The Risk of Importing Western Financial Governance Models: MBA News

The collapse of Japan’s banking system and the experience of Japanese corporations in a recession culminating in the ‘lost decade’ at the end of the 20th century, can largely be attributed to the adoption of Western financial governance models unsuited to the Pacific nation.

This is the argument put forward in a new paper from Saïd Business School professor, Colin Mayer, written in collaboration with Waseda University’s Hideaki Miyajima and London Business School’s Julian Franks.

‘The Ownership of Japanese Corporations in the 20th Century’ traces the impact of Japan’s adoption of Western financial governance models after World War II to warn other nations in Asia that pursuing similar policies could prove harmful in the long-term.

“The changes made in Japan in the middle of the century show how difficult it is to import structures from one country to another without a nuanced understanding of the differences between their social and legal contexts,” said Mayer, a Saïd Business School expert in financial governance.

Traditional structures behind Japanese corporations ruptured

Mayer’s paper comprehensively details pre-war conditions in Japan, when its corporations held little legal protection for shareholders but ‘institutions of trust’, the zaibatsu (family-based financial and industrial conglomerates) allowed investors to remain confident that their interests were well represented.

The paper from the Saïd Business School professor then argues that this system was slowly eroded after World War II with the adoption of Western-style financial governance models, including high formal levels of investor protection and the eventual breakup of the zaibatsu. Despite early signs of widening equity ownership, in the long-term, individual ownership was replaced by cross-holding between Japanese corporations and banks and saw many shareholders holding a more than purely financial interest in a firm’s fortunes. The crux of the paper is that this situation precipitated the country’s collapse in the latter years of the 20th century.

Lessons to be learnt says Saïd Business School professor

Indeed, with Japan now once again seeking to reform corporate ownership, the Saïd Business School professor believes nations such as South Korea and China should heed the lessons learnt by Japan.

“It would be tempting but risky for them to draw on established models such as those in the UK and US. The trust-based mechanism that prevailed in pre-WWII Japan and is now beginning to reemerge in 21st century Japan may be a more relevant model for many Asian countries,” said Mayer.

‘The Ownership of Japanese Corporations in the 20th Century’ is to be published by The Review of Financial Studies.