Concept of the Firm and Corporate Governance in Japan

In most Japanese firms, the untold “real power” of the firm is the core employee of the firm, including the management. In that sense, the author characterizes the Japanese concept of the firm as ‘employee sovereignty’, in order to contrast it with the typical American concept of ‘shareholder sovereignty’. Though born in chaotic post-war conditions of the Japanese economy with much labor unrest, the concept and the practice of employee sovereignty by the Japanese firms had various elements of economic rationality in the sense of incentive compatibility, informational efficiency and social persuasiveness. That rationality contributed in many ways to economically rational and efficient behaviors by the Japanese firms and explains in a large measure the post-war success by the Japanese firms. As in many social phenomena, however, the employee sovereignty has had not only positive effects but also negative sides, too. Foremost is the vacuum in corporate governance that it creates when it is silently practiced within the legal system of usual corporation law, which Japan has. The law presupposes that it is shareholders that will exercise the power to check the top management. The practice of employee sovereignty has tried to escape this legal power. As a result, there is no effective check mechanism for top management from outside.