Corporate law shapes the fundamental business environment and affects various stakeholders such as shareholders, managers, employees, and creditors. Each stakeholder has an incentive to influence on the reform process of corporate law. The many corporate law reforms in Japan reflect its rapidly-changing business environment. It is possible to determine the behavior of various stakeholders by examining the politics of the reform process of corporate law. In order to understand the corporate law reform process, this paper uses the notice-and-comment procedure (``public comment procedure''), which was introduced by the Administrative Procedure Act in 1993. The Administrative Procedure Act requires every reform of law or order proposed by a government agency to undergo a public comment procedure. Under this procedure, people submit comments to the Ministry of Justice; some of these comments are reflected in the final bill, whereas others are not. The paper performs a quantitative analysis of a hand-collected dataset from two recent public comment procedures of corporate law reform. By analyzing the comments with respect to the issues, we can understand the mechanism of the corporate law reform process, particularly the relative political power of various interest groups. The results showed that the bureaucrats are rigid and not willing to take public comments seriously. However, in some technical issues, legal academics and legal professionals, such as courts and law firms, influence the behavior of the bureaucrats. The results showed that the bureaucrats employed these comments to counterbalance the interests of politically powerful interest groups and to honor the technical views of professionals. In other cases, corporate managers significantly influence the reform process.

1. .
.
Corporate Law Reform and Political Environment: An
Empirical Analysis Employing Public Comment
Procedure Data
Hatsuru Morita†
hatsuru@law.tohoku.ac.jp
http://ssrn.com/abstract=2394451
† School
of Law, Tohoku University
Max-Planck-Institut f¨r ausl¨ndisches und internationales Privatrecht
u
a
3 March 2014
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
1 / 25

2. Table of contents
.
1
Introduction
. Background: Legislative Process of Japanese Corporate Law
2
Old Legislative Process (Before 1997)
The Turning Point: the 1997 Reform of Corporate Law
New Legislative Process (After 1997)
.
3 Public Comment Procedure and Corporate Law Reform
Public Comment Procedure
Hypotheses
. Data and Empirical Strategy
4
Data
Empirical Strategy
. Results
5
2002 Reform
2005 Reform
.
6 Concluding Remarks
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
2 / 25

3. Introduction
Motivation
Corporate law shapes the fundamental business environment
Various stakeholders have incentive to influence the formation process
of corporate law
e.g., shareholders, managers, employees, stock markets, securities
brokers, creditors
We try to shed light on how various stakeholders behave in the
process of corporate law reform
Unique feature of the paper: focusing on the influence of stakeholders
on the behavior of bureaucrats of the Ministry of Justice (MOJ)
Constructing hand-collected datasets from two corporate law reforms
in Japan (2002, 2005)
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
3 / 25

4. Introduction
Findings
The bureaucrats in general were rigid and unwilling to take public
comments seriously
Regarding some technical issues, legal academics and legal
professionals could influence the bureaucrats
The bureaucrats employed these comments to counterbalance
politically powerful interest groups and to honor the technical views of
legal professionals
At the same time, corporate managers employ the public comment
procedure as another vehicle for achieving their intentions
Otherwise, corporate managers do not need to realize their goals
through the public comment procedure because they can use other
political process
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
4 / 25

5. Background: Legislative Process of Japanese Corporate Law
Old Legislative Process (Before 1997)
Corporate Law Reform Process
Japanese corporate law has experienced repeated reforms, especially
after 1974
Old legislative process (applicable to other private laws):
. Minister of Justice consults the Legislative Council to make reform
reports
.
2 Council discusses the issue and makes reports by unanimous consent
.
3 Ministry of Justice drafts a reform proposal bill
.
4 Cabinet Legislation Bureau checks its consistency with the constitution
and the precedence
.
5 Discussions among CLB, MOJ, and Legislative Council members
.
6 Cabinet approval and deliberation by the Diet
.
7 During the Diet deliberation, modifications to the bill rarely occur
1
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
5 / 25

6. Background: Legislative Process of Japanese Corporate Law
Old Legislative Process (Before 1997)
Old Legislative Process
The most important decision-making body: the Legislative Council
(Housei Shingi Kai)
Its members consist of legal academics, attorneys, judges, stock market
participants, and representatives of the managers of major corporations
The members of its secretariat consist of judges and government
officials of the MOJ, Ministry of Finance (MOF), and Ministry of
Economy, Trade and Industry (METI)
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
6 / 25

7. Background: Legislative Process of Japanese Corporate Law
Old Legislative Process (Before 1997)
Old Legislative Process
Neither employees nor corporate creditors have representatives in the
council
The strong presence of corporate managers and the absence of
employees and creditors could have engendered a vacuum of political
balance
However, legal academics have protected the interests of politically
silent stakeholders, thereby counterbalancing the political power of
corporate managers and achieving a fair compromise among the
various stakeholders
The undemocratic nature of the council has enabled the well-balanced
development of Japanese corporate law.
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
7 / 25

8. Background: Legislative Process of Japanese Corporate Law
The Turning Point: the 1997 Reform of Corporate Law
Background of the 1997 Reform
At the beginning of the 1990s, the bubble economy collapsed, and the
Japanese economy slid into a deep depression
This economic downturn led to an intensive search for the means to
revive the Japanese economy and increase stock prices
The idea that “good” corporate law and “good” corporate
governance caused strong national economy had gained popularity
The old legislative process was considered inimical for such flexible
and speedy corporate law reform
“The Legislative Council was too cautious and slow to improve
corporate governance in Japan and the Japanese economy”
Decisions of the council requires unanimous consent of its all members
Corporate managers could not achieve their intentions directly through
the council
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
8 / 25

9. Background: Legislative Process of Japanese Corporate Law
The Turning Point: the 1997 Reform of Corporate Law
The 1997 Reform
Keidanren, a business group, and some members of the Liberal
Democratic Party (LDP), the ruling party, cooperated to implement a
breakthrough
Under the old legislative process, a reform bill must be tabled by a
member of the Cabinet
The 1997 reform bill was tabled by members of the Diet, bypassing the
council deliberation
Corporate managers had been forced to make compromises with legal
academics and were frustrated
By bypassing the Legislative Council and employing the
Diet-member’s bill system, corporate managers were able to realize
their interests directly
The mitigating role of legal academics was not included in the process
of the 1997 reform
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
9 / 25

10. Background: Legislative Process of Japanese Corporate Law
New Legislative Process (After 1997)
The Influence of the 1997 Reform
The recognition of the existence of the Diet-member’s bill system,
through which corporate managers can avoid the influence of legal
academics and other constituencies, changed the picture of corporate
law reform
Legal academics and other corporate stakeholders can no longer use
the Legislative Council to carry through their claims
Corporate managers have more influence than before, since their
outside option has changed drastically
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
10 / 25

11. Background: Legislative Process of Japanese Corporate Law
New Legislative Process (After 1997)
The New Legislative Process
Deliberation in the Legislative Council is carried on in the shadow of
the Diet-member’s bill system
The bargaining power of corporate managers has been strengthened
and the interests of corporate managers take priority
The deliberation time in the Legislative Council has been reduced
Instability of the new legislative process
In 2009, the LDP lost the general election of the Lower House and the
Democratic Party of Japan (DPJ) took office
The DPJ lost both the 2010 Upper House election and the 2012 Lower
House general election
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
11 / 25

12. Background: Legislative Process of Japanese Corporate Law
New Legislative Process (After 1997)
Evaluating the Change
The old legislative process: the undemocratic feature of the
Legislative Council has led to the overrepresentation of stakeholders
This feature enabled an equitable balance among various stakeholders
of corporate law
The new legislative process: powerful interest groups have more
influence than politically passive stakeholders do
Corporate managers have strong influence on the reform process of
corporate law
One way to achieve a balance among various stakeholders under the
new legislative process is to increase the transparency of the legislative
process, particulary with regard to the public comment procedure
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
12 / 25

13. Public Comment Procedure and Corporate Law Reform
Public Comment Procedure
Public Comment Procedure
The political process in Japan had long been criticized as opaque
On Mar 23, 1999, a cabinet decision was made to introduce the
Japanese version of the notice and comment procedure, as the public
comment procedure
The decision requires each branch of the government to publish a draft
of regulations that it wants to make or reform and to invite comments
on the draft
Although the branch is not forced to follow the collected comments
from the public, it must publish a report
In 2005, the public comment procedure was formally incorporated
into the reformed Administrative Procedure Act
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
13 / 25

14. Public Comment Procedure and Corporate Law Reform
Hypotheses
Hypotheses
The public comment procedure is implemented by the bureaucrats,
and the effect of the procedure falls mainly on the bureaucrats
Observation of the behavior of the bureaucrats around the procedure
could reveal the internal motivations of the bureaucrats
. The public comment procedure has no effect (i.e., the no effect
hypothesis)
.
2 The public comment procedure has a strong effect (i.e., the strong
effect hypothesis)
.
3 We can observe only the influence of powerful interest groups, namely
the corporate managers (i.e., the interest group hypothesis)
.
4 MOJ bureaucrats employ the public comment procedure in order to
countervail the pressure of interest groups (i.e., the independence
hypothesis)
.
5 MOJ bureaucrats are legal specialists and are affected by only
“convincing” comments (i.e., the persuasiveness hypothesis)
1
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
14 / 25

15. Data and Empirical Strategy
Data
Constructing the Dataset
The government usually releases only a report that summarizes and
analyzes the results of solicited comments but does not deliver the
individual data of the solicited comments
However, in two reforms of Japanese corporate law (2002 and 2005),
all the comments are to be published
The 2002 reform and the 2005 reform have different characteristics
The 2002 reform: a serious reform that introduced a US-like,
committee-based corporate governance system
The 2005 reform: separated the Corporate Code from the Commercial
Code, but substantively minor and technical
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
15 / 25

16. Data and Empirical Strategy
Data
Constructing the Dataset
What we do to construct the dataset:
. Divide the reform drafts into single issues
.
2 Check the outcome to determine whether the final reform bills that
were submitted to the Diet were different from the original drafts
.
3 Count the number of affirmative and negative resopnses to each issue
.
4 Classify the numbers according to who submitted each comment
.
5 Classify the nature of issues: tightening of regulations or relaxing
regulations
.
6 Check the ex-ante attitude of the MOJ bureaucrats: already fixed or
undecided
1
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
16 / 25

17. Data and Empirical Strategy
Data
Summary Statistics: the 2002 Reform
Variable
Reform02
Yes (total)
No (total)
Academics (Y)
Business (Y)
Fin. Inst. (Y)
Other (Y)
Academics (N)
Business (N)
Fin. Inst. (N)
Other (N)
Regulatory
Expression
RegEn02
En (total)
Reg (total)
Academics (En)
Business (En)
Fin. Inst. (En)
Other (En)
Academics (Reg)
Business (Reg)
Fin. Inst. (Reg)
Other (Reg)
MORITA, Hatsuru (Tohoku University)
Mean
0.642
22.2
11.2
8.72
5.72
0.925
6.79
4.94
3.09
0.774
2.34
0.264
0.83
0.604
23.7
9.62
7.64
8.06
1.58
6.32
6.15
0.755
0.113
2.87
Standard Deviation
0.484
9.6
10.5
4.52
4.04
1.11
3.54
4.82
5.38
1.6
2.41
0.445
0.379
0.631
9.56
8.54
4.53
4.32
1.61
3.4
5.47
1.71
0.32
3.29
Politics of Corporate Law Reform
Min
0
3
0
0
0
0
0
0
0
0
0
0
0
-1(REG)
4
0
0
1
0
1
0
0
0
0
Max
1
38
42
18
14
4
15
20
18
6
8
1
1
1(EN)
42
36
17
18
6
15
20
8
1
12
3 Mar 2014
17 / 25

18. Data and Empirical Strategy
Data
Summary Statistics: the 2005 Reform
Variable
Reform05
Yes (total)
No (total)
Academics (Y)
Business (Y)
Fin. Inst. (Y)
Other (Y)
Academics (N)
Business (N)
Fin. Inst. (N)
Other (N)
Regulatory
Expression
RegEn05
En (total)
Reg (total)
Academics (En)
Business (En)
Fin. Inst. (En)
Other (En)
Academics (Reg)
Business (Reg)
Fin. Inst. (Reg)
Other (Reg)
MORITA, Hatsuru (Tohoku University)
Mean
0.809
16.3
5.28
4.76
3.8
0.439
7.39
2.89
0.554
0.197
1.64
0.14
0.675
0.407
14
8.49
3.41
4.26
0.457
5.97
4.51
0.507
0.207
3.26
Standard Deviation
0.394
6.54
4.87
2.82
2.29
0.779
3.08
3.05
1.06
0.512
2.32
0.348
0.47
0.767
7.69
6.98
2.73
2.18
0.762
3.84
3.69
0.909
0.53
3.28
Politics of Corporate Law Reform
Min
0
1
1
0
0
0
0
0
0
0
0
0
0
-1(REG)
1
0
0
0
0
0
0
0
0
0
Max
1
31
25
17
11
4
19
17
4
3
11
1
1
1(EN)
28
31
13
10
4
19
17
4
3
13
3 Mar 2014
18 / 25

19. Data and Empirical Strategy
Empirical Strategy
Empirical Model
Simple probit regression:
Reform∗ = xβ + zγ + ϵ
Reform = 1[Reform∗ > 0]
Ordered probit regression: when the original draft presents multiple
alternatives
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
19 / 25

20. Data and Empirical Strategy
Empirical Strategy
Predictions from the Hypotheses
The no effect hypothesis: comments 0, “Expression” +
The strong effect hypothesis: affirmative comments +, negative
comments -, “Expression” 0
The interest group hypothesis: business groups
+(affirmative)/-(negative), or 0 (other venues)
The independence hypothesis: business groups 0 or -, legal academics
and others +(affirmative)/-(negative)
The persuasiveness hypothesis: legal academcs and others
+(affirmative)/-(negative)
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
20 / 25

21. Results
2002 Reform
The 2002 Reform: Probit Models
Yes (total)
No (total)
(1)
0.0583*
(0.0293)
-0.0483*
(0.0216)
(2)
Academics (Y)
0.0985
(0.115)
Business (Y)
0.0319
(0.0970)
Fin. Inst (Y)
0.240
(0.397)
Others (Y)
-0.0213
(0.124)
Academics (N)
-0.0996
(0.0880)
Business (N)
0.0806
(0.126)
Fin. Inst. (N)
-0.738
(0.602)
Others (N)
-0.268
(0.196)
Expression
1.19
0.752
(0.752)
(1.03)
N
53
53
Log-likelihood
-20.48
-16.09
Standard errors are in parentheses. †, *, and ** denote
10%, 5%, and 1% level significance respectively.
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
21 / 25

22. Results
2002 Reform
Thw 2002 Reform: Ordered Probit Models
All Issues
Issues with ‘shall be’
(3)
(4)
Academics (En)
-0.261†
-0.133
(0.134)
(0.136)
Business (En)
-0.0336
-0.0704
(0.0731)
(0.0933)
Fin. Inst. (En)
0.299
-0.170
(0.238)
(0.285)
Others (En)
0.634*
0.391†
(0.262)
(0.217)
Academics (Reg)
-0.183*
-0.0223
(0.0923)
(0.0902)
Business (Reg)
0.177
0.113
(0.160)
(0.196)
Fin. Inst. (Reg)
-0.0467
2.30†
(0.699)
(1.29)
Others (Reg)
0.159
-0.306†
(0.168)
(0.168)
Expression
1.50
(0.916)
Exp × Regulation
-2.65**
(0.930)
N
53
44
Log-likelihood
-23.39
-16.48
Standard errors are in parentheses. †, *, and ** denote
10%, 5%, and 1% level significance respectively.
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
22 / 25

23. Results
2005 Reform
The 2005 Reform: Probit Models
All Issues
Issues with ‘shall be’
(1)
(2)
(3)
0.0728**
(0.0258)
No (total)
-0.101**
(0.0287)
Academics (Y)
0.0362
0.244
(0.0812)
(0.174)
Business (Y)
0.468**
0.535†
(0.159)
(0.303)
Fin. Inst (Y)
0.398
-0.156
(0.340)
(0.480)
Others (Y)
-0.0395
0.0419
(0.0997)
(0.198)
Academics (N)
-0.254**
-0.339†
(0.0917)
(0.187)
Business (N)
0.125
0.0181
(0.160)
(0.381)
Fin. Inst. (N)
0.0494
0.121
(0.324)
(0.615)
Others (N)
-0.222*
-0.134
(0.102)
(0.224)
Expression
0.933**
1.14**
(0.331)
(0.384)
N
157
157
106
Log-likelihood
-46.09
-40.15
-15.20
Standard errors are in parentheses. †, *, and ** denote
10%, 5%, and 1% level significance respectively.
Yes (total)
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
23 / 25

24. Results
2005 Reform
The 2005 Reform: Ordered Probit Models
All Issues
Issues with ‘shall be’
(4)
(5)
Academics (En)
0.0618
-0.475
(0.0781)
(0.295)
Business (En)
0.200*
0.576†
(0.0947)
(0.323)
Fin. Inst. (En)
0.227
-0.196
(0.234)
(0.480)
Others (En)
0.0433
0.256
(0.0742)
(0.278)
Academics (Reg)
-0.0822†
-0.349
(0.0494)
(0.220)
Business (Reg)
-0.0707
-0.291
(0.172)
(0.787)
Fin. Inst. (Reg)
-0.107
0.297
(0.235)
(0.681)
Others (Reg)
-0.0492
-0.0765
(0.0768)
(0.289)
Expression
1.64**
(0.366)
Exp × Regulation
-6.88
(284)
N
140
77
Log-likelihood
-69.37
-11.88
Standard errors are in parentheses. †, *, and ** denote
10%, 5%, and 1% level significance respectively.
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
24 / 25

25. Concluding Remarks
Conclusions
No hypothesis universally holds true; each hypothesis is applicable to
limited situations
The MOJ bureaucrats have considerable control over the public
comment procedure
Although corporate managers have critical influence on the reform
process of corporate law, during the public comment procedure their
influence is limited to a few cases
Legal academics and other legal professional institutions, such as
courts, bar associations, and law firms, have influence in some cases
Future research agenda
to investigate what is happening under the changing political
environment of Japanese corporate law
MORITA, Hatsuru (Tohoku University)
Politics of Corporate Law Reform
3 Mar 2014
25 / 25