Japanese Corporate Governance Changes

- An improved Entrepreneurial Habitat?

R. Eberhart

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Are there other Entrepreneurs in Japan?

• Japan is the world’s 2nd largest economy– 2nd largest consumer and industrial market– Fully developed financial system– Fully advanced legal system

• The rate of entrepreneurship is “moderate”– Entrepreneurship not unknown

• Japan, Inc. companies had founders• Honda, Sony, etc.• Softbank, Rakuten, Value Commerce

• New corporate laws may be improving the entrepreneurial habitat …let’s look.

Habitat for EntrepreneurshipDeveloped at Stanford by:

Prof. William Miller

Prof. Henry Rowen

Published in:“ The Silicon Valley Edge”

10 structural / business requirements for an entrepreneurial environment or “habitat”

No location is perfect…how is Japan…in 1989?

Japan’s Startup Habitat

Entrepreneurship Dimension 1989 2008

Favorable and rational rule of law

Knowledge intensity

High quality, mobile workforce

Results oriented meritocracy

Climate that tolerates failure

Open business environment

University / Industry collaboration

Business / gov’t / non-profit collaboration

High quality of life

Specialized business infrastructure

Background to Change

• 1991-1997 Liquidity Crisis– Post-bubble - main bank monitoring failed

when banks failed/restructured– Lack of liquidity creates consensus for

stat-ups, new finance, FDI to fund firms– Lack of transparency, stockholder rights

in corporate gov (particularly accounting and kansayaku) limit VC and FDI

• 1997 - 2006 legal and structural changes to move toward a “liberal market” model and improve habitat for start-ups

Reforms

1997 1998 1999 2000 2001 2002 2003 2004 2005

•Stock Options•Decrease Minimum Capital•Tax benefits for Angels•Allow Repurchase shares•Deregulate Mergers•Allow Holding Co.’s•Consolidated Acct’g

•Limit Liab Partnership•Allow Stock Swaps•Mark-to-Market Acct’g•J version of Bayh-Dole

•Corporate Divisions

•Limit Director’s Liability•Kansayaku Authority•Lifted ban on Treasury Stock

•Committee system governance option

•Codification of Kansayaku•Revision of Bankruptcy Law•JSOX and beyond

Corporate Governance Reform

• Limiting Director’s Liability– Daiwa case– Upper limit established

• Strengthening Statutory Auditors (2001)– “The Agency Problem”– 50% must be outside after 2005– First Japan law to intervene in CG without

corporate agreement

Result of Reforms

• Habitat improvements– Rule of law

• Auditor reform• Liability reform• Iinkai no kaisha• Accounting standards

– Business Infrastructure• PE, VC firms enter• New law firms• New reformed banks

– Climate for Startup• FDI => “Best and brightest” enter• New hero’s

– Business/Gov’t• Weakened• Where METI goes, entrepreneurs go elsewhere…WHY?

Japan’s Habitat Post Reforms

Entrepreneurship Dimension 1989 2008

Favorable and rational rule of law

Knowledge intensity

High quality, mobile workforce

Results oriented meritocracy

Climate that tolerates failure

Open business environment

University / Industry collaboration

Business / gov’t / non-profit collaboration

High quality of life

Specialized business infrastructure

Key Insights

• Potential for Startups improved in Japan– Vigorous and deliberate reform– Key corporate conduct and governance areas

• Corporate structure• Accounting• Liability• Transparency and governance

• Should see measurable improvement in:• Rate of start-up formation• Valuation improvements• Vigorous market for corporate control• Improved economic activity