Summary and Conclusion
by
Takeshi
Inagami
in
"Corporate
Governance in Japan"
edited
by
Takeshi
Inagami and RIALS
Chapters One through Three of this book
analyze the results of the questionnaire survey with executives of large enterprises
in Japan. On the basis of this analysis
as well as Japan's Commercial Code, corporate laws and labor laws in
comparative context with major countries in the world, Chapters Four and Five
go on to discuss corporate governance in Japan in relation to the country's
legal system and the relationship between the corporate governance and the
employment relations in Japan.
In
this Summary and Conclusion, we first present main points of each chapter and
then consider a number of critical issues that will have important bearings on
the future of corporate governance and employment relations in Japan.
<Contents>
Summary of Each Chapter
Introduction. New Japanese-Type Corporate
Governance and Employment Relations
Chapter One. Corporate governance of Japanese
Enterprises - Today and Tomorrow
Chapter Two. Japanese-Type and
Non-Japanese-Type of Corporate Governance
Chapter Three. Careers and Remunerations for
Executives
Chapter Four. Corporate Governance and Corporate
Laws
Chapter Five. Corporate Governance and
Employment Relations in Japan, U.S.A.and Germany: from the
Viewpoint of Comparative Law
Chapter Six. Corporate Governance and Trade
UnionsConclusions and Future Prospects
Summary of Each Chapter
Introduction 'New Japanese-Type Corporate Governance and Employment Relations' by Takeshi Inagami
In the introduction, Inagami reviews the
relevant developments in the 1990s regarding corporate governance in terms of
emerging global debates, formulation of principles, and their reform and
codification in various national legal systems. It then outlines the resulting three models of corporate
governance: traditional model with the
principle of shareholder-value maximization; the enlightened
shareholder-value model; and the pluralist model. It then posits that there is no such a thing
as the global standard in corporate governance and that there in fact exist a
number of different models competing with each other in all the major countries
under investigation, each embracing more than one model. It finally discusses two recent reports on
corporate governance issued by two of Japan's major business organizations (The
13th White Paper on Japanese Corporations published in 1998 by the Japan
Association of Corporate Executives, and the Report in 1998 of the Special
International Committee of the Japan Federation of Employers' Associations),
and concludes that both basically espouse the third pluralist model.
The
Introduction also analyzes, on the basis of the above, the questionnaire survey
with executives of big enterprises in Japan. For the purpose of our analysis, we defined the Japanese model of
corporate governance as follows:
The hypothetical Japanese model here is
the one which;
(1) is characterized by a dual
supervision system
(2) emphasizes the survival of corporate
community and its development
(3) is governed by internally promoted
managersand also the one which is supported by
the long-term relationship of mutual trust with;
(4) their silent and stable shareholders
mutually holding shares of each other
(5) their main bank involved in financing
their business indirectly
(6) and other stakeholders especially the
regular full-time employees
We
compared the survey results with this working hypothesis, and tried to posit a
possible future development scenario. The result shows that there are only relatively minor discrepancies
between our model and the reality, and also that the future could hold two
scenarios of continuation of this model as well as a clear change of it.
However, the resulting models seem to be able to be essentially a new
Japanese-type corporate governance characterized by the basic features of the pluralist
model discussed above.
If
we enumerate important features of the continuation scenario, we see internally
promoted managers, long-term employment practices, high ratios of stable
shareholders, expectation of certain behaviors by silent stable shareholders on
the basis of solid investor relations, cooperative industrial relations within
the corporate/industrial group, dual supervision system, and the concept of
business enterprises as not owned by shareholders. In the change scenario, we see introduction of new factors such
as reforms in the management organization and decision-making mechanisms
(simplification of the top decision-making body, quicker decision-making,
divestiture and other forms of decentralized management together with the
consolidated management within the Corporate/industrial group), leaner
management echelon and merit evaluation of management performance (executive
directors introduced, and a differentials of management salaries from those of
the employees), better management performance (change of management performance
indices from the emphasis on sales to current profits, more emphasis on shareholder
value, and greater roles of external supervisors), higher ratios of direct
financing, introduction of employment portfolio management, reforms of the
seniority-based wage system, individualization of working conditions, and
diversification of the employee reward system.
The
motivation for these and other reforms is the need for ever-stronger
international competitiveness of the whole corporate/industrial group. In the context of the debate on corporate
governance, this can be seen as a greater emphasis placed on business
prosperity rather than on business accountability.
The
Introduction also poses a further question: Can the emphasis on employee
welfare and/or the concept of good corporate citizenship be reconciled with the
notions of greater importance to be placed on shareholders and/or greater
capital efficiency? This chapter hints
at a positive answer.
Chapter One. 'Corporate governance of Japanese Enterprises - Today and Tomorrow' by Michio Nitta
In Chapter One, Nitta identifies three
types of business corporations from the point of view of ownership and
control: controlling companies in
corporate/industrial groups (not managed by owners); owner-manager-type
companies; and controlled companies.
This typology addresses the diversity within Japanese corporate
governance, depending on how the company is owned and controlled. The questionnaire respondents are composed
of the following distributions: over 50 percent being the controlling companies
in various industrial groups, and approximately 20 percent each being
owner-manager-type companies and controlled ones.
In
order to examine differing corporate governance in these three types of
companies, three criteria are established: fundamental structure of corporate
governance; its system; and its ideals vs. implementation. The fundamental structure refers to the
forms of ownership such as the cross-shareholding practices, the role of stable
shareholders, and financing methods including indirect financing. One of the important hypothesized features
of the new Japanese-type corporate governance is the lack of strict control by
shareholders. The system of corporate
governance refers to the roles and functions of various management and
executive bodies, including the influence shareholders wield on corporate
control, the personal characteristics of individual managers, and the nature of
the board meeting. Last, the ideal and
implementation of corporate governance refers to normative aspects of the
concept of corporate governance, which broadly determines the ownership and
control relationship.
Then
Nitta analyzes the current state of affairs as well as the future prospects of
corporate governance in Japan, with the following results:
i. The Japanese model is applicable on the
level of the fundamental structure (most conspicuously among controlling
companies in industrial groups). Furthermore, only minor differences exist among the three types of the
companies on this level.
ii. As for the system of corporate
governance, some noteworthy differences are observable among the three types of
companies in terms of expression or non-expression of large shareholders on the
way the company is run, and as well as the executives' profiles including their
past career and their terms of office. However, the three types of companies have many commonalities in other
aspects of the corporate governance system. Nor are there big discrepancies between the model and the current
practices.
iii.As for the ideal and implementation of
corporate governance, all the three types of companies essentially agree in
criticizing the traditional (shareholder-value maximization) model and
prefer the pluralist model.
The
future can be described in the following three ways:
i.In the fundamental structure of Japanese
corporate governance, there seems to be a trend for weaker mutual shareholding
practice, but thorough dismantling of this practice seems hardly
imaginable. Many executives wish to
retain a certain number of stable shareholders. We must point out, however, that their clear preference for
direct financing may exert a big influence on their future behavior.
ii. In the systemic aspects of corporate
governance in Japan the present trends will be reinforced to reform the
business executing and implementing bodies with greater emphasis to be placed
in preventing scandals by giving greater authorities to internal supervisors
rather than to external board members, and further reforms in top personnel
affairs.
iii. In the area of the ideal and
implementation, the basic framework of stakeholder orientation will be
maintained, while there is a good possibility of greater emphasis on more
efficient use of capital and on the shareholder value.
Chapter Two. 'Japanese-Type and Non-Japanese-Type of Corporate Governance'by Hiroki Sato
Chapter Two deals with the extent to
which these two types of corporate governance are different from each other,
and its future prospects especially regarding the future of employment and
trade union relations.
First,
the questionnaire responses are divided into two groups: those which fit with the Japanese model of
corporate governance, and those which do not. Differences between these groups are then analyzed in terms of board
membership, their remunerations, actual practices of board meetings, relations
with shareholders, perception of various business scandals, and the concept of
stakeholders. Future prospects of
management reforms as well as the employment relations are also discussed.
The
Japanese-type corporate governance is defined by six criteria: (1) career of
managers who have attained their position as a result of internal promotion
(rather than brought in from outside), (2) where the duties and the
remunerations of executives have not a sharp discontinuity from those of the
employees, (3) where important decisions are not made formal board meetings but
rather in more informal top management gatherings of various nature, (4) where
the ratio of stable shareholders is high and stable dividends valued highly,
(5) where the ratio of indirect financing is high through the use of a main
bank, and (6) where there is some hefty criticism of the view that the
company is owned by shareholders. Each of these criteria is applied to actual corporate practice, and the
score of one or zero is given, with one meaning applicable and zero not
applicable. A resulting score of zero
to three designates a non-Japanese-type, and scores of four to six designate a
Japanese-type. The result shows that
over 80 percent of the companies surveyed belong to the Japanese-type (nearly
20 percent of them scoring six points, and 64.9 percent of them scoring four
and five), while less than 20 percent of them non-Japanese-type.
How
different are these two types of companies from each other qualitatively in
their current corporate governance practices? This Chapter concludes that while non-Japanese-type corporations have
lower ratio of stable shareholders, lower rates of salary cuts for top
executives at times of poor business performance, and a greater tendency to
view the company itself as owned by shareholders, there are little
marked differences with respect to the other criteria.
What
does the future hold in store? Both the
Japanese and the non-Japanese-types seem to move in the direction of placing
greater emphasis on more efficient use of capital. The non-Japanese-type is more aggressive in the introduction of
external executives and stock options, in the establishment of pure holding companies,
and the exchanges of mutually held shares. And yet few differences seem to result in employment relations between
the two types of companies: both will
give greater preference to actual employee performance rather than seniority,
diversify their pay system, and individualize employment and working
conditions. According to this analysis,
however, this does not mean that they will move toward the Anglo-Saxon version
of corporate governance, nor toward the employment relations that are conducive
to the Anglo-Saxon corporate governance.
Chapter Three. 'Careers and Remunerations for Executives'by Hiroyuki Fujimura
Chapter Three analyzes the survey results
from the four points of view: the careers of corporate executives, the
substantive (as against formal) process of selecting corporate executives, the
content of their work and duties, and their remuneration.
Hitherto
career of corporate executives is of the two types: one recruited from within (called Type A) and the other
from outside (called Type B). Type
A constitutes 75.6 percent of the respondents, and Type B 22.3 percent. Many of those belonging to Type B is
from subsidiaries and associated companies. The pattern here is the executives moving among the companies within the
same corporate/industry group, or the career pattern on the basis of internal
promotion, internal to the corporate/industry group.
There
are conspicuous differences among sectors and industries as to whether or not
the executives have in the past held trade union posts,: In the financial and insurance sectors, many
served as trade union officials before assuming executive posts, while in
commerce the proportion of such people is low.
Generally
speaking, the President wields strong influence on the selection of the
Vice-President(s) and other business executives, and this is viewed
favorably. On the selection of the
President, however, there is some antipathy to a strong influence of big
shareholders or the parent company. There is neither the practice of promoting low-ranking employees and
appointing them to big jobs by jumping the corporate ladder, nor fixed terms of
office for the executives. However,
there are a fairly large number of respondents who feel that fixed terms of
office should be introduced. The rather
large number of cases of former executives assuming the post of auditor do not seem
to concern our respondents.
These
observations, however, are not necessarily those of the Presidents themselves
but rather those of the top management at large. Different echelons of executives do harbor different opinions on
these issues. The same applies to
different types of companies to which these executives belong (i.e., whether
the company in question is an owner-manager company, one of the member
companies in a corporate/industry group, or a subsidiary or an associated
company).
Duties
and responsibilities of corporate executives are characterized as those of employees
in the sense that they are assigned specific duties. Not a few serve more than one company in similar executive
posts. Nearly 60 percent of them serve
3.6 companies on the average, 90 percent of them devoting an average of 2.8
days a month (meaning they are part-time executives), mostly, however, serving
other companies within the same group.
The
average yearly pay of the corporate executives amounts to only nine times that
of the first-year employee, signifying a rather modest gap. Executive bonuses also are similar in nature
to those of other employees, subject to cuts at a time of poor business
performance. Many respondents feel that
executives should be rewarded on different grounds in the future.
Chapter Four. 'Corporate Governance and Corporate Laws' by Hiroyuki Kansaku
Chapter Fourfirst describes the legal framework surrounding corporate governance
in Japan with emphasis on the supervisory system and the board meeting.
It then refers to the survey result and discusses recent debates on the
revisions of corporate law in relation to the two systems mentioned above. It also analyzes in great detail the recent
German debate on corporate governance, where the pluralist model also prevails.
The
Japanese systems of internal corporate control, i.e., the system of internal
supervisors and board meeting, are quite noteworthy in the international
comparative context in that they represent a systemic division of power between
the executing branch and supervising branch within one company, which is
derived from the German legal experience. The board meeting, as the executing
branch of business, supervises the supervisors (and supervisory board meetings)
as well as the board members, including the President himself (thus, the dual
supervision system). When the
Commercial Code was revised in 1950 under American influence, the board meeting
was introduced anew but the supervisory system remained unchanged. Subsequent revisions of the Commercial Code
have not effected the board meeting (which gradually degenerated into mere
formalities) but the supervisory system. More recently, however, there has been an argument proposing to dispose
of the supervisory system so that the board meeting will be the only control
system to orient efforts toward the realization of the American-type corporate
governance. Other arguments include
that of the Sub-Committee on Commercial Code of the Liberal Democratic Party on
the revision of the supervisory system, as well as other proposals to invite
employees to sit on the supervisory board given the reality of Japanese
corporate management where employees (including middle management) are
authorized to select neutral supervisors from among specialists with relevant
qualifications, and lastly one novel proposal to give the employees the right
to select board members. The pros and
cons of these proposals as well as their assumptions are examined from legal
point of view. All these proposals have
one thing in common: it is recognized
that there is no effective and functioning internal control on executives and
managers of the company within the existing legal framework of corporate
governance. One of the conclusions of
this Chapter is that there is a definite need for a thorough review of the
division of power among the executive board, supervisory board, and
shareholders' meeting. It is also
asserted that employee participation should also be a very relevant issue in
this process of review.
The
German corporate governance is analyzed in order to reinforce the argument
presented here and to contribute to the on-going debate in Japan. Some interesting phenomena are pointed out:
many cases exist where the executing branch (board meeting) is not distinct
functionally from the supervising branch (supervisory board meetings), with
supervisors often integrated into the board meeting to form a unitary body of
corporate control; there are many supervisors who serve other companies; the
pay of the supervisors is often markedly lower than that of the executives; the
chairperson of supervisory board meetings have broad authorities; supervisory board meetings have often become
mere formalities due to prior consultations among various internal meetings and
committees (attended by the members of the board, supervisors, and outside
specialists) and the board meeting; and
these prior consultations include separate sub-consultations where board
members and specialists meet with shareholder and employee representatives.
Germany
has seen its own debate on corporate governance in recent years, and the
supervisory board was reformed by the revision in 1998 Law on Control and
Transparency. However, the majority
view in Germany is that the two-tiered board system should be
maintained. Also there is a debate on
the pros and cons of the co-determination system (in particular
regarding the difficulty of carrying out adversarial TOB), but most view it
favorably. The German feature of the
great impact by financial institutions on companies through the share ownership
and proxy voting of share deposits was somewhat reformed in the direction of
making this system more neutral and equitable in the corporate law reform in
1998. However, there is no debate over
the basic desirability of this system itself, except to say that the interests
of the depositing shareholders are identified as that of long-term rise in the
shareholder value.
Chapter Five. 'Corporate Governance and Employment Relations in Japan, U.S.A., and Germany: from the Viewpoint of Comparative Law'by Takashi Araki
Chapter Five deals with how the legal
system and the legal theory in the U.S.A., Germany, and Japan place employment
and industrial relations in the whole context of corporate governance, and conversely
what influence these relations exert on the debate on corporate governance in
each of these countries. From among the
issues related to various component elements of a company, such as shareholders,
managers, and employees (employment relations), employment security and the
employment relations are selected for comparative analysis, and a future scenario
of corporate governance and employment relations in Japan is given on the basis
of the questionnaire survey.
In
the American debate on corporate governance, a trend is observable from the
traditional, shareholder-value maximization model to an enlightened
shareholder-value model. The
emergence of the new model, however, fails to break out of the first. Rather, the new model stays largely within
the confines of the traditional one, and employees are not seen as an essential
constitutive element of the enterprise in relation to corporate
governance. Freedom to discharge
workers remains a basic rule in employment relations in America, and workers
are seen merely as one of a factor of production, freely adjustable according
to the whims of the management. When it
comes to employment relations, the experience with the company union (as
against bona fide union) during the 1920s and the 1930s in America still
maintains its shadow over the Industrial Relations Act, continuing to view
employee participation with potentially large benefits as blatantly
illegal. However, there are some
noteworthy attempts at realizing some features of the pluralist model of
corporate governance by utilizing certain channels that are available within
the shareholder-value maximization model, for instance, by making shareholders
out of workers.
The
German model of corporate governance, in stark contrast to that in the United States,
is a pluralist one on the basis of co-determination (employee
participation). The German law on
worker dismissal provides various considerations, both substantively and
procedurally, in favor of employment security, including requiring a long period
of advance notice for firing, provision of socially justifiable reasons, and
the need to consult the Works Council. Partial revisions are sometimes proposed, but no thoroughgoing reforms
are contemplated.
We
can characterize the corporate governance in Japan that it belongs to the pluralist
model, like that in Germany. It is employee-oriented rather than
shareholder-oriented. These two
countries are alike in terms of employment security and cooperative industrial
relations. However, one distinctive difference
exists: in Japan these features are
merely established practices, with little direct legal guarantee. And these practices continue to be effective
only on a subtle balance among a number of factors that determine the state of
affairs of the day. The Chapter
concludes that this implies a far bigger chance of systemic changes in these
institutions.
What
about the future? The general trend is
toward giving a greater place to shareholder-value, and toward a greater
fluidity in employment relations. However, no clear pattern of change is foreseeable regarding industrial
relations. It is also vital to see the
extent to which these changes are going to be implemented. Although the questionnaire survey gives no
clear-cut conclusions, it does seem that 'the on-going changes for a greater
shareholder-value will remain minor in the order of priorities within the
totality of the pluralist model.' One
should not, however, lose sight of a distinct possibility of employee dismissal
laws and employee representation laws emerging on the political agenda,
changing the scene rather drastically and quickly.
Chapter Six. 'Corporate Governance and Trade Unions'by Fujikazu Suzuki
Chapter Six relies on the preceding
chapters and relevant surveys in order to come up with a comprehensive view on
corporate governance and trade unions in Japan.
In
big enterprises in Japan, the expression members of the company denote
full-time, regular employees of the company, not the shareholders (despite the
contrary legal definition in the Commercial Code). This perception became prevalent in Japan within the context of
post-war booms and high economic growth. The regular employees have made a far bigger contribution to
corporations, borne higher risks, and alleged higher commitment to corporate
success than shareholders. As long as
this is true, while the executives act as a mediator between employees and
shareholders, there is enough ground for employees to assert their sovereignty.
The
employee solidarity and pursuit of their interests are founded, in
institutional terms, on the trade union voluntarily organized on the enterprise
level. These enterprise-based unions
correspond to the organizational structure of the corporation whose employees
they unionize in terms of decision-making mechanism and membership. Many executives used to be union
officials. But this does not mean that
their views on corporate activities and industrial relations are affected in
any specific ways.
Attempts
at employee participation with the enterprise-based union as its main agency
are being pursued at a deeper level now, although they failed to achieve legal
guarantee during the 1970s. This is
happening in the form of labor-management consultation, and through informal
but regularized contacts between the top leadership of both management and
labor, disclosure of confidential business information to the top union
leadership, and stronger voice of the union with substantive effect on
management strategy. In these ways,
enterprise-based unions are exerting greater influence on the management.
However,
these relationships of trust in corporate community have been eroded during the
1990s, sometimes dubbed the lost decade with a prolonged and bitter
experience. Many employees even
mistrust their own union officials. Labor-management consultation as an institution is looked upon with
skeptical eyes.
How
should the trade unions in Japan respond to such a pathetic situation? First, they should try to formulate a
socially accepted view of what a company is. The points made above suggests that this company ideal must emphasize
stakeholder-value in line with the pluralist model of corporate
governance.
Second,
self-help efforts on the part of the trade unions are essential on a number of
fronts. They should have a firm grasp
of and meet the diversified needs of the union members. They should be better able to formulate
national policies and implement them. They should work harder to unionize those in atypical employment
contracts such as part time workers or temporary workers, and secure fair
employment conditions for them. They
should also design a mechanism through which middle management can have their
interests reflected. Other tasks facing
them include improving their own organization to facilitate formation of trade
union federations on the basis of the corporate/industry groups, and
legislative activities to adequately respond to corporate restructurings.
Third,
in view of the often ruthless pace of corporate governance reforms threatening
the relationship of trust in Japanese corporate community (this often was the
basis of their competitive strength), trade unions should also start examining
possible legal guarantees for employee participation. Of immediate importance are at least the following: formally legalize the labor management
consultation mechanism; participation of worker representatives as board
members; and participation in share ownership.
On
the first issue of legalizing labor management consultation, Suzuki proposes a
Japanese-type employee representation system with enterprise-based unions and
employee representation complementing each other. On the second issue of worker representatives becoming board
members, he realizes that it requires revisions of the Commercial Code.
However, it is time to contemplate the introduction to the Japanese corporate
scene of supervisors elected from employees and/or neutral supervisors. On the issue of workers' participation in
share ownership, he has tentatively suggested a trade union version of
shareholder activism.
Conclusions and Future Prospects
Corporate governance in Japan is in the
midst of great turmoil and change. It
is not easy to secure a comprehensive picture and valid future prospects under
such circumstances. Certain basic
currents are apparent, but whether we should expect a great waterfall ahead of
us or a prolonged torrent on a steep riverbed is not to be determined
lightly. And yet a number of
fundamental issues suggest themselves with foreseeable impact on the future of
corporate governance in Japan.
The
issue of corporate governance is essentially nothing more than the issue of
whose interests is to be preferred and how corporations are managed - or should
be managed -for that purpose. However,
when it comes to the reality of how the issue is resolved, even the normative
ideals are not the same. We are using
three models of corporate governance: the traditional shareholder-value maximization model, the enlightened
shareholder-value model, and the pluralist model. The realities in different countries suggest
the American case to be closer to the traditional model, while the German and
Japanese cases come closer to the pluralist model.
Through
the 1990s we have seen a global surge of debates and reform movements on corporate
governance. All the major industrial
nations have seen various attempts at reviewing their own version of corporate
governance. In 1999 the OECD adopted
the Principles of Corporate Governance. They basically espouse the enlightened shareholder-value model,
but warn against a one-size-fits-allapproach, or a global
standard.
In
addition to the OECD efforts at defining corporate governance, the American Bar
Association came out with its own Principles of Corporate governance in 1992,
the Corporate Round Table with its Statement on Corporate Governance in 1997,
the TIAA-CREF with its Guideline Announcement on Corporate Governance in 1997,
and we also see a British Hampel Report of 1998. Significantly, all these Anglo-Saxon views advocate the enlightened
shareholder-value model. It is only
too natural to see a general trend away from the short-term emphasis on
shareholder-value maximization (the traditional model) toward a more
enlightened shareholder-value orientation.
When
one turns one's attention to the German and Japanese debates and reality
regarding corporate governance codification, one sees that national models of
corporate governance have firmly maintained their basic outlines while a
somewhat greater emphasis is being placed on shareholder-value and on the
efficient utilization of capital. In
relation to our three models of corporate governance, one could interpret it as
a change in orientation, but not a substantive change from the pluralist
modelto the enlightened shareholder-value one.
One
bold hypothesis is therefore discussed as to whether we will see a global
convergence of various corporate governance models and practices on the enlightened
shareholder-value model. Even so,
the phenomenon is not sufficiently developed at least at this point in time to
warrant a statement to the effect that either Germany or Japan is moving toward
this model. Both the intensity of this
trend and its implication warn us again making such a broad statement.
There
are, however, four points that merit emphasis here on the compatibility of
efficient use of capital with employee welfare. These are dealt with more fully below.
i. This is an issue of how to understand the
relationship between corporate governance and employment relations. If the first is an independent variable
(cause) and the second its function (result), compatibility becomes rather
flimsy in comparison with other cases (such as seeing it more as a
self-regulated correlation ship).
ii.This compatibility also depends directly on
the legal system of the country concerned. If fundamental convergence were accepted, the immediate task would be
how to integrate its basic features of employee orientation into the country's
code of law.
iii.This compatibility also depends on the
value preferences of the principal agents of corporate governance, their
executives and managers, and their degree of enthusiasm. This has a lot to do with how these business
leaders have arrived at this stage of corporate ladder.
iv.It is also necessary to give more thought
to the broader issues involved in the compatibility between greater efficiency
in the use of capital and greater employee welfare.
We
have briefly touched on the first issue, i.e., the relationship between
corporate governance and employment relations, and said that the corporate
governance variables and employment relations variables maintain certain
self-regulating relations while mutually influencing each other. There are numerous cases of re-structuring
corporate workforce for a more efficient use of capital resulting in
redundancy, in turn driving up stock prices. As Chapter Five made it clear, there is a diversity of national models
combining various corporate governance variables with employment relations
variables, where institutional complementarities can be observed. But it should also be quite possible that
these two groups of variables, while enjoying certain self-regulation, are
correlated without denying institutional complementarities. For instance, the long-term employment system
with emphasis on long-term capital efficiency can easily co-exist with
cooperative industrial relations. Both
the 13th White Paper on Corporation by the Japan Association of Corporative
Executives and the Report in 1998 of the Special Committee of the Japan
Federation of Employers' Associations have precisely these scenarios in mind.
It
must be pointed out, however, that there is no such a thing as an automatic
guarantee that such desirable scenarios can be realized. Institutional arrangements, including legal
codification, are essential. Point ii.
above is relevant here.
How
can we then proceed with the task of formulating or re-formulating a legal
system to ensure that employees are valued? First, one could envisage the introduction of employees (here including
middle-management) selecting their representatives to serve as corporate
supervisors. It is a Germanization of
corporate governance, and Ronald Dore for one is a forceful advocate of this
idea. Secondly, the middle management
can be assigned the right to choose external supervisors to serve as neutral
supervisors, and this is an idea discussed in Chapter Four. Thirdly, labor-management consultation can
be given a definite legal status. This
is a rather traditional approach to the issue. Fourthly, trade unions can become shareholders so that they have a
stronger voice on the management of the company and their positions can be
improved.
With
respect to the first and second options, we have already emphasized the need to
clarify the anticipated roles of supervisors. Unless this point is clearly formulated, they both lack the final stroke
to be valid. And once the supervisory
board system come under close scrutiny, one is bound to face the issue of the
division of power between the board meeting and shareholder meeting, calling
for systemic adjustment. The
questionnaire survey with the executives reveals that 19.4 percent are in favor
of employee representatives becoming supervisors, 34.4 percent against, and
44.5 percent neutral. Similarly, 11.6 percent
were in favor of trade unions becoming shareholders, 41.2 percent against, and
45.4 percent neutral. It is quite
noteworthy that about 20 percent of Japan's top management is in favor of
having employee representatives acquiring the power of supervisors.
Greater
emphasis on employees must be codified not merely in the Commercial Code and
the corporate law but also in labor laws in general. When the Commercial Code was revised in 2000 regarding the
break-up of companies, labor laws decreed that certain groups of workers had a
right to file complaints (amounting to virtual veto) and that the collective
agreements (and similar agreements) must maintain their validity in the new
companies spin off. This is a good
example of employee value protection through broader codification.
No
definite response can be given to the third issue raised here regarding the
proposed codification of labor-management consultation. One might note here the often-heard
complaint that this consultation has come to lose its intended meaning and
become void. The company now refuses to
divulge meaningful information and discuss it in detail with employee representatives
for fear that it may invite societal criticism of insider dealing of
stocks. If codification of
labor-management consultation is to be pursued in earnest, one must draw a
clear line designating who can be employee representatives. To be precise, the issue is whether the middle
management can become employee representatives in view of the fact that they
have thorough knowledge of the business of the company and most of them wish to
stay with the same company for their working life. This in turn has a bearing on the traditional issue of
union membership eligibility (at lest since the 1980s when union identity
campaign was carried out).
Compatibility
between capital efficiency and employee welfare is profoundly related, as has
been alluded to above, to the value preference and morale of executives, as
well as how they have come to occupy these top corporate positions. Management
is placed in between the two basic stakeholders of the company, i.e.,
shareholders and employees.
We
repeatedly argue in the book that the two documents issued by Japanese
employers' organizations as well as the survey itself are unanimous in coming
up with the future possibility with a normative connotation of the very
compatibility between these two potentially opposing notions. Whether or not such a prospect becomes a
reality depends not only on codification of some of the important elements in
it and legislation of relevant new laws but also on the influence of
institutional investors (some of whom may be non-Japanese in origin) on
corporate governance, and the achievement of business performance envisaged in
such a scenario where corporations must prosper as a prerequisite. If internally promoted executives are to
decrease drastically in number (i.e., if a nation-wide market for executives
and managers is born across industrial groups) - and include here the corporate
groups' efforts to train their own executives -, and if their pay system comes
to strongly reflective short-term achievement in raising capital efficiency, we
will see yellow light flickering vis-a-vis the realistic prospect for this scenario. What this book has revealed through its
questionnaire survey, however, is a continuation of the pattern of internally
promoting its own employees to the positions of executives, which is conducive
to the hypothesized compatibility between capital efficiency and employee
welfare.
Let
us say a few words on the last issue raised above, to ponder more broadly over
the compatibility between greater efficiency in the use of capital and greater
employee welfare. Shareholder activism
of the last ten years has been dependent on the pension funds, one of the most
important institutional investors. The
pension funds do not merely represent retirees' and their families' interests
but also have a profound bearing on the active workforce through how the funds
are managed. At the risk of
misunderstanding, one could therefore say that promotion of funds' interests is
of great societal value. In other
words, we cannot just meet the needs of employees at the expense of
shareholders (nor has this been the case in Japan). The root cause of the situation in Japan lies in the fact that
shareholders' interests have not been well articulated in such forms as
shareholder activism. A result could be
the fund manager in charge of the fund opting for a short-term
adventurism. Shareholder activism of
pension funds is not to be blamed but the lack of clear policy, giving a great
deal of discretion to specialist mediators in the management of the
funds.
Let
us briefly deal with the issue of systematically monitoring executives and
their behavior.
First,
the dominant view of the executives on the prevention of the recurrence of
scandals involving companies tends overwhelmingly not to require the
introduction of external board members but to guarantee the independence and
neutrality of supervisors. In this
sense, they are basically in agreement with the view of the Guideline proposed
by the Sub-committee on the revisions of the Commercial Code of the ruling
Liberal Democratic Party. Although a
lot depends on what the nature of supervisors' authority is and how they are
selected (for instance, whether or not employee representatives may become
supervisors), the revisions of the Commercial Code as indicated by the
Guideline would apparently lean toward external monitoring. Second, higher ratios of direct financing
and greater sensitivity to stock prices will also reinforce the trend toward
external monitoring. This would include
more active information dissemination to shareholders. Third, strengthened and improved internal
monitoring is a definite possibility. Corporate executives and managers will be paid more in accordance with
their achievement, which must be monitored more closely. Some executives will be given greater power
and separate companies will be created to monitor their performance. Board meetings and supervisors' meetings
will be activated to improve their functioning. Furthermore, trade unions will be involved more in checking
management behavior, and the codification of the practice of employee
representatives becoming supervisors and that of labor management consultation
would also play important roles in improving internal monitoring. Fourth and last, the concept of
compatibility between greater capital efficiency and employee welfare needs to
be reflected in devising a method of better monitoring executive behavior. This calls for not merely greater roles to
be played by external monitoring but an expansion of internal monitoring
systems.