The document discusses corporate governance in Japan, including: 1. Definitions of CG in Japan focus on company ownership and management monitoring. 2. A debate in the 1930s mirrored in Japan around stockholder vs stakeholder ownership theories. 3. Japan initially adopted the stockholder theory but reconsidered stakeholders' interests. 4. Japan's system has characteristics of insider-type governance with long-term relationships and an emphasis on stakeholders, as well as open-type governance with an emphasis on shareholders.

1. Pankaj Kumar
12HM28
HSSM
NITK Surathkal

2. Definition of CG in Japan
can be divided into two categories:
1. The question for whom a
company should exist
• Company ownership and
control.
• Focus on problems of
whether a company exist
for the stockholders or for
the stakeholders.
• Legality check- CSR and
Participating management.
2. The consideration of
company management and
organization
• Monitoring systems for
company managers.
• Focus on the question of
company structure and
management monitoring.
• Efficiency check which
determines the standard of
management.

3. Who actually owns the company?
In America
• American argument of 1930s over whose trustees are
company managers.
• This argument was held between Berle and Dodd.
• Berle- company ownership should be entrusted by
stockholders – this theory called Stockholders-Ownership
Theory.
• Dodd- company ownership should be kept under trust by the
public.

4. Stockholders-Ownership Theory
In Japan
• Employee-Ownership theory was popular but it was faded with the onset
of recession.
• Stockholders-Ownership Theory was adopted.
• it was supported by following arguments:
– Government allows private property.
– Stockholders are the members of the corporation, & they contribute their own
property to company.
– Stockholders hold the stockholder’s meetings and they have right to decide
the essential matters of the company such as appointment or dismissal of
management members.
– Stockholders have right of dividend when company gains profit.
– Stockholders have right of liquidation.
• Issue of Stakeholders-Ownership Theoy:
– Large companies have not only stockholders’ profit but also have connection
with their employees, customers and public.
– This argument has yet to reach the conclusion.

5. Characteristics of CG System in Japan
Mainly divided into two system:
• Insider Type Governance
– Based on long term relationship & mutual reliance between principal and
agents.
– Bearer of corporate governance is limited.
– Main bank is appropriate monitor of firms.
– It tends to stress on various kinds of stakeholders
• Open Type Governance
– Based on short term competitive markets, contracts and self-responsibility.
– A lot of bearers of corporate governance.
– Various participants of stock market effectively as monitors.
– It emphasizes on shareholders.
Japan follow Insider Type Governance

7. Monitoring system for management
Single System
• Internal control system
• UK & USA
• BOD supervises managers who
carryout the business.
• Mgmt. & Supervision come under
same organ.
• BOD has several rights- rights to
appoint, to decide, to supervise the
mgmt etc.
• Example-Cadbury report
Dual System
• External control system
• Germany
• BOA supervise and monitors the
managers
• Mgmt. and supervision are done
by two independent organ.
• BOA has right to appoint BOD
who runs the business.
Japan- Mixed System
Under Mixed System:
- BOD & BOA supervise and monitor the representative directors.
- Representative directors are the real managers in Japanese companies.

8. Corporate governance reform in Japan
• Post-bubble recession of the 1990s.
• The Japanese government passed new laws, various ministries and agencies
enacted reforms, and the stock exchanges issued new official and semi-official
guidelines.
• Corporate finance – impact of finance theory (e.g. stock repurchase)
• Deregulation – minimum capital requirement abandoned, freedom in articles of
association enlarged etc.
• Corporate governance – global competitiveness
• Corporate restructuring
• Reforms regarding the separation of control and management

9. Government policies to strengthen the Japanese
corporate governance
• Strengthening the legal arrangements of corporate organizations:
– Simplification of merger procedures
– Modification of bankruptcy laws
– Strengthening the auditing and corporations' internal governance
systems
• Strengthening the functions of markets:
– Introduction of consolidated financial statements system
– Opening of public utility works to private sector
– Unification of the trading procedure of financial firms
• Diversifying the governance structure of corporations:
– Introduction & expansion of outside auditor system
– Completing legal framework to allow for diversified corporate
governance structure

10. Changes taking place
in the last decade
• Shareholdings of banks fell: from 21 percent in 1990 to 5.7 percent in 2003
• Foreign ownership has grown: from 7.3 percent in 1990 to 20.3 percent in
2004
• Shareholders have become more vocal, visible and active than before
• Shareholder activism: dialogue, proposals, proxy voting, and litigation
• SRI movements have been a topic of concern
• Management is increasingly aware of the importance of enhancing
shareholder value

11. Executive
officers
Transitions of Japanese-style management
Mutual dependence among
companies
Crossholding of shares,
main financing bank system,
company groups, etc.
Japanese-style employment
practice
Lifetime employment,
seniority system,
company union, etc.
Industrial policy
Administrative control,
public-private cooperation framework,
coordination in a industry group, etc.
Ambiguous corporate accounting
practice
Limited disclosure of corporate
information
EraofJapanese-stylecorporategovernance
Governancebymanagement,bankand
economicagenciesofstate
Japanese-style management
1960s 1980s
High-growth period
2000～
Change of capital market
Indirect financing → Direct financing
Shift to borderless economy
Global economization
Trade and capital liberalization
Big ban, IT revolution
Corporate scandal
(Limitation of Japanese-style governance)
New corporate governance
Reform of the board
of directors
Introduction of
US-style
Enhancement
of auditor's
authority
Independent
board members
System selectivity
1990s
Lost decadeEconomic bubbles
Shareholder
value

12. Olympus Scandal 2011
• Japan-based manufacturer of camera, medical equipment, optics and reprography
products. Olympus was established on 12 October 1919, initially specializing in
microscope and thermometer businesses.
• share price plummet by almost 75 percent in October 2011.
• Kikuwaka resigned as chairman
• CEO and president Michael Woodford, who brought the matter to the company’s
attention
DEALS
• controversy were four deals made between 2006 and 2008. In this period Olympus
acquired three firms –
– Humalabo, a producer of nutritional supplements;
– Altis, a waste disposal and recycling firm; and
– News Chef, a seller of microwave cooking ware and asset management firm.
(These companies were bought for a combined $773m, written down to just $187m in 2009)
– The fourth deal, the $2.2bn purchase of UK medical firm, Gyrus Group, proved to be the
most controversial. Olympus reportedly paid $687m in fees to two advisory companies
related to the purchase

13. GOING PUBLIC
• The report stated that the acquisitions had led to a combined loss of $1.2bn for shareholders
and highlighted potential offences including false accounting, financial assistance and breaches
of duties by the board, inadequate corporate governance procedures and a lack of transparency.
• Mr Kikiwaka’s successor, Shuichi Takayama stated that the purchase of Gyrus and all three
Japanese companies was legal and part of its ongoing M&A stategy. he added “Our corporate
value hasn’t been ruined. We believe we can restore the stock price.”
INVESTIGATION
• FBI investigation & Tokyo Stock Exchange (TSE) demanded the disclosure of more information
about the deals.
• it is under investigation by Japan’s Financial Services Authority (FSA) and the Tokyo Metropolitan
Police Department.
• companies hide losses on bad assets by selling them to other companies, often dummy
companies, with the intent of buying them back at a later date.
• Mr Kikukawa and Mr Mori both confessed to having roles in the fraud. The firm’s internal
auditor, Hideo Yamada, also offered to resign. Those who knowingly falsified financial
statements could face 10 years in prison, or a fine of ¥10m.

14. REACTION
• Olympus shareholders to discuss removing the firm’s directors and
internal-audit board.
• TSE warned that they could be delisted. To avoid this, Olympus must post
its quarterly results by 14 December
LOSS
• company has lost 70 percent of its value, or $6 billion.

15. Bulldog Sauce case
• Steel Partners Japan Strategic Fund is a private investment
fund, used to purchase shares and invested in many
companies in Japan over several years.
• announced a takeover bid (TOB) to acquire all outstanding
shares in Bull-Dog Sauce Co. Ltd
• Bull-Dog shares are listed in the second section of the Tokyo
Stock Exchange.
• The original tender offer price by Steel Partners was ¥1,584 for
each share in Bull-Dog .
• As of 18 May 2007, the time of the TOB, Steel Partner held
about 10. 25% of the shares of Bull-Dog. And later raised the
tender offer price to ¥ 1,700 per share.

16. Questions arises:
• How did Bull-Dog defend?
– On 7 June 2007 Bull-Dog announced a form of defense. Provided the
shareholders approved at the Annual General Meeting (AGM) on
Sunday 24 June, Bull-Dog would issue free of charge three stock
acquisition rights (SARs) for each share.
– in respect of SARs held by Steel Partners, buy these back at ¥396 per
SAR
– The effect would be that Steel Partners’ shareholding would be
effectively diluted from 10.25% to 2.86 %.
– shareholders approved a defensive measure,

17. • What were the grounds for Steel Partners’ court challenge?
– On 13 June 2007 Steel Partners asked the Tokyo District Court to grant an injunction to
prevent Bull-Dog issuing the SARs.
– it was contrary to the principle of shareholder equality (Article 109 of the Corporation
Law); and
– the manner of issue was “manifestly unfair” (Article 247 of the Corporation Law).
• What happened in the lower court?
– The Tokyo District Court decided in favor of Bull-Dog.
• What happened in the appeal court?
– The Tokyo High Court also decided in favor of Bull-Dog.
– Steel Partners was an abusive acquirer;
– TOB was against general principles of good faith and trust;
– TOB was an act detrimental to the corporate value of the target company and the joint
– interests of its shareholders;

18. • What happened in the Supreme Court?
– SC also decided in favor of Bull-Dog.
• Isn’t an AGM on a Sunday unusual?
• Where does Japanese law stand after the Bull-Dog case?

19. Reference
• Corporate governance in japan, Suenaga,
Toshikazu, 2000-02
http://hdl.handle.net/11094/11367
• http://ir.library.osaka-u.ac.jp/dspace