Understanding the Japanese Keiretsu: Overlaps between Corporate Governance and Industrial Organization

By Gilson, Ronald J.; Roe, Mark J. | The Yale Law Journal, January 1993 | Go to article overview

Understanding the Japanese Keiretsu: Overlaps between Corporate Governance and Industrial Organization


Gilson, Ronald J., Roe, Mark J., The Yale Law Journal


CONTESTS

I.    The Berle-Means Model of American Corporate Governance            876
II.   The Japanese Main Bank as the Missing Monitor                     879

III. The Japanese System as Global Contractual Governance of Which

      Specific Corporate Governance is a Subset                         882
      A. A Stylized Model of the Japanese System                        884
         1. The Continuum: Contract Versus Organization                 884
         2. Japan: A Hybrid Between Contract and Organization           885
         3. Illustration: General Motors and Fisher Body                889

B. But What About Monitoring? Product Market Competition as the

         Catalyst that Makes the Hybrid Work                            891
         1. Competition as Catalyst                                     891
         2. Vertical and Horizontal Keiretsu: Helping to Explain Some
            Performance Differences                                     894
         3. Is Competition Enough?                                      895
IV.   IMPLICATIONS FOR COMPARATIVE CORPORATE GOVERNANCE ANALYSIS        895

A. Implications for Understanding the Japanese Corporate

         Governance System                                              896
         1. Understanding the Role of the Main Bank                     896
         2. Understanding the Significance of Cross-Holdings'
            Antitakeover Role                                           897
         3. Understanding Japanese Contract                             899
         4. Understanding the Role of Public Shareholders in Japan      900
         5. Understanding the Stability of the Contractual
            Governance Model                                            901

B. Evaluating Reform Proposals for the U.S. Corporate

            Governance System                                           901
         1. The Keiretsu and the LBO Association                        902
         2. Where Might the Japanese Model Provide Guidance?            904
V.    CONCLUSION                                                        905

We aim here for a better understanding of the Japanese keiretsu. Our essential claim is that to understand the Japanese system--banks with extensive investment in industry and industry with extensive cross-ownership--we must understand the problems of industrial organization, not just the problems of corporate governance. The Japanese system, we assert, functions not only to harmonize the relationships among the corporation, its shareholders, and its senior managers, but also to facilitate productive efficiency.

Comparative corporate governance, once an academic backwater, now enjoys important government and scholarly attention. U.S. government reports attribute Japan's competitive success in part to features of the Japanese system.(1) Harvard Business School's major, multi-disciplinary study of American management's time horizons recommends, as a way to combat "short-termism" among U.S. managers, restructuring American corporate governance so that it resembles Japan's more closely.(2)

This newfound interest derives from two changes, one domestic and one international. The domestic change is evident in scholars' new understanding of America's corporate governance system; during a short period of time, the basic paradigm has shifted. The "traditional" model of American corporate governance presented the Berle-Means corporation--characterized by a separation of ownership and management resulting from the need of growing enterprises for capital and the specialization of management--as the pinnacle in the evolution of organizational forms. Given this model's dominance, the study of comparative corporate governance was peripheral; governance systems differing from the American paradigm were dismissed as mere intermediate steps on the path to perfection, or as evolutionary dead-ends, the neanderthals of corporate governance. …

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