Japanese Corporate Governance Changes An improved Entrepreneurial Habitat

1
Japanese Corporate Governance Changes - An
improved Entrepreneurial Habitat?

• R. Eberhart

2
My Background
3
Are there other Entrepreneurs in Japan?

• Japan is the worlds 2nd largest economy
• 2nd largest consumer and industrial market
• Fully developed financial system
• Fully advanced legal system
• The rate of entrepreneurship is moderate
• Entrepreneurship not unknown
• Japan, Inc. companies had founders
• Honda, Sony, etc.
• Softbank, Rakuten, Value Commerce
• New corporate laws may be improving the
  entrepreneurial habitat lets look.

4
(No Transcript)
5
(No Transcript)
6
Habitat for Entrepreneurship

• Developed at Stanford by
• Prof. William Miller
• Prof. Henry Rowen
• Published in
• The Silicon Valley Edge
• 10 structural / business requirements for an
  entrepreneurial environment or habitat
• No location is perfecthow is Japanin 1989?

7
Japans Startup Habitat
8
Background to Change

• 1991-1997 Liquidity Crisis
• Post-bubble - main bank monitoring failed when
  banks failed/restructured
• Lack of liquidity creates consensus for stat-ups,
  new finance, FDI to fund firms
• Lack of transparency, stockholder rights in
  corporate gov (particularly accounting and
  kansayaku) limit VC and FDI
• 1997 - 2006 legal and structural changes to move
  toward a liberal market model and improve
  habitat for start-ups

9
Reforms

• Stock Options
• Decrease Minimum Capital
• Tax benefits for Angels
• Allow Repurchase shares
• Deregulate Mergers
• Allow Holding Co.s
• Consolidated Acctg

• Corporate Divisions

• Committee system governance option

1997 1998 1999 2000 2001
2002 2003 2004
2005

• Limit Directors Liability
• Kansayaku Authority
• Lifted ban on Treasury Stock

• Limit Liab Partnership
• Allow Stock Swaps
• Mark-to-Market Acctg
• J version of Bayh-Dole

• Codification of Kansayaku
• Revision of Bankruptcy Law
• JSOX and beyond

10
Corporate Governance Reform

• Limiting Directors Liability
• Daiwa case
• Upper limit established
• Strengthening Statutory Auditors (2001)
• The Agency Problem
• 50 must be outside after 2005
• First Japan law to intervene in CG without
  corporate agreement

11
Result of Reforms

• Habitat improvements
• Rule of law
• Auditor reform
• Liability reform
• Iinkai no kaisha
• Accounting standards
• Business Infrastructure
• PE, VC firms enter
• New law firms
• New reformed banks
• Climate for Startup
• FDI gt Best and brightest enter
• New heros
• Business/Govt
• Weakened
• Where METI goes, entrepreneurs go elsewhereWHY?

12
Japans Habitat Post Reforms
13
Key Insights

• Potential for Startups improved in Japan
• Vigorous and deliberate reform
• Key corporate conduct and governance areas
• Corporate structure
• Accounting
• Liability
• Transparency and governance
• Should see measurable improvement in
• Rate of start-up formation
• Valuation improvements
• Vigorous market for corporate control
• Improved economic activity