Long Legal Transplants: illustrations from Japanese Corporate Governance


Sean McGinty
Associate Professor at the Graduate School of Law, Nagoya University, Japan


Time to read

3 Minutes

In a recent paper I take a look at how the past twenty years of reform to the rules governing corporate director compensation in Japan can be characterized as a ‘long’ (in the temporal sense) legal transplant.  The literature on Japanese corporate law has long made use of the comparative law concept of the legal transplant to explain much of its historical development.  However, one distinguishing feature of reform to Japanese corporate law in the 21st century has yet to be explored in this regard: the fact that it is taking a really long time.  Since 2002 Japanese corporate law has been in a near constant state of reform. These have notably included the 2002 introduction of the ‘companies with committees’ structure, the creation of a separate Companies Act in 2005 and the substantial reforms of this act that came into effect in 2015 and 2021.Many of the changes taking place have been explicitly intended to introduce rules or practices found in foreign (particularly US) corporate governance models and thus may be (and in fact often are) considered a form of legal transplant.  But what does a transplant that takes twenty years (and counting) look like, and what insights for both the comparative law literature on transplants and for the literature on change in Japanese corporate law can we learn from studying one?

The rules on director compensation which the paper looks at (which cover the pay of most executives in Japan, not just directors) provide three answers to this question.   First, a long legal transplant may, counterintuitively, result in formal and substantial divergence rather than convergence between the ‘importing’ and ‘exporting’ jurisdictions due to the level of choices and options left to companies.  Much of the reforms over the past twenty years mentioned above can be explained by the desire to introduce elements of US-style executive pay practices to Japanese corporate governance.  Yet a comparison of how the actual rules governing pay, contained in Article 361 of the Companies Act, have evolved shows a significant formal and substantial divergence between Japanese and US law, which increased with each new amendment in Japan. The paper looks into these in some detail, but they can be explained, briefly, by the difficulties of importing US-style pay processes (among other things) that led Japan to legislate optional systems that allow companies to choose between three separate governance models which differ significantly from each other in terms of how pay is set. The end result is that Japan now has a much more complex system for determining director pay than it did in 2002 and an overall system that bears less resemblance to the US rules now than it previously did – the opposite result of what one might have expected from a legal transplant.

Secondly, over time, the conversation over the normative ends that a given rule seeks to achieve can evolve in different ways in each country. The debate over what the regulation of executive pay are meant to achieve in the US today, which is coloured by the explosion in pay levels and is concerned with the question of how to control, rather than encourage, pay packages,  looks quite different from the one prevailing at the turn of the century, with a focus on shareholder privacy and an effort to minimise agency costs between shareholders and executives. In Japan, in contrast, the idea that pay levels needed to be controlled was already well ingrained in both law and practice – executive pay levels being far lower than those found in the US. Changes to the legal rules since 2002 have tended to go hand in hand with introducing the normative idea that pay should be structured so as to efficiently deal with the agency problem between shareholders and executives, an idea largely absent previously.  This has led to an ironic paradox that could only have occurred in a legal transplant that took a long time: Japan is seeking to emulate pay practices in the US at the same time that Japan’s traditional practices (and the more modest levels of pay they produce) have come to look better from the US perspective precisely because they lack the features Japan is trying to import. 

Thirdly, a long transplant allows time for unexpected reactions, such as the outbreak of scandals, to occur, which can affect the course of change. The nature of reform in Japan has created a space in which extremely different pay systems have been thrown into the ring with each other, which has provided opportunities for such events to occur. This is best illustrated by the case of Carlos Ghosn, the former CEO of Nissan who dramatically fled prosecution in Japan in late 2018 while disguising himself as loudspeakers. Mr. Ghosn’s arrival in Japan almost two decades earlier roughly coincided with the beginning of the reform process and throughout his tenure at Nissan Mr. Ghosn was very much the public face of ‘global’ executive pay standards. Ultimately his pay would lead to his downfall, with most of the criminal charges brought against him relating to his compensation. While his escape from Japan would seem to provide an excellent transplant-related metaphor to a literature that loves metaphors (the ‘transplant rejected so badly it had to flee the country incognito’ or some variation thereof), in evaluating the actual effect of the Ghosn case on corporate governance at Nissan it seems, perhaps surprisingly, that the opposite is true. Whatever the normative conflicts associated with Ghosn’s high remuneration compared with Japanese norms were, the actual reaction at Nissan itself was to further embrace, rather than retreat from key features of US corporate governance. The negative reaction of the system to Ghosn’s pay practices have thus not only failed to lead to any sort of reconsideration of the adoption of US-style compensation practices, but may in fact have accelerated them.

Sean McGinty is Associate Professor at the Graduate School of Law, Nagoya University, Japan


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