Japan’s Corporate Governance Code From the Perspective of ‘Sustainable Growth of the Company and Improvement of Medium- to Long-Term Corporate Value’ [Appendix] Comments on Recent Criticisms of

Media type: E-Book

Title: Japan’s Corporate Governance Code From the Perspective of ‘Sustainable Growth of the Company and Improvement of Medium- to Long-Term Corporate Value’ [Appendix] Comments on Recent Criticisms of "Stakeholderism" and "Anti-Criticism of Short-Termism"

Contributor: Watanabe, Hiroyuki [Author]

Published: [S.l.]: SSRN, [2021]

Extent: 1 Online-Ressource (49 p)

Language: English

DOI: 10.2139/ssrn.3705070

Identifier:

Origination:

Footnote: Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments October 5, 2020 erstellt

Description: This paper intends to scrutinize the Japan’s Corporate Governance Code from the perspective of its subtitle “sustainable growth of the company and improvement of medium- to long-term corporate value.” The first half of the paper focuses on the significance of this Code and related issues from the perspective of the company’s sustainable growth and increase in corporate value. The latest version of this paper refers also to the 2021 revised Japan’s Corporate Governance Code. In the United States, in August 2019, the Business Roundtable, business organization of major companies, issued a new Statement that it should commit to management that aims for the interests of all stakeholders not for the shareholder supremacy. It seemed that they sent a sign of fundamental change to the world. However, recently some scholars have expressed extremely skeptical views on this new Statement, and many papers have been published that severely criticize such a tone regarding the harmful effects of short-termism in the stock market etc. Under these circumstances, in the latter half of this paper, I will comment on recent Criticisms of "Stakeholderism" and "Anti-Criticism of Short-Termism" etc. In conclusion, regarding the Japan's Corporate Governance Code, we can highly evaluate that the Code has the theme of improving corporate value over the medium to long term, but from the perspective of achieving that goal, it can be said that the Principles etc. of the Code are still developing and it is necessary to review variously and support by practice. For example, the following issues and problems are pointed out. (1) Although the rights of shareholders at shareholders meeting are much stronger than those of the United States under the Companies Act, it seems that the focus of the Code is still on strengthening the rights of shareholders, (2) As for the dialogue with shareholders (engagement), the perspective of dialogue in line with long-term improvement of company value is not sufficient. (3) Due to the influence of the Code etc., takeover defense measures and cross- shareholding at Japanese listed companies have been decreasing dramatically in recent years. It should be recognized that the number of companies which plan to delist is rapidly increasing because the pressure from shareholders has become a little too strong these days. (4) As for the low level of ROE etc., even if the figures are improved in the short term by share buybacks etc., the essential problems will not be solved. Measures should be taken from the perspective of how to create more and more innovations and regain "earning power". In the New 2021 version of the Code, various directions were presented to promote sustainability and diversity, and to improve the function of the board of directors. However, from the point of view of improving the ‘earning power’ that is the driving force for Japanese companies and improving their corporate value over the medium to long term, I believe that the Code has not provided enough principles or rules yet and needs support through practice and further review in the future. Regarding the recent "anti-criticism of short-termism" mainly from U.S. scholars, there are not a little reasonable criticisms of the recent EU Report(so called “EY Report”), which is the main target of criticism. We should be aware of the focus of the discussion and to be careful not to confuse and discuss issues of different dimensions. However, the view that short-termism has little harm is lacking in good ground. And even if short-termism has certain advantages, it does not mean that short-termism doesn’t have harmful effects. Regarding the U.S. Business Roundtable New Statement in 2019, it is important to recognize that the U.S. corporate society etc. are not yet fully prepared to realize a new Statement’s policy. In addition, regarding the structural problems and possible hurdles of so-called stakeholderism, those who truly aim to realize the interests of various stakeholders should be listened to it seriously. However, it seems that the shareholder-first principle, which is the premise of such a comprehensive criticism of stakeholderism, also includes various "illusions" and "myths." Rather, it should be returned to the way of thinking that the company grows its pie (social welfare) by working to achieve its "purpose" under the supervision of shareholders and, as a result, enhances the interests of its stakeholders. Recently, many studies have showed the superiority of these policies as a business model. In the United States, the ongoing "Restatement of Corporate Governance" project seems to introduce a provision regarding the corporate purpose, but the draft suggests that, in line with the case law of the Delaware corporate law, it is possible to take into account the interests of various stakeholders as long as the shareholder’s interests are not impaired. It should be noted here that, according to Professor Edward Rock who is the reporter of “Restatement of Corporate Governance” project, "shareholder supremacy" means "priority is given to the interests of shareholders when the interests of other stakeholders of the shareholders are fundamentally conflicting." It means "the principle of adjustment of conflicting aspects". The Delaware corporate case law is also correct in this sense, and does not mean the idea of "maximizing shareholder value" or "shareholders is the owners of the company." Based on the legitimate way of thinking above, such a "grow the pie" perspective in company management as mentioned does not contradict "shareholder supremacy". The problem is that it is not easy to properly understand the above legitimate idea of "shareholder supremacy", and many lawyers (as well as me) have been misunderstood and confused about the concept. However, it can be said that there was a problem in expressing the above idea under the name of "shareholder supremacy". Probably more serious problem is that in addition to the idea of "shareholder supremacy", the "agency theory" that directors and managers represent shareholders is persistent. It can be said that "shareholder supremacy" is justified if it has the above idea by Professor Rock, but on the other hand, the above "agency theory" lacks a clear basis and it is nothing more than "one influential idea". And here I see the remnants of "shareholder supremacy" that goes beyond the legitimate framework of corporate law. Also, (1) giving priority to the interests of shareholders when there is a “conflict of interest between shareholders and other stakeholders” is not the same as (2) setting “shareholders' benefits” as the “objective of the corporation”. Theoretically there is a big gap between the two. Therefore, if Restatement introduces the provision of position (2), it can be said that a big leap is occurring even from the case law theory of the Delaware corporate law

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