controlling company or companies,
stronger cohesion could only be achieved within a keiretsuunder the commit-
tee system if the member companies were able to coordinate effective appoint-
ment of outside directors among themselves. However, if such a keiretsuwere
to achieve stronger cohesion in this way, it would not be a result of the
committee system but of the capacity for cooperation within the group.
Thus, it is the existence of a controlling company (or companies) that
makes the objective of stronger group cohesion possible. The flexibility
advantage the committee system offers to corporate groups can only be
exploited if there is a controlling company with the power to appoint outside
directors of its choosing to subsidiary boards.
2.3 Industry
In a well-known article on the structure of Japanese companies written almost
two decades ago, Aoki (1990) argued that the substantive characteristics of
Japanese production determine the structure of Japanese companies. Thus, the
traditional Japanese corporate governance mechanisms grew up in industries
characterised by slow, linear change. Building upon AokiÕs theory, Gilson and
Milhaupt argue that a companyÕs decision to move to the committee system
may be driven by its particular circumstances. Specifically, the committee
system may be suitable for companies that (a) are engaged in industries with
particular characteristics, or (b) have large foreign investment or are listed on
a foreign exchange (Gilson and Milhaupt, 2005, pp. 362—4).
Gilson and Milhaupt identify electronics as a fast-moving industry that
requires a flexible governance structure able to respond quickly to market
changes. They suggest that the committee system is suited to the electronics
industry because outside directors, without a Ôlifetime investment in a
companyÕs particular infrastructureÕ, are faster at responding to changes
(Gilson and Milhaupt, 2005, pp. 362—3). By definition, grey directors do not
fit this description, so the validity of this argument depends upon an individ-
ual companyÕs use of outside directors. However, other elements of the
committee system might contribute to managerial flexibility. The separation of
the executive from the board of directors, for example, might give executive
officers the managerial freedom to respond quickly and effectively to the
market. Furthermore, the improved monitoring mechanisms of the committee
system may also make it suitable for companies in industries, such as the
finance industry, that require strict regulation. On the other hand, a companyÕs
ability to perform well in a particular industry may be unrelated to its corpo-
138 Corporate governance in the 21st century
Page 300
value principles 135, 148, 164,
210—11, 225
voice 30, 117, 163, 196
voting rights 17, 189, 193, 210—12
shareholdings
caps on 224
cross-shareholding 159, 178, 234—5
disclosure of 8—9, 13, 42
major, trends in Top 40 companies
234—5
shares
blockholding 47—9
buy-back 112, 116, 213, 223—4, 235
call options 16, 235
class voting 17
exchange/ transfer 15, 112
golden 125, 187, 210—11, 219, 222
prices 24, 98—9, 122, 134, 146—8, 223
shikko-yaku seeexecutive officers
Shimizutani, Satoshi 31, 68, 70—71
shingikai(reform councils) 35
Shinn, James 47—9, 203—4, 225
Shinsei Bank 102, 133, 139
shinsha sarariiman(ÔnewÕ white-collar
workers) 67
Shiozaki, Yasuhisa 215—16
Shishido, Zenichi 34, 110
ShohoseeCommercial Code
shunto(spring offensive) 40
Shuwa v. Chujitsuya/ Shuwa v. Imageya
183
Small and Medium Enterprise Agency
(SMEA) 109, 114
small and medium-sized enterprises
(SMEs) 7
Social Democratic Party 199
Sony 27, 133, 137, 143, 159, 181
Soskice, David 43
sovereign funds 218
special interests theory 50
Special Law on the Corporate
Governance of Stock Corporations
(No. 22 of 1974) 111
Special Measures to Promote New
Businesses by Small and Medium
Companies Law (No. 47 of 1995)
117
stakeholders 56 see alsobanks;
employees
governance by 23—5, 56
influence of, shifts in 28—37
non-governmental organisations
(NGOs) 3, 29
tunnelling 135—7, 149—50
statutory reserve fund 16
Steel Partners v. Bulldog Sauce189—96
stock
options 14, 16—17
purchase/ repurchase, deregulation of
13—14, 16
super voting 210
warrants 36, 158, 184—5, 188—9
stock exchanges 16, 40, 125, 182
Streeck, Wolfgang 38—41, 79
suboptimal schemes seeinstitutional
incentives perverse
subordinate debt 99, 102
Sumitomo 232, 241
sunset clauses 188
suppliers 29, 204—5, 209—10
Sweden 48, 89—90
Tagaki, Shokichi 99
Takeovers Panel
in Australia 8—9, 156, 165—71, 176—7,
243
in Japan 171—7
in United Kingdom 8—9, 36, 243
takeovers see alsoTakeovers Panel
advantages of 157
hostile 7—10, 22, 33, 202 (see also
Bulldog Sauce;Delaware;
Livedoor;Murakami)
abusive acquirers 191—2, 222—3
advance warning system 178,
188—9, 210
Corporate Value Standard on
defensive measures 186—9
MoJ guidelines on 155—6, 160—62,
174—7
poison pill defence 155—6, 162—3,
174, 176—7, 188—9, 210—13
tests, primary/ proper purpose
125—6, 183—4, 243
warrants 36, 158, 184—5, 188—9
judicial involvement in 7—9, 36—7,
125, 128, 163, 165, 171,
173—4, 185—6
legislation on 19
reasons for development of 159—60
target management 9, 162
trends in Top 40 companies 243—4
Index 287
Page 301
taxes
deferred 99–100
incentives 225–6
used to support banks 102–3
tender offers 13
Thelan, Kathleen Ann 38–41, 79
Tokyo Kohtetsu 202
Tokyo Stock Exchange 108, 210
Mothers 40, 125
Tokyo University 32, 210
Toshiba 202, 215, 239
Toyota 27, 131–2, 159, 210, 239
trade unions 31–2
trading losses, compensation for 13
transformation, socio-economic
gradual 1–3, 21–3, 38–41, 197–8
comparing theories on 41–52
modes of 39–41
trends in Top 40 companies
229–45
layering 1, 7, 40, 79
treasury stock 16, 235
triangular mergers 19
UNCTAD (United Nations Conference
on Trade and Development) 201
unemployment 79, 97, 205, 207
unfair dismissal 75–7
Uniform Companies Act 1961
(Australia) 166
United Kingdom
City Code on Takeovers/ Takeovers
Panel 8–9, 36
FDI inflows 201
United States 48 see also Delaware
takeovers model
bilateral relationships with Japan
215–16
capital ‘crunch’ 96
corporate governance scandals 41–2
FDI inflows 201
Great Depression 90
Japanese influence on 42–3
market model 24, 228
poison pill defence 162–3
University of Tokyo 210
Unocal Corp. v. Mesa Petroleum Co. 36,
181–3, 185
venture capital 32, 40, 58
Vodafone 201, 232
Vogel, S. K. 33, 40
voting rights 17, 189, 193, 210–12
wages see pay
warrants 36, 158, 184–5, 188–9
West, Mark D. 22, 32–3, 37, 45, 49, 172
Whistleblowers Protection Law (No. 122
of 2004) 77
women 58–60, 77
Worker Dispatching Law (No. 88 of
1985) 78
yen carry trade 217
Yomiuri Shimbun 67, 217, 218–19
Yosano, Kaoru 210
Yoshikawa, Toru 70–71
yugen kaisha see closely-held companies
under companies
Yumeshin Holding v. Japan Engineering
Consultants 185
‘zombies’ 102
288 Index
