176 InManagersWeTrust
councils on major corporate policies affecting labor interests, in-
cluding layoff proposals and in many cases potential changes of con-
trol. Galvanizing this labor element in the corporate governance
model, the EU also requires that employment contracts follow busi-
ness assets when sold as a going concern so that a buyer of such
assets remains subject to those agreements by operation of law.
Compared to the European model, the Japanese variation deep-
ens the roles of both labor and lender banks in the governance struc-
ture. As in Europe, banks tend to own the vast bulk of the debt and
equity of industrial companies. The distinguishing factual charac-
teristic is the Japanese production model that is called horizontal
coordination. Workers are generalists when it comes to the produc-
tion process and engage in a substantial amount of information shar-
ing and training throughout production. Limited specialization, how-
ever, requires high corporate investment in labor markets to develop
the necessary human capital.
Japanese corporations thus face a higher ris kof loss on invest-
ment from worker defection than do European and American cor-
porations. However, workers face the risk of acquiring nontrans-
portable, firm-specific skills. Corporations and workers have
addressed these risks by developing a system of lifetime employment.
This policy provides workers with permanent job security and affords
corporations a concomitantly restricted labor market.
No binding contract guaranteed this mutual security system, and
so the Japanese model turned to corporate cross-ownership to pro-
vide the necessary structural protections. Industrial corporations in
Japan own substantial percentages of the securities of other indus-
trial corporations. The resulting ownership concentration is even
more centralized than it is in the European model, and it causes a
commensurate dilution of capital market disciplining power.
ILLUSIONS OF DUTY
So much for these polar stories. Reality suggests far more overlap
and universal looseness across advanced economies in regard to the
real beneficiaries of managerial duties—an important point for in-
vestors to understand.
Corporate social responsibility remains an important dimension
of U.S. corporate governance. Direct efforts to improve the lot of
nonshareholder constituencies supplement the simple argument that