Understanding the Japanese Keiretsu: Overlaps between Corporate Governance and Industrial Organization

Ronald J. Gilson, Columbia Law School
Mark J. Roe


We aim here for a better understanding of the Japanese keiretsu. Our essential claim is that to understand the Japanese system-banks with extensive investment in industry and industry with extensive cross-ownership-we must understand the problems of industrial organization, not just the problems of corporate governance. The Japanese system, we assert, functions not only to harmonize the relationships among the corporation, its shareholders, and its senior managers, but also to facilitate productive efficiency. Comparative corporate governance, once an academic backwater, now enjoys important government and scholarly attention. U.S. government reports attribute Japan's competitive success in part to features of the Japanese system.' Harvard Business School's major, multi-disciplinary study of American management's time horizons recommends, as a way to combat "short-termism" among U.S. managers, restructuring American corporate governance so that it resembles Japan's more closely.2 This newfound interest derives from two changes, one domestic and one international. The domestic change is evident in scholars' new understanding of America's corporate governance system; during a short period of time, the basic paradigm has shifted. The "traditional" model of American corporate governance presented the Berle-Means corporation--characterized by a separation of ownership and management resulting from the need of growing enterprises for capital and the specialization of management-as the pinnacle in the evolution of organizational forms. Given this model's dominance, the study of comparative corporate governance was peripheral; governance systems differing from the American paradigm were dismissed as mere intermediate steps on the path to perfection, or as evolutionary dead-ends, the neanderthals of corporate governance. Neither laggards nor dead-ends made compelling objects of study. More recent scholarship challenges the "traditional" view, arguing that the separation of ownership and management-and the absence of substantial shareholders or lenders to monitor professional management-is historically and politically contingent. In particular, in the United States, populism, federalism, and interest group conflicts combined to restrict the growth of large financial intermediaries, especially banks, and constrained other efforts to oversee management, through a regulatory web of banking, insurance, tax, and securities laws.' The American system may be the product of an evolutionary process, but its development has been affected by features of our politics, some of which are fundamental to democracy, some peculiar to American democracy. Nothing in that process assures the American system's productive superiority to systems that evolved under different conditions.