Chapter 10: Corporate Governance 331
Japan’s corporate governance practices have been changing in recent years. For exam-
ple, because of Japanese banks’ continuing development as economic organizations, their
role in the monitoring and control of managerial behavior and firm outcomes is less
significant than in the past.^131 Also, deregulation in the financial sector has reduced the
cost of mounting hostile takeovers.^132 As such, deregulation facilitated additional activ-
ity in Japan’s market for corporate control, which was nonexistent in past years. And
there are pressures for more changes because of weak performance by many Japanese
companies. In fact, there has been significant criticism of the corporate governance prac-
tices of the Tokyo Electric Power Company after the severe problems at the Fukushima
Daiichi nuclear power plant following the earthquake and tsunami in 2011. Most Japanese
firms have boards that are largely composed of internal management, so they reflect the
upper echelon of management. However, independent, nonexecutive board members
are increasingly important in Japanese firms because they have adopted a new corporate
governance code.^133 As the Strategic Focus illustrates, engagement funds are helping to
change the landscape as well, given they have become more active in Japan.
10-5b Corporate Governance in China
China has a unique and large, socialist mixed with a market-oriented, economy. Over
time, the government has done much to improve the corporate governance of listed
companies.^134 These comments suggest that corporate governance practices in China
have been changing with increasing privatization of businesses and the development of
equity markets. However, the stock markets in China remain young and are continuing
to develop. In their early years, these markets were weak because of significant insider
trading, but with stronger governance these markets have improved.^135
There has been a gradual decline in China in the equity held in state-owned enter-
prises and the number and percentage of private firms have grown, but the state still relies
on direct and/or indirect controls to influence the strategies firms use. Even private firms
try to develop political ties with the government because of their role in providing access
to resources and to the economy.^136 In terms of long-term success, these conditions may
affect firms’ performance because research shows that firms with higher state ownership
tend to have lower market value and more volatility in that value across time. This is
because of agency conflicts in the firms and because the executives do not seek to maxi-
mize shareholder returns, given that they must also seek to satisfy social goals placed on
economies participating in the market for corporate control
and in restructuring investments, especially sovereign wealth
funds that also have influence in developed as well as devel-
oping countries by their large ownership positions. These
funds often focus to support government strategies, such as
in China’s energy sector, where the Chinese government is
seeking to acquire more energy assets and natural resources
to support its economy. Sometimes these sovereign funds
also support government positions such as the example
provided from Norway fund divesting coal assets in order to
increasing its emphasis on sustainability, an important social
and political movement.
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activism update, IR Magazine, http://www.irmagazine.com, March 10; K. M. Howl, 2015,
Norway oil fund sheds more coal assets, Wall Street Journal, http://www.wsj.com, May 5;
K. Narioka, 2015, Activist investors in Japan find some doors cracking open,
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90: 293–320; S. G. Lazzarini, A. Musacchio, R. Bandeira-de-Mello, & R. Marcon,
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