No.25   April 1, 2001   Rebirth of Japanese Companies Through Governance Reforms   Takashi NARUSAWA, Masafumi EMORI and Satoshi OHMORI       Since the collapse of the so-called bubble economy, Japanese companies have been working to overcome their sluggish performance by means of reforms in business management strategies. While corporate earnings have begun to recover to some extent, returns on assets and other indicators of profitability are still hovering at very low levels, suggesting that structural reforms in business management are far from satisfactory. Recent slumps in the stock markets also suggest that investors are still disappointed over the delays in corporate structural reforms. The discussions on the need for such reforms have been fully exhausted, and the time has come to actually start carrying them out.   It is difficult for companies to put reforms into practice by themselves, however, as they invariably involve internal pain. In many cases in Europe and the United States, for example, such reforms were achieved under outside pressure, especially shareholder governance. In Japan as well, recent trends towards selling off cross-held shares by banks and affiliates, the increase in overseas shareholders, and the introduction of the current value accounting system are expected to reinforce the power of shareholder governance. And as shareholders demand improved investment returns, directors are being forced to concentrate on their fundamental functions such as strategic planning and operational supervision as the representatives of the shareholders, accelerating the momentum for structural reform. In short, the rebirth of the Japanese economy is conditioned on the recovery of Japanese companies, which in turn fully depends on the firm establishment of corporate governance. Contents I Urgent Need for Structural Reforms in Japanese Firms 1 Corporate Earnings Began to Recover 2 Inadequate Recovery in Earnings 3 Delayed Structural Reforms in Japan 4 Signs of Progress in Structural Reforms in Japan II Business Environments Requiring Adaptability to Changes 1 Far-Reaching Changes in Business Environments 2 Need to Quickly Respond to Changes III Major Traditional Firms Require Revolutionary Reforms 1 US Firms Suffer Setback After the Booms of the 1960s 2 Successful Examples of Management Reforms in the United States 3 Increasing Influence of Institutional Investors IV Governance Promotes Responses to Changes 1 Changing Governance Structure in Japanese Companies 2 Reinforced Supervision Over Companies 3 Boardroom Reforms on the Starting Line 4 Towards the Creation of a New Administrative System GO to PDF