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Corporate Law Reform and Political Environment: AnEmpirical Analysis Employing Public Comment

Procedure Data

Hatsuru Morita†

hatsuru@law.tohoku.ac.jp

http://ssrn.com/abstract=2394451

†School of Law, Tohoku University

Max-Planck-Institut fur auslandisches und internationales Privatrecht3 March 2014

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 1 / 25

Table of contents

...1 Introduction

...2 Background: Legislative Process of Japanese Corporate LawOld Legislative Process (Before 1997)The Turning Point: the 1997 Reform of Corporate LawNew Legislative Process (After 1997)

...3 Public Comment Procedure and Corporate Law ReformPublic Comment ProcedureHypotheses

...4 Data and Empirical StrategyDataEmpirical Strategy

...5 Results2002 Reform2005 Reform

...6 Concluding Remarks

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 2 / 25

Introduction

Motivation

Corporate law shapes the fundamental business environment

Various stakeholders have incentive to influence the formation processof corporate law

e.g., shareholders, managers, employees, stock markets, securitiesbrokers, creditors

We try to shed light on how various stakeholders behave in theprocess of corporate law reform

Unique feature of the paper: focusing on the influence of stakeholderson the behavior of bureaucrats of the Ministry of Justice (MOJ)

Constructing hand-collected datasets from two corporate law reformsin Japan (2002, 2005)

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 3 / 25

Introduction

Findings

The bureaucrats in general were rigid and unwilling to take publiccomments seriously

Regarding some technical issues, legal academics and legalprofessionals could influence the bureaucrats

The bureaucrats employed these comments to counterbalancepolitically powerful interest groups and to honor the technical views oflegal professionals

At the same time, corporate managers employ the public commentprocedure as another vehicle for achieving their intentions

Otherwise, corporate managers do not need to realize their goalsthrough the public comment procedure because they can use otherpolitical process

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 4 / 25

Background: Legislative Process of Japanese Corporate Law Old Legislative Process (Before 1997)

Corporate Law Reform Process

Japanese corporate law has experienced repeated reforms, especiallyafter 1974

Old legislative process (applicable to other private laws):...1 Minister of Justice consults the Legislative Council to make reformreports

...2 Council discusses the issue and makes reports by unanimous consent

...3 Ministry of Justice drafts a reform proposal bill

...4 Cabinet Legislation Bureau checks its consistency with the constitutionand the precedence

...5 Discussions among CLB, MOJ, and Legislative Council members

...6 Cabinet approval and deliberation by the Diet

...7 During the Diet deliberation, modifications to the bill rarely occur

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 5 / 25

Background: Legislative Process of Japanese Corporate Law Old Legislative Process (Before 1997)

Old Legislative Process

The most important decision-making body: the Legislative Council(Housei Shingi Kai)

Its members consist of legal academics, attorneys, judges, stock marketparticipants, and representatives of the managers of major corporationsThe members of its secretariat consist of judges and governmentofficials of the MOJ, Ministry of Finance (MOF), and Ministry ofEconomy, Trade and Industry (METI)

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 6 / 25

Background: Legislative Process of Japanese Corporate Law Old Legislative Process (Before 1997)

Old Legislative Process

Neither employees nor corporate creditors have representatives in thecouncil

The strong presence of corporate managers and the absence ofemployees and creditors could have engendered a vacuum of politicalbalance

However, legal academics have protected the interests of politicallysilent stakeholders, thereby counterbalancing the political power ofcorporate managers and achieving a fair compromise among thevarious stakeholders

The undemocratic nature of the council has enabled the well-balanceddevelopment of Japanese corporate law.

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 7 / 25

Background: Legislative Process of Japanese Corporate Law The Turning Point: the 1997 Reform of Corporate Law

Background of the 1997 Reform

At the beginning of the 1990s, the bubble economy collapsed, and theJapanese economy slid into a deep depression

This economic downturn led to an intensive search for the means torevive the Japanese economy and increase stock prices

The idea that “good” corporate law and “good” corporategovernance caused strong national economy had gained popularity

The old legislative process was considered inimical for such flexibleand speedy corporate law reform

“The Legislative Council was too cautious and slow to improvecorporate governance in Japan and the Japanese economy”Decisions of the council requires unanimous consent of its all membersCorporate managers could not achieve their intentions directly throughthe council

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 8 / 25

Background: Legislative Process of Japanese Corporate Law The Turning Point: the 1997 Reform of Corporate Law

The 1997 Reform

Keidanren, a business group, and some members of the LiberalDemocratic Party (LDP), the ruling party, cooperated to implement abreakthrough

Under the old legislative process, a reform bill must be tabled by amember of the CabinetThe 1997 reform bill was tabled by members of the Diet, bypassing thecouncil deliberation

Corporate managers had been forced to make compromises with legalacademics and were frustrated

By bypassing the Legislative Council and employing theDiet-member’s bill system, corporate managers were able to realizetheir interests directly

The mitigating role of legal academics was not included in the processof the 1997 reform

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 9 / 25

Background: Legislative Process of Japanese Corporate Law New Legislative Process (After 1997)

The Influence of the 1997 Reform

The recognition of the existence of the Diet-member’s bill system,through which corporate managers can avoid the influence of legalacademics and other constituencies, changed the picture of corporatelaw reform

Legal academics and other corporate stakeholders can no longer usethe Legislative Council to carry through their claimsCorporate managers have more influence than before, since theiroutside option has changed drastically

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 10 / 25

Background: Legislative Process of Japanese Corporate Law New Legislative Process (After 1997)

The New Legislative Process

Deliberation in the Legislative Council is carried on in the shadow ofthe Diet-member’s bill system

The bargaining power of corporate managers has been strengthenedand the interests of corporate managers take priorityThe deliberation time in the Legislative Council has been reduced

Instability of the new legislative process

In 2009, the LDP lost the general election of the Lower House and theDemocratic Party of Japan (DPJ) took officeThe DPJ lost both the 2010 Upper House election and the 2012 LowerHouse general election

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 11 / 25

Background: Legislative Process of Japanese Corporate Law New Legislative Process (After 1997)

Evaluating the Change

The old legislative process: the undemocratic feature of theLegislative Council has led to the overrepresentation of stakeholders

This feature enabled an equitable balance among various stakeholdersof corporate law

The new legislative process: powerful interest groups have moreinfluence than politically passive stakeholders do

Corporate managers have strong influence on the reform process ofcorporate law

One way to achieve a balance among various stakeholders under thenew legislative process is to increase the transparency of the legislativeprocess, particulary with regard to the public comment procedure

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 12 / 25

Public Comment Procedure and Corporate Law Reform Public Comment Procedure

Public Comment Procedure

The political process in Japan had long been criticized as opaque

On Mar 23, 1999, a cabinet decision was made to introduce theJapanese version of the notice and comment procedure, as the publiccomment procedure

The decision requires each branch of the government to publish a draftof regulations that it wants to make or reform and to invite commentson the draftAlthough the branch is not forced to follow the collected commentsfrom the public, it must publish a report

In 2005, the public comment procedure was formally incorporatedinto the reformed Administrative Procedure Act

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 13 / 25

Public Comment Procedure and Corporate Law Reform Hypotheses

Hypotheses

The public comment procedure is implemented by the bureaucrats,and the effect of the procedure falls mainly on the bureaucrats

Observation of the behavior of the bureaucrats around the procedurecould reveal the internal motivations of the bureaucrats

...1 The public comment procedure has no effect (i.e., the no effecthypothesis)

...2 The public comment procedure has a strong effect (i.e., the strongeffect hypothesis)

...3 We can observe only the influence of powerful interest groups, namelythe corporate managers (i.e., the interest group hypothesis)

...4 MOJ bureaucrats employ the public comment procedure in order tocountervail the pressure of interest groups (i.e., the independencehypothesis)

...5 MOJ bureaucrats are legal specialists and are affected by only“convincing” comments (i.e., the persuasiveness hypothesis)

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 14 / 25

Data and Empirical Strategy Data

Constructing the Dataset

The government usually releases only a report that summarizes andanalyzes the results of solicited comments but does not deliver theindividual data of the solicited comments

However, in two reforms of Japanese corporate law (2002 and 2005),all the comments are to be published

The 2002 reform and the 2005 reform have different characteristicsThe 2002 reform: a serious reform that introduced a US-like,committee-based corporate governance systemThe 2005 reform: separated the Corporate Code from the CommercialCode, but substantively minor and technical

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 15 / 25

Data and Empirical Strategy Data

Constructing the Dataset

What we do to construct the dataset:...1 Divide the reform drafts into single issues...2 Check the outcome to determine whether the final reform bills thatwere submitted to the Diet were different from the original drafts

...3 Count the number of affirmative and negative resopnses to each issue

...4 Classify the numbers according to who submitted each comment

...5 Classify the nature of issues: tightening of regulations or relaxingregulations

...6 Check the ex-ante attitude of the MOJ bureaucrats: already fixed orundecided

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 16 / 25

Data and Empirical Strategy Data

Summary Statistics: the 2002 Reform

Variable Mean Standard Deviation Min MaxReform02 0.642 0.484 0 1Yes (total) 22.2 9.6 3 38No (total) 11.2 10.5 0 42

Academics (Y) 8.72 4.52 0 18Business (Y) 5.72 4.04 0 14Fin. Inst. (Y) 0.925 1.11 0 4Other (Y) 6.79 3.54 0 15

Academics (N) 4.94 4.82 0 20Business (N) 3.09 5.38 0 18Fin. Inst. (N) 0.774 1.6 0 6Other (N) 2.34 2.41 0 8Regulatory 0.264 0.445 0 1Expression 0.83 0.379 0 1RegEn02 0.604 0.631 -1(REG) 1(EN)En (total) 23.7 9.56 4 42Reg (total) 9.62 8.54 0 36

Academics (En) 7.64 4.53 0 17Business (En) 8.06 4.32 1 18Fin. Inst. (En) 1.58 1.61 0 6Other (En) 6.32 3.4 1 15

Academics (Reg) 6.15 5.47 0 20Business (Reg) 0.755 1.71 0 8Fin. Inst. (Reg) 0.113 0.32 0 1Other (Reg) 2.87 3.29 0 12

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 17 / 25

Data and Empirical Strategy Data

Summary Statistics: the 2005 Reform

Variable Mean Standard Deviation Min MaxReform05 0.809 0.394 0 1Yes (total) 16.3 6.54 1 31No (total) 5.28 4.87 1 25

Academics (Y) 4.76 2.82 0 17Business (Y) 3.8 2.29 0 11Fin. Inst. (Y) 0.439 0.779 0 4Other (Y) 7.39 3.08 0 19

Academics (N) 2.89 3.05 0 17Business (N) 0.554 1.06 0 4Fin. Inst. (N) 0.197 0.512 0 3Other (N) 1.64 2.32 0 11Regulatory 0.14 0.348 0 1Expression 0.675 0.47 0 1RegEn05 0.407 0.767 -1(REG) 1(EN)En (total) 14 7.69 1 28Reg (total) 8.49 6.98 0 31

Academics (En) 3.41 2.73 0 13Business (En) 4.26 2.18 0 10Fin. Inst. (En) 0.457 0.762 0 4Other (En) 5.97 3.84 0 19

Academics (Reg) 4.51 3.69 0 17Business (Reg) 0.507 0.909 0 4Fin. Inst. (Reg) 0.207 0.53 0 3Other (Reg) 3.26 3.28 0 13

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 18 / 25

Data and Empirical Strategy Empirical Strategy

Empirical Model

Simple probit regression:

Reform∗ = xβ + zγ + ϵ

Reform = 1[Reform∗ > 0]

Ordered probit regression: when the original draft presents multiplealternatives

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 19 / 25

Data and Empirical Strategy Empirical Strategy

Predictions from the Hypotheses

The no effect hypothesis: comments 0, “Expression” +

The strong effect hypothesis: affirmative comments +, negativecomments -, “Expression” 0

The interest group hypothesis: business groups+(affirmative)/-(negative), or 0 (other venues)

The independence hypothesis: business groups 0 or -, legal academicsand others +(affirmative)/-(negative)

The persuasiveness hypothesis: legal academcs and others+(affirmative)/-(negative)

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 20 / 25

Results 2002 Reform

The 2002 Reform: Probit Models

(1) (2)Yes (total) 0.0583*

(0.0293)No (total) -0.0483*

(0.0216)Academics (Y) 0.0985

(0.115)Business (Y) 0.0319

(0.0970)Fin. Inst (Y) 0.240

(0.397)Others (Y) -0.0213

(0.124)Academics (N) -0.0996

(0.0880)Business (N) 0.0806

(0.126)Fin. Inst. (N) -0.738

(0.602)Others (N) -0.268

(0.196)Expression 1.19 0.752

(0.752) (1.03)N 53 53

Log-likelihood -20.48 -16.09Standard errors are in parentheses. †, *, and ** denote10%, 5%, and 1% level significance respectively.

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 21 / 25

Results 2002 Reform

Thw 2002 Reform: Ordered Probit Models

All Issues Issues with ‘shall be’(3) (4)

Academics (En) -0.261† -0.133(0.134) (0.136)

Business (En) -0.0336 -0.0704(0.0731) (0.0933)

Fin. Inst. (En) 0.299 -0.170(0.238) (0.285)

Others (En) 0.634* 0.391†(0.262) (0.217)

Academics (Reg) -0.183* -0.0223(0.0923) (0.0902)

Business (Reg) 0.177 0.113(0.160) (0.196)

Fin. Inst. (Reg) -0.0467 2.30†(0.699) (1.29)

Others (Reg) 0.159 -0.306†(0.168) (0.168)

Expression 1.50(0.916)

Exp × Regulation -2.65**(0.930)

N 53 44Log-likelihood -23.39 -16.48

Standard errors are in parentheses. †, *, and ** denote10%, 5%, and 1% level significance respectively.

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 22 / 25

Results 2005 Reform

The 2005 Reform: Probit Models

All Issues Issues with ‘shall be’(1) (2) (3)

Yes (total) 0.0728**(0.0258)

No (total) -0.101**(0.0287)

Academics (Y) 0.0362 0.244(0.0812) (0.174)

Business (Y) 0.468** 0.535†(0.159) (0.303)

Fin. Inst (Y) 0.398 -0.156(0.340) (0.480)

Others (Y) -0.0395 0.0419(0.0997) (0.198)

Academics (N) -0.254** -0.339†(0.0917) (0.187)

Business (N) 0.125 0.0181(0.160) (0.381)

Fin. Inst. (N) 0.0494 0.121(0.324) (0.615)

Others (N) -0.222* -0.134(0.102) (0.224)

Expression 0.933** 1.14**(0.331) (0.384)

N 157 157 106Log-likelihood -46.09 -40.15 -15.20Standard errors are in parentheses. †, *, and ** denote10%, 5%, and 1% level significance respectively.

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 23 / 25

Results 2005 Reform

The 2005 Reform: Ordered Probit Models

All Issues Issues with ‘shall be’(4) (5)

Academics (En) 0.0618 -0.475(0.0781) (0.295)

Business (En) 0.200* 0.576†(0.0947) (0.323)

Fin. Inst. (En) 0.227 -0.196(0.234) (0.480)

Others (En) 0.0433 0.256(0.0742) (0.278)

Academics (Reg) -0.0822† -0.349(0.0494) (0.220)

Business (Reg) -0.0707 -0.291(0.172) (0.787)

Fin. Inst. (Reg) -0.107 0.297(0.235) (0.681)

Others (Reg) -0.0492 -0.0765(0.0768) (0.289)

Expression 1.64**(0.366)

Exp × Regulation -6.88(284)

N 140 77Log-likelihood -69.37 -11.88

Standard errors are in parentheses. †, *, and ** denote10%, 5%, and 1% level significance respectively.

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 24 / 25

Concluding Remarks

Conclusions

No hypothesis universally holds true; each hypothesis is applicable tolimited situations

The MOJ bureaucrats have considerable control over the publiccomment procedure

Although corporate managers have critical influence on the reformprocess of corporate law, during the public comment procedure theirinfluence is limited to a few cases

Legal academics and other legal professional institutions, such ascourts, bar associations, and law firms, have influence in some cases

Future research agenda

to investigate what is happening under the changing politicalenvironment of Japanese corporate law

MORITA, Hatsuru (Tohoku University) Politics of Corporate Law Reform 3 Mar 2014 25 / 25