Corporate Law Reform and Political Environment: An Empirical Analysis Employing Public Comment Procedure Data

.

.

Corporate Law Reform and Political Environment: An
Empirical 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 f¨r ausl¨ndisches und internationales Privatrecht
u
a
3 March 2014
MORITA, Hatsuru (Tohoku University)

Politics of Corporate Law Reform

3 Mar 2014

1 / 25

Table of contents
.
1

Introduction
. Background: Legislative Process of Japanese Corporate Law
2
Old Legislative Process (Before 1997)
The Turning Point: the 1997 Reform of Corporate Law
New Legislative Process (After 1997)
.
3 Public Comment Procedure and Corporate Law Reform
Public Comment Procedure
Hypotheses
. Data and Empirical Strategy
4
Data
Empirical Strategy
. Results
5
2002 Reform
2005 Reform
.
6 Concluding Remarks


3 Mar 2014

2 / 25

Introduction

Motivation

Corporate law shapes the fundamental business environment
Various stakeholders have incentive to inﬂuence the formation process
of corporate law
e.g., shareholders, managers, employees, stock markets, securities
brokers, creditors

We try to shed light on how various stakeholders behave in the
process of corporate law reform
Unique feature of the paper: focusing on the inﬂuence of stakeholders
on the behavior of bureaucrats of the Ministry of Justice (MOJ)
Constructing hand-collected datasets from two corporate law reforms
in Japan (2002, 2005)



3 Mar 2014

3 / 25

Introduction

Findings

The bureaucrats in general were rigid and unwilling to take public
comments seriously
Regarding some technical issues, legal academics and legal
professionals could inﬂuence the bureaucrats
The bureaucrats employed these comments to counterbalance
politically powerful interest groups and to honor the technical views of
legal professionals

At the same time, corporate managers employ the public comment
procedure as another vehicle for achieving their intentions
Otherwise, corporate managers do not need to realize their goals
through the public comment procedure because they can use other
political process



3 Mar 2014

4 / 25

Background: Legislative Process of Japanese Corporate Law


Corporate Law Reform Process

Japanese corporate law has experienced repeated reforms, especially
after 1974
Old legislative process (applicable to other private laws):
. Minister of Justice consults the Legislative Council to make reform
reports
.
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 constitution
and 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
1



3 Mar 2014

5 / 25



Old Legislative Process

The most important decision-making body: the Legislative Council
(Housei Shingi Kai)
Its members consist of legal academics, attorneys, judges, stock market
participants, and representatives of the managers of major corporations
The members of its secretariat consist of judges and government
oﬃcials of the MOJ, Ministry of Finance (MOF), and Ministry of
Economy, Trade and Industry (METI)



3 Mar 2014

6 / 25



Old Legislative Process

Neither employees nor corporate creditors have representatives in the
council
The strong presence of corporate managers and the absence of
employees and creditors could have engendered a vacuum of political
balance
However, legal academics have protected the interests of politically
silent stakeholders, thereby counterbalancing the political power of
corporate managers and achieving a fair compromise among the
various stakeholders
The undemocratic nature of the council has enabled the well-balanced
development of Japanese corporate law.



3 Mar 2014

7 / 25



Background of the 1997 Reform
At the beginning of the 1990s, the bubble economy collapsed, and the
Japanese economy slid into a deep depression
This economic downturn led to an intensive search for the means to
revive the Japanese economy and increase stock prices

The idea that “good” corporate law and “good” corporate
governance caused strong national economy had gained popularity
The old legislative process was considered inimical for such ﬂexible
and speedy corporate law reform
“The Legislative Council was too cautious and slow to improve
corporate governance in Japan and the Japanese economy”
Decisions of the council requires unanimous consent of its all members
Corporate managers could not achieve their intentions directly through
the council



3 Mar 2014

8 / 25



The 1997 Reform
Keidanren, a business group, and some members of the Liberal
Democratic Party (LDP), the ruling party, cooperated to implement a
breakthrough
Under the old legislative process, a reform bill must be tabled by a
member of the Cabinet
The 1997 reform bill was tabled by members of the Diet, bypassing the
council deliberation

Corporate managers had been forced to make compromises with legal
academics and were frustrated
By bypassing the Legislative Council and employing the
Diet-member’s bill system, corporate managers were able to realize
their interests directly
The mitigating role of legal academics was not included in the process
of the 1997 reform


3 Mar 2014

9 / 25



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 legal
academics and other constituencies, changed the picture of corporate
law reform
Legal academics and other corporate stakeholders can no longer use
the Legislative Council to carry through their claims
Corporate managers have more influence than before, since their
outside option has changed drastically



3 Mar 2014

10 / 25



The New Legislative Process

Deliberation in the Legislative Council is carried on in the shadow of
the Diet-member’s bill system
The bargaining power of corporate managers has been strengthened
and the interests of corporate managers take priority
The 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 the
Democratic Party of Japan (DPJ) took oﬃce
The DPJ lost both the 2010 Upper House election and the 2012 Lower
House general election



3 Mar 2014

11 / 25



Evaluating the Change

The old legislative process: the undemocratic feature of the
Legislative Council has led to the overrepresentation of stakeholders
This feature enabled an equitable balance among various stakeholders
of corporate law

The new legislative process: powerful interest groups have more
inﬂuence than politically passive stakeholders do
Corporate managers have strong inﬂuence on the reform process of
corporate law

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



3 Mar 2014

12 / 25

Public Comment Procedure and Corporate Law Reform



The political process in Japan had long been criticized as opaque
On Mar 23, 1999, a cabinet decision was made to introduce the
Japanese version of the notice and comment procedure, as the public
comment procedure
The decision requires each branch of the government to publish a draft
of regulations that it wants to make or reform and to invite comments
on the draft
Although the branch is not forced to follow the collected comments
from the public, it must publish a report

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



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 procedure
could reveal the internal motivations of the bureaucrats
. The public comment procedure has no effect (i.e., the no effect
hypothesis)
.
2 The public comment procedure has a strong effect (i.e., the strong
effect hypothesis)
.
3 We can observe only the influence of powerful interest groups, namely
the corporate managers (i.e., the interest group hypothesis)
.
4 MOJ bureaucrats employ the public comment procedure in order to
countervail the pressure of interest groups (i.e., the independence
hypothesis)
.
5 MOJ bureaucrats are legal specialists and are affected by only
“convincing” comments (i.e., the persuasiveness hypothesis)
1



3 Mar 2014

14 / 25

Data and Empirical Strategy

Data

Constructing the Dataset

The government usually releases only a report that summarizes and
analyzes the results of solicited comments but does not deliver the
individual 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 characteristics
The 2002 reform: a serious reform that introduced a US-like,
committee-based corporate governance system
The 2005 reform: separated the Corporate Code from the Commercial
Code, but substantively minor and technical



3 Mar 2014

15 / 25


Data

Constructing the Dataset

What we do to construct the dataset:
. Divide the reform drafts into single issues
.
2 Check the outcome to determine whether the final reform bills that
were 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 relaxing
regulations
.
6 Check the ex-ante attitude of the MOJ bureaucrats: already fixed or
undecided
1



3 Mar 2014

16 / 25


Data

Summary Statistics: the 2002 Reform
Variable
Reform02
Yes (total)
No (total)
Academics (Y)
Business (Y)
Fin. Inst. (Y)
Other (Y)
Academics (N)
Business (N)
Fin. Inst. (N)
Other (N)
Regulatory
Expression
RegEn02
En (total)
Reg (total)
Academics (En)
Business (En)
Fin. Inst. (En)
Other (En)
Academics (Reg)
Business (Reg)
Fin. Inst. (Reg)
Other (Reg)


Mean
0.642
22.2
11.2
8.72
5.72
0.925
6.79
4.94
3.09
0.774
2.34
0.264
0.83
0.604
23.7
9.62
7.64
8.06
1.58
6.32
6.15
0.755
0.113
2.87

Standard Deviation
0.484
9.6
10.5
4.52
4.04
1.11
3.54
4.82
5.38
1.6
2.41
0.445
0.379
0.631
9.56
8.54
4.53
4.32
1.61
3.4
5.47
1.71
0.32
3.29


Min
0
3
0
0
0
0
0
0
0
0
0
0
0
-1(REG)
4
0
0
1
0
1
0
0
0
0

Max
1
38
42
18
14
4
15
20
18
6
8
1
1
1(EN)
42
36
17
18
6
15
20
8
1
12

3 Mar 2014

17 / 25


Data

Summary Statistics: the 2005 Reform
Variable
Reform05
Yes (total)
No (total)
Academics (Y)
Business (Y)
Fin. Inst. (Y)
Other (Y)
Academics (N)
Business (N)
Fin. Inst. (N)
Other (N)
Regulatory
Expression
RegEn05
En (total)
Reg (total)
Academics (En)
Business (En)
Fin. Inst. (En)
Other (En)
Academics (Reg)
Business (Reg)
Fin. Inst. (Reg)
Other (Reg)


Mean
0.809
16.3
5.28
4.76
3.8
0.439
7.39
2.89
0.554
0.197
1.64
0.14
0.675
0.407
14
8.49
3.41
4.26
0.457
5.97
4.51
0.507
0.207
3.26

Standard Deviation
0.394
6.54
4.87
2.82
2.29
0.779
3.08
3.05
1.06
0.512
2.32
0.348
0.47
0.767
7.69
6.98
2.73
2.18
0.762
3.84
3.69
0.909
0.53
3.28


Min
0
1
1
0
0
0
0
0
0
0
0
0
0
-1(REG)
1
0
0
0
0
0
0
0
0
0

Max
1
31
25
17
11
4
19
17
4
3
11
1
1
1(EN)
28
31
13
10
4
19
17
4
3
13

3 Mar 2014

18 / 25


Empirical Strategy

Empirical Model

Simple probit regression:
Reform∗ = xβ + zγ + ϵ
Reform = 1[Reform∗ > 0]
Ordered probit regression: when the original draft presents multiple
alternatives



3 Mar 2014

19 / 25


Empirical Strategy

Predictions from the Hypotheses

The no effect hypothesis: comments 0, “Expression” +
The strong effect hypothesis: affirmative comments +, negative
comments -, “Expression” 0
The interest group hypothesis: business groups
+(affirmative)/-(negative), or 0 (other venues)
The independence hypothesis: business groups 0 or -, legal academics
and others +(affirmative)/-(negative)
The persuasiveness hypothesis: legal academcs and others
+(affirmative)/-(negative)



3 Mar 2014

20 / 25

Results

2002 Reform

The 2002 Reform: Probit Models
Yes (total)
No (total)

(1)
0.0583*
(0.0293)
-0.0483*
(0.0216)

(2)

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
-16.09
Standard errors are in parentheses. †, *, and ** denote
10%, 5%, and 1% level signiﬁcance respectively.



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
44
Log-likelihood
-23.39
-16.48



3 Mar 2014

22 / 25

Results

2005 Reform

The 2005 Reform: Probit Models
All Issues
(1)
(2)
(3)
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
106
Log-likelihood
-46.09
-40.15
-15.20
Yes (total)



3 Mar 2014

23 / 25

Results

2005 Reform

The 2005 Reform: Ordered Probit Models
All Issues
(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
77
Log-likelihood
-69.37
-11.88



3 Mar 2014

24 / 25

Concluding Remarks

Conclusions
No hypothesis universally holds true; each hypothesis is applicable to
limited situations
The MOJ bureaucrats have considerable control over the public
comment procedure
Although corporate managers have critical influence on the reform
process of corporate law, during the public comment procedure their
influence is limited to a few cases
Legal academics and other legal professional institutions, such as
courts, bar associations, and law firms, have influence in some cases
Future research agenda
to investigate what is happening under the changing political
environment of Japanese corporate law



3 Mar 2014

25 / 25

Corporate Law Reform and Political Environment: An Empirical Analysis Employing Public Comment Procedure Data

More Related Content

What's hot (20)

Recently uploaded (20)

Corporate Law Reform and Political Environment: An Empirical Analysis Employing Public Comment Procedure Data