The Development of Corporate Governance in Japan and Britain

Etsuo Abe

• Publisher: Routledge
• Year: 2017
• Topic: Business
• eBook ISBN:
  9781351147187
• Subtopic: Business General
• Index: Business

The topic of 'corporate governance' attracts the interest of commentators, policy makers and academics due to its focus on major differences between national business systems and their performance. Yet many works engage in generalizations, and fail to appreciate the realities and circumstances of its long-term evolution. Comparative study is used in this book to analyse national, legal, cultural and industry-specific contexts and the broad range of key factors contributing to the emergence of business institutions. Historical insight into the origins of corporate governance systems and the impact of institutional legacy is used to unravel development pathways in Japan and Britain. The book is the result of genuine international cooperation between established Japanese and British business historians and management academics.

Chapter 1
What is Corporate Governance? The Historical Implications

Etsuo Abe

Introduction

Just when the dissolution of the USSR seemed to indicate the triumph of western economic systems, the phrase 'capitalism versus capitalism' was coined by Michel Albert to reflect a continuing conflict. One form of capitalism he labelled Anglo-Saxon, the other Rhineland.¹ Anglo-Saxon capitalism was depicted as quite different to Rhineland capitalism, which is in turn seen as closer to that of Japan. The character of each capitalism is mainly decided by the nature of corporate governance, defined as the relationship between ownership and management. It is fair to say that corporate governance constitutes the pillar of the economic institutions in both systems.

As Berle and Means point out, the separation of ownership and management has become a fundamental base of economic institutions in all advanced capitalist societies, as have the managerial firms defined by Alfred Chandler.² However, the relationship between ownership and management varies across countries. In addition, it is not enough to consider only the relation between shareholders and management, for the role of employees, suppliers, customers, banks, or, in other words, stakeholders is also important.³ By extension, state policy, laws, economic environment, culture and historical background affect the character of corporate governance as specified by the relationship between numerous stakeholders.

The hierarchy from top managers to rank-and-file workers is material in deciding the character of corporate structure. The organizational hierarchy can influence corporate governance, just as corporate governance can affect the organizational hierarchy. Besides this, inter-firm relationships with suppliers and customers are significant. In Japan, these relationships frequently form what are called vertical keiretsu, which are particularly conspicuous in the automobile and electronics industries. Moreover, financial institutions such as banks and insurance companies are important sources of investment funds in both Japan and Germany. These financial institutions, especially banks, can exercise monitoring functions, and they can influence and sometimes control the behaviour of firms. They are sometimes called 'relational stakeholders', because they maintain long-term relationships with firms.

With respect to relational stakeholders, the following three questions arise. Who owns the firm? Who governs the firm? Who can determine decisions within the firm? Shareholders legally own the firm, but managers can govern, and banks, labour unions and the state can exert a strong influence. In Japan, employees including top managers govern the firm rather than shareholders. By contrast, in the USA, it is said that shareholders govern the firm, though some scholars insist that strong top managers facing weak owners are dominant, and that, in Japan, shareholder power might in reality be stronger than the USA.⁴ Under German law, trade unions can appoint half the members of the supervisory board. Accordingly, they are supposed to exert substantive pressure on decision-making.⁵ It is obvious, therefore, that the second and the third questions are more important than the simple ownership structure.

If we think along these lines, it is clear that Anglo-Saxon and Rhineland-style capitalism are appreciably distinct. One might be termed the A-B (American-British) model, the other the G-J (German-Japanese) model, and it is worth considering how this perspective affects our interpretation of the development of business in major countries.

Models of Capitalism

Each country has its own style of corporate governance within the two general models, whether the A-B version controlled by the market, or the G-J type controlled by organizations. How can these models seriously affect economic performance or the competitiveness of nations? Or are they unrelated to economic performance and competitiveness? An American scholar, Mark Roe, maintains that corporate governance is not closely connected to the economic performance of nations in comparison to other factors such as product, capital and labour markets.⁶

In contrast, William Lazonick and Mary O'Sullivan argue that the A-B model may impair competitiveness and that the G-J model can realize good performance by encouraging long-term investment policies and strengthening R&D activities.⁷ Whereas the A-B model fits a market-control hypothesis of innovative enterprise, the G-J model suits the organizational hypothesis. Undoubtedly, R&D activities can be essential to manufacturing firms, and long-term investment is indispensable to fruitful results. In these respects, the corporate governance structures of two countries, Germany and Japan, supported better records, and Lazonick and O'Sullivan's conclusions seem persuasive in this one regard. Yet their argument pays little attention to the recent stagnant economies of Germany and Japan. US and British 'success', not 'failure', and German and Japanese 'distress' seem the appropriate words of the moment. Evaluating the USSR's collapse in 1990, an American journalist, Michael Prowse, wrote in the Financial Times: 'Now Pax Americana will begin just as Pax Britannica began after the victory of the Napoleonic War.'⁸

While the American and British economies are in relatively good shape, Germany and Japan require changes in their economic systems and corporate governance. Is their adverse situation temporary? Or is it a long-lasting phenomenon? If so, should the G-J model, thought to be better than the A-B model throughout the 1970s and 1980s, move towards the A-B model?

A positive answer to the second question suggests that corporate governance globally will converge towards the A-B model. Or will the specific arrangements of countries be preserved? If we consider the conclusions of William Baumol and Leslie Hannah that levels of GDP per capita in developed countries show a tendency to converge, regardless of differences in economic systems, a dual convergence may arise.⁹ In one instance, the absolute level of GDP per capita may be similar; in the other, corporate governance may be comparable. The globalization of firms may give further cause for convergence since international firms prefer to operate within the same structures. The regional and worldwide integration of company laws and auditing, as in the case of the EU, acts as another spur. German and British corporate governance will come under the same, homogenized company laws of the EU in the future.

Another question is: how different are the US and Britain, even though they are called forms of Anglo-Saxon capitalism? Britain has been characterized as 'family capitalism' by Chandler, and as 'gentlemanly capitalism' by Coleman, who sees its firms as once controlled by amateur 'gentlemen' and, to a lesser extent, by professional 'players' (in a sense not to be confused with the work of Cain and Hopkins).¹⁰ Historically, Britain would be quite different from the USA, the paragon of managerial capitalism. To clarify the similarities and differences of corporate governance, we will survey its historical development in Britain and Japan, simultaneously placing the USA and Germany in perspective.

The British Case

In the mid-19th century, due to the passing of company acts, a host of joint stock enterprises appeared in Britain. Yet, along with many public limited companies, private limited companies came into being and became the typical form of British joint stock enterprises. These businesses remained, in general, small in scale compared to US counterparts, and they did not they integrate forwards and backwards extensively.

Consequently, relatively small and un-integrated firms were a marked British characteristic, despite their adopting joint stock company forms. The original owners' power persisted, and, in the case of the large holding firms created around the turn of the century, the power of constituent firms and their owners was dominant in decision-making. According to Chandler, the British economy was an example of 'personal capitalism', in which internal organization and managerial hierarchies were weak. In also referring to 'family capitalism', he is stressing family ties and the proprietors' influence. The larger British firms were no longer partnerships but joint stock companies. Nonetheless, management and ownership were not separated, and owner-managers continued to govern.

In the inter-war period, large companies such as ICI, Unilever, Imperial Tobacco, J. & P. Coats, and Dorman Long emerged, and they demonstrated to a certain extent a transformation in the relationship between ownership and management. Professional and salaried managers appeared on a significant scale in a variety of industries. Their new role was often coupled with the holding company form, examples being Imperial Tobacco and United Steels, which preserved the owners' power.

After the Second World War, the British economy experienced an all-time high growth rate, and the trend towards the managerial firm continued. At the same time, institutional investors such as pension funds and insurance companies began to acquire a large quantity of shares, and transformed the ownership of joint stock companies. Approximately 60 per cent of shares were held by insurance companies and pension funds in 1992. By contrast, although there are influential pension funds such as CalPERS in the US, they account for a more modest 35 per cent of shares nationally. It should be acknowledged that the British economy is especially dominated by institutional investors.

Given the enhanced role of institutional investors, what kind of changes took place in British corporate governance? In the 1960s and 1970s, the British economy faced a worsening situation, evidenced by high unemployment and low growth rates, or even, sometimes, negative growth rates. Yet, in the 1980s, and notably in the 1990s, the British economy seemed revitalized, having moved towards US-style managerial hierarchies and governance structures predicated on market control. Is the historical relic of family or gentlemanly capitalism still working in Britain today? Or is it dead?

The Japanese Case

The development of joint stock companies in Japan began during the late 19^th century, mainly in the railways, cotton spinning, and banks. Most of these firms became big, independent enterprises, and were basically isolated from the zaibatsu.¹¹ On the other hand, these business groups-such as Mitsui, Mitsubishi and Sumitomo-emerged as a particularly Japanese feature. At first, they were controlled by associations of families, then became a form of partnership with corporate status, and eventually, around 1920, evolved into holding companies with family ties. But, within Mitsui and Sumitomo, traditionally salaried managers had exercised a large degree of the power and decision-making. This tendency was fortified by the demands generated by the growth of the zaibatsu, and by the fact their activities in mining, banking, trading and manufacturing required professional knowledge and expertise. Families could not have a large enough pool of capabilities, and, instead, salaried managers with qualifications from higher education were employed. In the Mitsui and Sumitomo zaibatsu, the separation of ownership and management proceeded over time.

Mitsubishi was different because its origins were more recent in comparison to its Mitsui and Sumitomo rivals with histories amounting to hundreds of years.¹² Its founders-Yataro and Yanosuke Iwasaki, and their sons-had decision-making roles, although they also hired a number of university graduates. But, even at Mitsubishi, the rise of professional managers became undeniable because its huge business needed professionals. All three zaibatsu built large-scale organizations and internal capabilities. In the wartime economy, around 1940, military agencies exerted strong pressure on the zaibatsu to invest in armaments production, but the parent companies did not have the required funds. They were obliged to turn to external financing, and their subsidiaries came under strong governmental control. Each company was ordered to transact with a designated bank, so foreshadowing the post-war main bank system. As a consequence, the power of the families decreased and the centrifugal tendency accelerated, making subsidiaries and associated companies more independent of their parent companies.

After the Second World War, the US Occupation forces dissolved the zaibatsu, but they were shortly re-established as keiretsu, whose key feature was mutual shareholding.¹³ These groups can be termed horizontal keiretsu or bank-centered, financial keiretsu, because they have no distinct headquarters. Banks have a strong say in the operations of keiretsu, but trading companies and even heavy industry ente...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Contributors
• 1 What is Corporate Governance? The Historical Implications
• 2 The Corporate Governance of Japanese Firms at the Early Stage of Industrialization: Osaka Cotton Spinning and Nippon Life Assurance
• 3 Corporate Governance, Business Organization and Competitiveness: British Business in the Inter-War Period
• 4 Corporate Governance in the Inter-War Zaibatsu
• 5 Corporate Governance in British Insurance: How the Phoenix Lost Norwich Union and Lived to Regret London Guarantee and Accident
• 6 Japanese Corporate Governance in the Major Life Assurance Companies: an Historical Perspective
• 7 The Main Bank System and Corporate Governance in Post-War Japan
• 8 Corporate Governance, Management and British Venture Capital since 1945
• 9 Authority and Direction in British Manufacturing Companies, 1945-2000: Models, Realities and Consequences
• 10 Corporate Governance and Management Structure: the Nationalised Railway Industry in Britain
• 11 Recent Changes in Inter-Firm Relations in Japan: the Six Largest Corporate Complexes
• Index