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Blackwell Publishing Ltd 2005. 9600 Garsington Road, Oxford,OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. Volume 13 Number 3 May 200

Blackwell Publishing Ltd.Oxford, UK

CORGCorporate Governance: An InternationaReview0964-8410Blackwell Publishing Ltd. 200

May 2005133351361Guest EditorialGUESTEDITORIALCORPORATE GOVERNANCE

Continuity and Change in Corporate

Governance: comparing Germanyand Japan

Gregory Jackson and Andreas Moerke

Germany and Japan are often seen deviating from an economic model of shareholder controland thereby as being similar by virtue of their mutual contrast with the US. Given the commonchallenges for bank-based and stakeholder-oriented models of corporate governance,GermanyJapan comparison seems particularly timely. This article provides an introductoryoverview and analysis for the Special Issue by comparing recent developments in corporatelaw reform, banking and finance, and employment in Germany and Japan. While rejectingarguments for international convergence, we discuss this evidence of simultaneous continuityand change in corporate governance as a potential form of hybridisation of national modelsor renegotiation of stakeholder coalitions in German and Japanese firms. One consequence isthe growing diversity of firm-level corporate governance practices within national systems.

Keywords: Corporate governance, stakeholders, comparative management

Introduction

growing body of literature on compara-tive corporate governance has begun to

explore the similarities and differences incorporate governance structures and practicesacross countries. To a remarkable extent, theUS and sometimes Britain remain an implicit baseline for international comparison. Like-wise, corporate governance reform around theworld is often informed by the principlesunderlying the US model of corporate gover-nance such as shareholder rights, transpar-ency and disclosure, variable managementcompensation and external independentdirectors.

Meanwhile, the diversity of corporate gov-ernance in the non-English-speaking world isless well understood. Germany and Japan areoften seen deviating from an economic modelof shareholder control and thereby as beingsimilar by virtue of their mutual contrast with

A

the US. Various labels describe them, some-times uncomfortably, as bank-based, insider,stakeholder, coordinated or non-liberal modelsof corporate governance. Only recently has asmall but growing literature tried directlyto compare the similarities and differencesbetween deviant models such as Germanyand Japan (Dore, 1996, 2000; Streeck and Yama-mura, 2001; Yamamura and Streeck, 2003) ordifferentiate among East Asian, Latin and

other European models (Whitley, 1999; Aguil-era and Jackson, 2003; Nam and Nam, 2004).German publications on Japan (Hirata, 1996; Jackson, 2002; Waldenberger, 2002; Moerke,2004) and comparative studies written in Jap-anese (Sakakibara, 1995; Fukao and Morita,1997; Kikuchi and Hirata, 2000; Seki and Ueda,2000; Kikuzawa, 2004) remain little known toEnglish readers. Given the common challengesfor bank-based and stakeholder-orientedmodels of corporate governance, GermanyJapan comparison seems particularly timely.

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Volume 13 Number 3 May 2005

Similarities

Germany and Japan have striking similarities.Corporate ownership is typically concentratedamong a stable network of strategically ori-ented banks and other industrial firms, ratherthan fragmented among individuals andfinancially oriented institutional investors.

1

Consequently, the market for corporate con-trol is largely non-existent. Banks play thecentral external governance role throughrelational financing, commingling debt andequity, providing financial services andmonitoring in times of financial distress.

2

Employees exercise voice within corporategovernance through legal rights to co-determination in Germany or extensive useof joint labour-management consultation inJapan.

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This long-term role of employees isreflected in long employment tenures, in-frequent use of lay-offs and high investmentin firm-specific skills.

Meanwhile, top managers in both countriestend to be internally promoted. Managerialcompensation is much closer to that of aver-age employees schemes and lack strongshareholder-oriented incentives such as stockoptions. Consequently, managers are oftensaid to be less finance-oriented and focused onlong-term product strategy. As a result, man-agers are able to build corporate governancecoalitions among stable investors, banks,employees and inside management. This cor-porate governance model was widely consid-ered to have been successful and contributedcomparative institutional advantages ofGerman and Japanese firms in markets char-acterised by incremental innovation and themanufacture of high-quality products (Aoki,2001; Hall and Soskice, 2001).

Differences

Despite broad similarities, the role of law isnonetheless a key area of difference betweenGermany and Japan. Co-determination inGermany is a legal institution where em-ployee voice is a matter of public interestand supported through politics. Likewise, thetwo-tier board system reflects strong legalintervention into the internal make-up of theenterprise in order to promote effective checksand balances between management andshareholders. These non-contractual rightsand obligations based in law contrast sharplywith the informal arrangements of employeeparticipation in Japanese firms, as well asthe lack of separation between monitoringand management functions within Japaneseboards.

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These differences are sometimes con-trasted as a constitutional model in Germany

versus a community model in Japan (Jackson,2001).

Likewise, in Germany, business associationsplay a stronger governance role. For example,collective bargaining takes place at a sectorallevel between industrial unions and employ-ers associations. Likewise, worker traininginvolves an extensive apprenticeship system

that coordinates and gives public certificationto training efforts by companies. Training isconducted on the job, since universities andcolleges concentrate more on the developmentof social skills than on the intermediation ofspecific, business-related knowledge.

Meanwhile, Japanese business associationstend not to take on similar governance func-tions. Unions are organised around enterprise,rather than industry or occupational lines.Figure 1 also shows that coordination acrossfirms takes place on the basis of businessgroups (

keiretsu

), either vertically (Toyota andtheir supplier, for instance) or horizontallyorganised (like in the Mitsubishi group). Japa-nese horizontal keiretsu

groups link corpora-tions and banks within extensive patterns ofhorizontal cross-shareholding (Gerlach, 1992;Moerke, 1999), unlike the pyramidal conglom-erate holding companies (

Konzern

) in Ger-many that concentrate ownership much more(Beyer, 1998). Thus, important differences areapparent in the relative importance of hori-zontal class identities of capital and labourversus vertically segmented enterprise iden-tities as a basis of economic organisation(Dore, 1996).

Pressures for change

Despite past successes, Germany and Japanhave faced strong pressures to change theircorporate governance systems. International-isation has created pressures to move towarda more market-based and shareholder-ori-ented model of governance. In Japan, foreigninvestors owned 18.3 per cent of stockslisted on the Tokyo Stock exchange in 2002,compared to 4 per cent in 1990 (TSE, vari-ous years). Foreign direct investment hasincreased. Foreign companies made unprece-dented acquisitions of large stakes in Japa-nese companies such as Nissan, MitsubishiMotors or Chugai, as well as bankruptinstitutions like the (then nationalised) Long-term Credit Bank of Japan (now the success-ful Shinsei bank).

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International standardsare also playing a growing role in corporateregulation, such as international accountingstandards or the application of the USSarbanes-Oxley Act. These trends apply toGermany as well. EU efforts to harmonisecapital market regulation also have a pro-

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found impact for German financial marketliberalisation.

Deregulation and liberalisation have creatednew pressures. Financial deregulation in the1980s allowed for a shift towards bond financeenabling the substitution of direct financingvia banks.

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This process, of course, had effectson the capital market as well as on the bankingsystem, which underwent a stock and land

price bubble at the end of the 1980s. The col-lapse of this bubble economy contributed tothe huge problem of non-performing loans(NPL) held by Japanese banks. The NPL crisisgreatly eroded the capacity of Japanese banksto play their former beneficial role in corporategovernance. Meanwhile, also in Germany, theavailability of internal and direct finance liber-ated large firms from their dependence onbanks, and the banks themselves have under-gone strategic reorientation toward new busi-ness models.

Finally, the advent of new information tech-nology industries places changing demandson corporate governance. The US is perceivedas having renewed competitive strength dueto its liquid stock markets, venture capital andstrong external labour markets with portableprofessional qualifications. Meanwhile, Ger-many and Japan have more integrated andnetwork-based production models stressingincremental innovation and the strong devel-opment of shop floor skills. These modelsflourished under conditions of strong eco-nomic growth, but were argued to be less wellsuited to deal with slowed growth, restructur-

ing, mergers and acquisitions, or decline ofmature firms. Thus, the life-cycle demandsupon corporate governance institutions havebecome more diverse (Filatotchev and Wright,2005) and exposed gaps in the areas ofnew venture entrepreneurship and corporaterestructuring.

To explore these issues, an internationalconference was organised in February 2004 on

the topic of Changing Corporate GovernanceSystems Germany and Japan in Compari-son by the German Institute for JapaneseStudies (DIJ, Deutsches Institut fr Japanstu-dien) and Japan Investor Relations and Inves-tor Support, Inc. (J-IRIS) in cooperation withthe Research Institute of Economy, Trade andIndustry (RIETI) in Tokyo. The conferenceaimed to together both leading practitionersand researchers deeply involved in thedebates in each country.

This article will introduce the mainresearch findings from this Special Issue andcompare Germany and Japan across four broad areas: corporate law and regulation,the financial system and the role of banks,issues of employees and management pay,and finally how corporate governance relatesto broader issues of accountability, distribu-tional justice and corporate performance. Thepapers all share a simultaneous stress onchange and

continuity, suggesting some limitsto convergence and the continued relevanceof some traditional German and Japanesepractices within a more liberalised inter-national environment.

Figure 1: Inter-firm networks in Japan

2nd tier supplier

1 = horizontal group

2 = vertical group

subsidiary/

1st tier supplier

final manufacturer

"V" " V"

"H" "HC" "I" "IC"

1

2 2

Source: Adapted from Gerlach (1992).

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Issues in legal reform

Since the mid-1990s, Germany and Japan eachadopted a series of legal and regulatoryreforms related to corporate governance.Although approached incrementally throughnumerous small legislative measures, the par-allels between the countries are striking and

the cumulative impact likewise substantial.A first series of changes concerns the liber-alisation of how corporate equity is used, suchas share swaps, stock options and spin-offs. In Japan, the post-war ban on pure holdingcompanies was removed. These changes arelargely policy-push reforms lobbied for by cor-porations to facilitate corporate restructuring(Shishido, 2005), but also give managersgreater scope to actively manage stockprices. A second set of changes concern inter-national accounting standards. Both Germanyand Japan had rather creditor-orientedaccounting principles that stressed conserva-tive valuation and allowed for substantial building of reserves. New market-orientedrules introduce much greater volatility intocorporate balance sheets, since long-termstable shareholdings are now marked to themarket price. A third set of changes concernefforts to promote greater transparency anddisclosure, as well as strengthen shareholdersrights through derivative suits or removingvoting rights restrictions.

Beyond these parallels, some differencesemerge around the issue of the board itself.Here Germany and Japan have very different

starting points. Japan has a unitary board ofdirectors with only minimal legal distinctions between inside and outside members or between management and monitoring func-tions, such as the role of the statutory auditors.Meanwhile, Germany is a key example of atwo-tier board system that developed stronglegal distinctions between the roles of themanagement board and the supervisory board, as well as having a long tradition ofoutside members that represent various stake-holder groups including banks, large block-holders and employees. Germany has retainedits two-tier system as being consistent withinternational trends. The focus has been onimproving the monitoring functions during1998 corporate law reform and the subsequentcomply-or-explain approach introduced bythe German Code of Corporate Governance.

Whereas the two-tiered structure in Ger-many has remained remarkably stable, Japa-nese boards have lacked a clear role foroutsiders. As long as banks played a strongexternal governance role, there seemed littleneed to change the insider boards. But theweakened role of Japanese banks and inter-

national debates led policy makers to rethinkthis basic approach. Various measures werepassed to strengthen the independence of so-called statutory auditors. Or perhaps moreradically, Japanese law now permits the adop-tion of a US-style board based on committeesfor nominations, compensation and auditingthat have a majority of outside directors on them.

In this volume, two contributions (Crommeand Nietsch) deal with changes in the legalenvironment in Germany, whereas the third(Seki) deals with Japan. From his perspectiveas Chairman of the German Corporate Gover-nance Commission, Gerhard Cromme pro-vides an insiders view of the development ofthe German Corporate Governance Code. Henotes that while Germany remains distinctivein having a two-tier board structure andemployee co-determination, the general prin-ciples underlying the actual roles and func-tions of the board are increasingly similar tobest practices elsewhere in the world. Crommealso stresses the deep connection of the Ger-man debate to corporate governance debatesin other countries. For instance, the principlesof comply or explain in the German Codewere inspired by the Combined Code in theUK. As important new approach to industryself-regulation, the German Code has beenable to gain widespread acceptance. The Codereflects efforts to improving corporate gover-nance standards in order to make them trans-parent to growing ranks of internationalinvestors.

Next, Michael Nietsch offers a detailed anal-

ysis of the legal changes shaping Germancorporate governance. After discussing theGerman Corporate Governance Code, Nietschexplores the various amendments to corporatelaw itself. Like Cromme, Nietsch argues that board structures and their diversity acrosscountries may be less important than theunderlying tasks that boards fulfil. Herethe German two-tiered board structure hasproven remarkably resilient. Yet voluntaryreforms embedded within the German Codeare still useful in promoting best practices inhow the board operates, such as improving theflow of information and clarifying the respon-sibilities of various members. These currentdevelopments in law and self-regulation areinter-related and far from complete. TheGerman Corporate Governance Code ischecked and amended (if necessary) everyyear.

Turning to Japan, Takaya Sekis paper offersa practitioners view on recent legal reformsand their significance for investors. Cross-shareholding in Japan developed historicallyas a protection against hostile takeovers andto underwrite long-term business relation-

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ships. But the proportion of cross-sharehold-ing has recently declined, and ownership byforeign and domestic institutional investors isincreasing. Corporate governance patternsare therefore under increasing pressure. Sekiargues that foreign and institutional investorsare less concerned about long-term businessrelationships and are focused more on stock

market returns. Moreover, these new share-holders are playing a much more active role incorporate governance. While shareholderactivism by foreign institutional investors iswell known, Seki demonstrates that domesticpension funds in Japan have also become moreinterested in exercising voice in corporate gov-ernance, as reflected in the surprising increaseof no votes cast at shareholders meetings.

Japan has also seen a wave of legal reformsthat aim to strengthen the external monitoringfunctions within the board and improve share-holder rights. The centrepiece was the intro-duction of the committee system that allowsfirms to adopt a US-style board system thatuses committees with a majority of outsidedirectors. Seki notes that in the first year ofimplementation, just 43 companies (around 3per cent of First Section listed firms) haveadopted this system. However, Seki arguesthat the impact of these reforms is greater andmay have galvanised rethinking the tradi-tional Japanese system of oversight by statu-tory auditors. Not only have these auditors been also made more independent, Sekiargues that their future role may indeed be lesspassive.

Corporate governance, banksand finance

Germany and Japan are both prime casesof relational banking. Banks traditionallyinvolved long-term and complex relationswith industrial firms based on credit, largeequity stakes, financial services and advice,representing shareholders as a delegated mon-itor or through proxy votes, holding seats oncorporate boards, and being active in corpo-rate rescues (Aoki and Patrick, 1994). Financialliberalisation has eroded at least some rentsfrom relational contracting. Market-orientedreforms have reduced advantages of privateinformation by increasing public disclosureand transparency. Liberalisation also easedcorporations access to external capital mar-kets and increased competition among finan-cial intermediaries.

Japanese main bank relationships were dra-matically weakened as a consequence of thebubble. Financial liberalisation gave corpora-tions greater access to bond markets and risingshare prices led to cheap equity finance con-

sequently reducing the demand for bankcredit by large corporations. Banks initiallycompensated by lending to smaller and riskierfirms, which later resulted in a huge volumeof bad loans and unrealised losses on stockspurchased at the height of the bubble. As this banking crisis unfolded, banks reduced out-standing loans to meet capital adequacy ratios

and created a credit crunch for smaller firmsdespite the Bank of Japans zero interest ratepolicy. Banks also divested from shares or soldand repurchased holdings in order to improve balance sheets by booking unrealised gains.The introduction of market-based accounting,discussed in the previous section, has furtherreinforced equity divestment.

An interesting question arises as to whyJapan experienced as banking crisis, whereasGermany was able to avoid a similar lending bubble. This divergence may suggest howimportant differences are in the governance ofthe banking sector itself, both in terms ofprudence regulations, risk management andrelationships between banks and regulators.Although it was stressed quite often that banks play similar roles in Japan and Ger-many, differences in their behaviour need to be better researched. Today German banksseem more willing to let even major firms go bankrupt, such as Holzmann in 1999 andWalter Bau in 2005. Meanwhile, Japanesebanks remain more cautious about foreclosingon their clients. The adaptation of Germanbanks to market liberalisation appears to havebeen very difficult, but less crisis-driven.

German private banks have shifted awayfrom industrial loans and deposits, andtoward highly profitable investment bankingservices (Deeg, 1999). As large firms havebecome increasingly self-financing or look tointernational equity markets, banks havesought to diversify from lending activities thatgenerate interest-based income to other typesof fee-based income. Deutsche Bank andDresdner Bank acquired British and US invest-ment banks, shifted their equity holdings tosubsidiary companies and divested from somelarge stakes (Boehm, 1992). Banks are alsoslowly reducing their supervisory board seats:private banks held 20 per cent of seats in thelargest 100 companies during 1974, but only 6per cent in 1993 (Sherman and Kaen, 1997, pp.1116). German banks also face growing di-lemmas in maintaining traditional relationalbanking arrangements within a more market-oriented financial environment. For example, board representation may lead to conflicts ofinterest with banks investment banking ac-tivities (Hpner and Jackson, 2001).

Three papers (Vitols; Hackethal, Schmidtand Tyrell; Arikawa and Miyajima) also point

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out interesting continuities in the relation ofcorporate governance and banks. SigurtVitols paper examines to what extent Ger-manys bank-based financial system has actu-ally changed. Vitols shows that despite theattempts to modernise the financial systemand promote the New Economy, Germanystill remains a bank-centred financial system

with an underdeveloped capital market basedon indicators like stock market capitalisationand the number of IPOs. Despite the boom ofstock market activity during the IT bubble in1999 and 2000, levels of activity have rapidlydeclined. The company sector also continuesto show a strong demand for bank finance,underpinning the continued importance ofbanks.

Vitols explains this continuity by focusingon several institutional factors often ignored inrecent debates. German households still haveonly a very limited demand for purchasingequity. Given the comparatively low degree ofincome inequality in Germany, a large groupof middle-income households exist that preferless risky assets such as bank deposits, unlikehigh-income households. German publicpensions remain important and private pen-sion provision quite limited, despite recentreforms. On the company side, the large sectorof SMEs in Germany often specialises in lowerrisk technologies supporting Germanys com-petitive industrial infrastructure, and thus sus-tains demand for more traditional forms ofbank finance. Thus Vitols argues that the dis-tinctive characteristics of Germanys financial

system are not merely the product of financialregulation, but sustained by the complemen-tary institutions that govern householdincome and investment, as well as industrialorganisation.

Following from this, the paper by AndreasHackethal, Reinhard Schmidt and MarcelTyrell stresses that the main area of change inGermany is indeed restricted to the large pri-vate banks. These banks have reduced theirlong-term shareholding and seats in super-visory boards. However, given the broadercontinuities, this change in the role of keyinsiders in itself has not meant the conver-gence of Germany on a shareholder-orientedsystem. Rather, the authors provocatively sug-gest that one potential result of banks retreatis not shareholder power, but the increasedautonomy of management and separation ofownership and control.

Turning to Japan, Hideaki Miyajima andYasuhiro Arikawa investigate the pattern ofbank lending to firms during the 1990s and itsimplications for corporate governance. Largerand successful firms listed at the first sectionof the Tokyo Stock Exchange tend strongly

towards capital market finance. Meanwhile,firms with low growth prospects or youngfirms still depend on the banks to finance theirinvestments. A paradoxical situation emergedwhere potentially worthy firms faced a grow-ing credit crunch, as bad loans and capitalrequirements made it hard for banks to offernew loans, but past loans to bankrupt clients

were continuously rolled over.Miyajima and Arikawa suggest that rollingover old loans to so-called zombie firmsdepends on whether the concentration of mainbank loans is very high. Such high concentra-tion of bank loans to poorly performing firmsgives strong incentives for banks not to pushthe necessary restructuring onto the client,given the constraints placed on the strugglingbanks to avoid their own capital shortage. Themain bank system thus lost its positive func-tion as an effective in-corporate monitor(bright side) in the 1990s, and revealed a darkside. However, the authors do not predict thedemise of the Japanese main bank system. Thefuture role of the banks depends strongly onthe restructuring of the banking sector itself through new bank strategies, recent bankingmergers,

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policy measures to reduce bad loansand complementary roles in corporate restruc-turing played by new private equity investorsand reformed bankruptcy procedures. Allthese factors may contribute to revitalisingbank monitoring capabilities, which will makethe threat of intervention credible for strug-gling client firms.

Taken together, bankfirm relationships

thus display both continuity and change. Ero-sion has been substantial among the largestblue-chip firms in both Germany and Japan.At the same time, other segments of firmscontinue to have very strong relationshipswith banks. Thus relationship banking hasnot diminished completely, but has shiftedtowards different groups of firms. Banks areunlikely to regain their past monitoring capa-city with regard to very large firms, butmay continue to play a unique governancerole among smaller credit-oriented firms.

Corporate governance, employeesand managers

Complementarities have been posited be-tween human-resource management and cor-porate governance. However, the pressureof foreign ownership and regulatory reformhas increased the salience of shareholder inter-ests among managers and has cast some doubton the viability of long-term employment andthe stakeholder-oriented nature of corporategovernance. Two papers (Jackson and Kubo)

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examine these issues with regard to employ-ment adjustment and managerial pay.

Gregory Jackson explores the linkages ofcorporate governance and employment bylooking at cross-national data and recenttheoretical models of these linkages. His paperthen compares the impact of corporate gover-nance on four sets of employment outcomes in

Germany and Japan. While corporate gover-nance does impact employment, the evidencedoes not suggest a convergence toward a USmodel based entirely on shareholder value.For example, firms facing capital market pres-sure are more likely to reduce employment, but employment adjustment remains muchless rapid and more benevolent than in theUS. Still, the core group of employees is obvi-ously shrinking and suggests a more limitedscope of the stakeholder model.

Importantly, the formal institutions sup-porting employee participation seem quitestable. In Germany, the first German Govern-mental Commission on Corporate Governanceexplicitly excluded co-determination from itstarget areas for reform of the legal frameworkof corporate governance (Baums, 2001). More-over, employee representatives to the boardare even recognised as independent outsidersunder Sarbanes-Oxley in the US. Likewise,most Japanese managers express continuedcommitment to a modified notion of lifetimeemployment and stakeholder-oriented corpo-rate governance.

Katsuyuki Kubos paper deals with a veryspecial group of employees the directors, i.e.

members of the top management of Japanesestock corporations. Insider-domination of Jap-anese boards is particularly strong in Japandue to the seniority orientation, in-housecareer system and small external labour mar-ket for managers. Meanwhile, German manag-ers have been some quicker to adopt variableand performance-oriented pay packages,although to a lesser degree than in the US. Andexternal labour markets are growing morerapidly. Building upon previous research onthe link between director compensation andcorporate performance (Jensen and Murphy,1990; Kaplan, 1994), Kubo shows that no cor-relation exists between directors compensa-tion and shareholders return in Japan. Morespecifically, the sensitivity of director pay tocorporate governance is quite low in Japan,and increasing this sensitivity has no signifi-cant effect on performance.

This finding casts doubt on the usefulnessof high-power incentives as a corporategovernance mechanism. Kubo stresses thatin Japan a positive correlation does exist between directors compensation and em-ployees wages. He suggests that a post on

the Board of Directors is indeed a part of thecareer path in Japan, and the task of a directoris to motivate the employees rather than max-imise shareholder value. Here Kubo ties inclosely to Ronald Dores contribution Dorepays special attention to the fact that manag-ers tend to see themselves as employees ofthe firm in Japan and that the pressures from

lifetime peers within the firm may be animportant internal factor assuring corporateaccountability.

Rethinking good corporategovernance?

The above discussion documents both signifi-cant changes and continuities. But it is a sepa-rate question as to whether Germany andJapan should

move closer to the Anglo-Saxonmodel of corporate governance in order toassure the accountability of top managers andgood company performance. The final twopapers (Dore and Yoshimori) explore theissues involved in choosing between corporategovernance systems.

Ronald Dore distinguishes between theshareholder versus stakeholder dimension ofcorporate governance, on one hand, and theissue of accountability as a common underly-ing issue in corporate governance, on theother. Dore argues that accountability can beachieved in both shareholder- and stake-holder-oriented systems, but in different ways.An overlooked issue in this regard concerns

the socialisation and career paths of top man-agers. In Japan, managers enter the firm asordinary employees, slowly work their wayup through the ranks and rise into the highestranks ahead of their cohort peers only verylate in their careers. Dore argues that thislong-term socialisation into a corporate cul-ture during ones career path provides impor-tant motivational resources for Japanesemanagers that place many important checkson opportunistic behaviour.

Consequently, the institutions governingmanagerial careers underlie important differ-ent governance institutions across countries.For example, the importance of intrinsic moti-vations to establish a good reputation amongcompany peers is greater in Japan relative toextrinsic motivations for monetary reward.These and other internal mechanisms of socialcontrol are often lost in US debates that appealto high-powered incentive schemes and exter-nal control by outsiders. Dores analysis raisesserious questions as to whether adoptingUS-style corporate governance practices willimprove corporate accountability in Germanyand Japan. Alternatively, change may influ-

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ence distributional outcomes (the question ofwho gets what) and erode the more egalitarianinstitutions that reduce inequality betweentop managers and employees.

The paper by Masaru Yoshimori focuses oncorporate performance through paired com-parisons of Toyota and GM, as well as Canonand Xerox. His case studies suggest that the

Japanese corporate governance system is notnecessarily linked with bad performance. Nordoes US-style corporate governance guaranteegood performance. Rather, the role of values,corporate culture and strategy are central tothe excellent performance of Toyota andCanon. Yoshimori thus argues that the hugeemphasis placed in international debates onexternal corporate governance by outsidersmay have relatively little impact on the bottomline. Parallel to Dore, the paper draws atten-tion to many of the internal factors that shapeorganisational behaviour, including corporateculture and strategy.

And convergence?

Much attention has surrounded the questionof international convergence of corporate gov-ernance systems. The papers in this SpecialIssue seem to suggest that strong convergenceis not taking place. Continuities were pointedout, such as differences in the structures ofcorporate boards (Nietsch), the continuedweakness of capital markets (Vitols, Miyajimaand Arikawa), the importance of employees as

stakeholders (Jackson), the career patterns oftop managers (Kubo, Dore) and corporatestrategies based on long-term relationships(Yoshimori). These features seem sufficient toargue that German and Japanese corporategovernance still remain quite distinct fromtheir US or British counterparts.

Yet equally importance must be placed onthe significant changes underway in Germanyand Japan. Changes in the financial liberalisa-tion (Introduction), the growing role of out-side directors (Cromme), the role of foreigninvestors (Seki) and bankfirm relationships(Haeckethal et al.

, Miyajima and Arikawa) allsuggest that popular understandings of theGerman and Japanese models must be revised.A challenging question remains for socialscientists as to how to interpret the balance ofcontinuity and change.

From a systems-based perspective, currentdevelopments are sometimes seen in termsof a hybridisation of national corporategovernance systems (Jackson, 2003). Oldstructural elements from stakeholder-orientedmodels (e.g. employee co-determination) are being recombined with newer elements of

shareholder-oriented models (e.g. transpar-ency and disclosure) so as to arguably producedistinct hybrid practices based on theseunique combinations of features. However,hybrids may be unstable if their componentelements lack complementarities. Someauthors are therefore sceptical about the long-term adaptation of stakeholder models to

international pressure (Lane, 2003). However,hybrids may be stable if existing institutionscan be reconfigured to fit within a firm-specific competitive environment, existing firmcoalitions or a national institutional context(Streeck and Thelen, 2005). Conflicting logics,such as shareholder- and stakeholder-orientedcontrol, may even help balance each other.

For now, a more clear consequence ofhybridisation is the growing heterogeneity ofcorporate governance across firms withinGermany and Japan (Aoki et al.

, 2005). Cor-porations choose their corporate governancepractices within the boundaries of prevailinginstitutional constraints and past organisa-tional coalitions. While national models werenever entirely homogeneous, the capacity togenerate isomorphic practices across compa-nies and sectors within a particular countryis declining. Inherent institutional tensions,mentioned above, facilitate deviant patterns of behaviour (Whitley, 1992, p. 248) and greaterfirm-specific experimentation in combiningelements of different models. Even thoughfirms retain distinct profiles across coun-tries, the range of internal variation is growingparticularly between large internationalised

corporations and smaller domestically ori-ented corporations.At the firm level, changes in corporate gov-

ernance can perhaps be described in terms ofchanging coalitions among key actors. Someauthors describe the emergence of an aug-mented stakeholder coalition that now in-cludes institutional investors, and the outcomeof a kind of negotiated shareholder value inGermany (Vitols, 2004). Here performanceincentives for employees remain less strongthan in the US or UK, perhaps representing amore egalitarian version of Anglo-Americanpractices.

Along similar lines, Jackson stressed thatmoving toward greater shareholder value hasnot led to the complete exclusion of otherstakeholders from corporate governance. Notall changes lead to zero-sum shifts in powerbetween owners and employees. Rather ten-sions are growing between corporate insidersand outsiders, such as between stable share-holders and institutional investors or betweencore and more peripheral groups of employ-ees. Among investors the balance of power isshifting, albeit moderately, from insider to out-

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siders as institutional investors gain influenceand banks play a weaker role. Meanwhile,power among employees is shifting from out-siders to insiders as firms restructure anddivest from non-core activities.

In both Germany and Japan, reform is per-haps less about class conflict than about cross-class coalitions among insiders that bind

together insider management, stable share-holders and core employees. Hackethal,Schmidt and Tyrell likewise stress the continu-ity

in the basic insider coalition in Germany.The authors even speculate that moves tomarket-based forms of governance may havea potentially paradoxical result of weakening

corporate accountability to the extent thatbanks play a weaker role as corporate insiders,but is not compensated for by more active roleof outsiders. Still potential coalitions may ariseamong outsiders such as institutional inves-tors and unions or union federations that eachpressure for greater corporate accountability.

Despite many parallels between Germanyand Japan, the future development of corpo-rate governance will also be shaped by theirdifferences. In some sense, the underlyingsources of path dependence may be different.The continued importance of employees asstakeholders in Germany depends highlyon the political and legal nature of co-determination. In Japan, stakeholder gover-nance continues in part because the externallabour market for top managers seems muchfurther away. Other equally important differ-ences relate to the role of the state. German

developments will be bound ever moreclosely with policy in the European Unionand integration of the European economy,whereas Japan remains a more sovereignnation-state driven by domestic policy con-cerns (Katzenstein, 2003). These regionaldifferences will remain extremely importantin mediating global pressures.

Notes

1. Thus, unlike Anglo-Saxon institutional investorsoriented to financial gains from share-priceappreciation and dividends, ownership isprimarily held by investors with strategic or-ganisational interests in promoting inter-firmcooperation, reducing risks and generatingrelationship-specific rents.

2. Japanese main banks act as delegated monitorsthrough direct equity stakes, credit and dis-patched directors (Sheard, 1994). German uni-versal banks are linked to business throughcredit, equity stakes, the exercise of proxy votesand supervisory board representation (Edwardsand Fischer, 1994).

3. Co-determination (Mitbestimmung) involveslegal rights to information, consultation and co-

determination for works councils representingemployees at the plant and company levels.Employees are also allocated between one-thirdand one-half of the seats on the supervisory board, placing them alongside shareholders inappointing and monitoring management, givingbusiness advice and ratifying important strategicdecisions with the shareholder representatives. Japanese labourmanagement consultation is

less formalised in law and more restricted to thecore workforce among large corporations.

4. Consequently, Japanese boards are morehierarchically structured, with decision-makingfocused on a group of senior representativedirectors under the CEO. In Germany, the wholemanaging board has equal responsibilities, inprinciple, and more influence and more leewayto participate.

5. Overall inward FDI relative to GDP remainsextremely low in Japan compared to other coun-tries, but has increased concern about corporatereform to attract more international investment,such as reducing cross-shareholdings, facilitat-ing M&A, privatising government business or

liberalising the use of stock options that US andother foreign firms perceived as necessary toattract qualified staff.

6. The process that enterprises attempt to loosentheir ties to the banks in Japan is called ginko banare literally increasing distance to thebanks or even leaving the banks.

7. The major mergers follow: (1) Industrial Bank of Japan, Dai-ichi Kangyo Bank and Fuji Bank,forming Mizuho Holdings; (2) Sumitomo Bankand Sakura Bank, forming MitsuiSumitomoFinancial Group; (3) Sanwa Bank, Tokai Bankand Toyo Trust Bank, creating UFJ, (4) Bank ofTokyo-Mitsubishi and Mitsubishi Trust andBanking forming Mitsubishi Tokyo Financial

Group, as well as (5) Asahi and Daiwa Bankforming Resona Holdings.

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Gregory Jackson

is Senior Lecturer in Strategyand Comparative Management at Kings Col-

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lege London. He graduated from the Univer-sity of Wisconsin-Madison, received his PhDin Sociology from Columbia University andwas formerly a Research Fellow at the Max-Planck Institute for the Study of Societies inCologne, Germany (19962002). He was also aFellow at the Research Institute of Economy,Trade and Industry (RIETI) (20022004). He

has written widely on comparative and histor-ical aspects of corporate governance, indus-trial relations and institutional theory with aspecial focus on Germany and Japan. He isalso co-editor of the forthcoming book Corpo-rate Governance in Japan: Institutional Changeand Organizational Diversity

(with MasahikoAoki and Hideaki Miyajima).

Andreas Moerke

is Senior Research Fellow atthe German Institute for Japanese Studies,Tokyo. He did his MA in Japanese Studies andreceived a PhD in Management Science fromHumboldt University Berlin. His work back-ground includes research at the Market Pro-cesses and Corporate Development ReseachUnit at the Science Center Berlin for Social

Research (WZB) and setting up a businessconsultancy with a focus on market-entrystrategies in Japan and Germany. In hisresearch publications and lectures, Moerkefocuses on industrial organisation aspects in Japan and Germany and corporate gover-nance in international comparison.

The more financially numerate we are, the greater the temptation to forget the humanfactor, to dismiss it as fluffy stuff or to place it outside the category of measurable andmanageable business factors. Lynn McGregor, Managing Director, Convivium, The HumanSide of Corporate Governance, International Corporate Governance 128, June 2004

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