Observations on the Current State of Corporate Governance in Japan

This paper discusses recent positive and negative developments related to Japanesecorporate governance. It first offers the good news in the M&A market and makes note of some general improvements in Japanese corporate governance, including a reduction in the size of boards, different terms of office for board members, and better transparency, reporting, and accounting. Further, it is noted that recent corporate scandals have increased awareness of theneed for internal risk management controls and systems, though Japanese corporations still must distinguish more clearly between corporate governance and internal risk controls. Activist investors will stimulate and challenge management, but Japanese companies must develop better strategies for responding to them. Three activist cases are discussed to elucidate recent trends. Finally, a number of worrisome trends are analyzed. They include triangular mergers,Japan’s diminished status as a global financial center, the number of defensive measure proposals, evidence of “MBO bad behavior,” and the Nikko Cordial delisting. Japanese corporations still must do much more to integrate outside directors and allow them to perform their function efficiently.