The Reform of Corporate Governance

ABSTRACT

Since the rise and fall of the bubble economy, a lack of corporate governance has caused many corporate management scandals in Japan, leading to a considerable reduction in Japanese competitiveness. In regards to startup companies, such as IT-related venture businesses, in recent years the nonexistence of a management monitoring mechanism has contributed to an Internet bubble.

Such lack of governance has a direct bearing on the malfunctioning Japanese financial system, which is based on the main bank system. The lack of corporate governance in established companies has its roots in the loss of the monitoring function of corporate management by main banks. Taking risks in the midst of an absence of management monitoring functions within the Japanese financial system has resulted in a lack of governance in startup companies.

Enhancing internal control is essential to overcoming the lack of governance in established companies. More specifically, it would be feasible to strengthen supervision by the board of directors and to establish holding companies. The reinforced board of directors (or holding company) will have to serve as a node to link shareholders with the actual operations of a company.

Venture capital will play a key role in overcoming the lack of corporate governance in startup companies, such as IT-related venture businesses. Venture capitalists in Japan will be able to enhance the management capabilities of startup companies if, in addition to making investments, they are more directly involved in management by dispatching directors, just as their US counterparts do.

In order for the above two measures-strengthening the supervision by the board of directors and direct involvement of venture capital in management-to be realized, amendments must be made to the commercial code. To cope with the above two measures, a new governance mechanism should be instituted in which supervision and execution management is clearly delineated for the former, and the ban on issuing stocks with voting rights (such as the right to elect some directors) should be lifted to encourage the latter.

Introduction

Conclusion