Governance in Japan, Germany, and China has been changing as “western” governance systems have increasingly been adopted. Traditionally, boards of directors in these nations have largely been composed of insider manager directors. In 2015, Japan adopted a new governance code that strongly emphasized the importance of firms to elect many more independent outside directors. Activist shareholders and a strong market for corporate control have traditionally been absent in Japan. More recently, shareholders have been more active and the most successful ones have been labelled “engagement” funds. The change is signaled, for example, by the Japanese Government Pension Investment Fund choosing an activist investor, the Taiyo Pacific Partners LP—a U.S. based engagement fund—to manage some of its $1 trillion in assets. Furthermore, the Japanese Financial Services Agency has introduced a “stewardship code” that calls on investors to “press for greater returns.” As such, the Japanese environment is becoming more oriented toward “shareholder rights,” although the
approach comparatively is not as “activist” as found elsewhere in the world. Besides a new brand of activism in Japan, activism is spreading around the globe including Germany. Again, a revised governance code pushed for more shareholder- friendly governance arrangements, including an emphasis on outside directors and stronger emphasis on executive long-term incentive compensation. With stronger emphasis on shareholders’ rights, activist funds pursued more activity. Cevian Capital, an activist fund, is involved in ownership with ThyssenKrupp and Bilfinder. Likewise, Elliott Management, another activist fund, is involved with Celesio and Kabel Deutschland. Although management teams are quite suspicious of activists in Germany and other continental European countries, “Germany is an area where activists may look because of its protections for minority investors in takeover deals.” However, research shows that activist investors have less influence on top management teams because of restrictive governance regulation. For example, one study found that activist investors’ involvement did not lead to increased CEO turnover.

Questions

1. Why are many countries adopting “western” governance systems similar to those found in the United States and the United Kingdom that are more shareholder friendly?
2. What particular governance devices are helping or hindering good governance in these countries that are changing their governance systems?
3. How do sovereign wealth funds affect governance of firms in home and foreign countries?
4. What would you recommend to improve the governance systems in Japan, Germany, and China, respectively, given the governance devices described in Chapter 10?