Understanding Corporate Governance in Japan: Do Classical Concepts Apply?

Theories of corporate governance, as formulated by US researchers, typically rely on mechanisms of control such as monitoring by an independent board of directors and incentive alignment contracts to protect shareholder interests (e.g. Fama and Jensen, 1983a), dismissal of poorly performing CEOs (e.g. Fama, 1980) and discipline from financial markets including the threat of takeovers for underperforming firms (e.g. Jensen and Ruback, 1983). Firms are responsive to market forces and achieve efficiency through the mechanisms of corporate governance (e.g. Williamson, 1988). But how generally able is this theory in explaining the functioning of markets in nonUS settings such as Japan? This paper examines the applicability of current theories of corporate governance to Japan and highlights a number of important differences which may undermine the usefulness of US theories. Based on field research in Japan, this paper suggests that existing theory needs to be expanded to include uniquely Japanese mechanisms of informal networks of former government officials ('old boys') and the use of administrative guidance (gyōsei-shidō) as important control mechanisms that are ignored by US theories. [ABSTRACT FROM AUTHOR]