Japanese Corporate Governance: Structural Change and Financial Performance

This paper analyzes institutional and legal changes related to corporate governance and their impact on financial performance in Japan since the second half of the 1990s. We attempt to address two issues systematically: (1) how much the governance reforms of Japanese firms transformed the conventional system of alliance capitalism and managerial control; and (2) what economic outcomes those governance changes have yielded. As the Commercial Code and other legal and institutional frameworks were revised, Japanese firms experienced shifts in terms of stock ownership, corporate control and managerial organizations. Our empirical results show that the influence of new ownership composition and reformed governance mechanisms on financial performance remains varied. We find that certain factors, such as foreign and financial investors, functioned positively, while others, like the executive officer system and stock options, had little or negative performance effect. Japanese management apparently appeased market investor pressure by superficially institutionalizing various governance reforms, while enhancing financial performance through strategic modifications.