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Over the recent years there has been an interest in studies directed towards corporate governance for academic and non-academic purposes. In the academic world, the interest has cut across the interdisciplinary and has been considered in many academic areas such as law, finance studies, accounting, economics and even managerial disciplines. Corporate governance can be defined as the way in which various suppliers of a finance of a country assure themselves a return on their investment. The returns of this suppliers of finance depends majorly on concepts of contractual arrangements, myriad legal, various markets and the behaviour of different actors in the market and this the reason why corporate governance has evolved into numerous literatures. A lot of the academic work that has been done in line with the corporate governance has been done on the two models of shareholders verses stakeholder models. This paper analyses the corporate governance between Japan and China by comparison of the various aspects.

Corporate governance of China

In the years of 1970’s, China underwent the long period of programmatic reforms in  its corporate governance which appeared to focus much on the market reform of the post-WTO environment accompanied its financial sector opening for a greater foreign competition. This system ushered in the period that they experienced a dynamic economic growth in the country and also restructuring of the economy that brought a tenfold increase in their GDP (Clarke , 2006, p.167). This improvements made China to acquire the second largest economy state worldwide following US as the leading economy in the world in the year 2006. This was attained when the economic growth was measured in the purchasing power parity of the country. The economist report of 2008 reported that China had grown in its gross domestic product (GDP) by 11.4%. This has been as a result of the change of the economy of China that has been experienced in the past years (Clarke , 2006, p.172).

According to (Clarke, 2006), defining China’s corporate governance can be considered as a set of rules and practices regulating relationships among participants in post-traditional error. This type of corporate governance that is exhibited by China inclines to regulate the existing relationship in the market among all market participants. In sense, the type of governance that is being experienced today in China does not entirely exhibit the post traditional enterprise, most of the duties that are being undertaken under the two types of firms that exist in China which are state owned enterprise  (SOEs) and the other known as the publicly held companies (PHCs) (Gillan, 2006, p.393).

In China, the corporate governance is classified into two main categories of governance which include the external governance and the internal governance. Internal governance is made up of the board of directors, managerial incentive and ownership and control mechanism. The external governance of the other side consist of the external markets and generally the government rules and policies governing the country (Gillan, 2006, p.334). Research done on the external and the internal corporate governance shows that both the external and the internal governance influence the performance of the country. The restructure of SOEs of China is pointed out as the major vehicle that has brought China in its current economical state (Firth, et al., 2006, p.34). Before this, China was fully dominated by the state ownership which after consideration was changed.

Board of directors

In the china case, the main responsibility of the board of directors in controlling purposes is to minimize total costs that is generated from the act of separation of decision control and ownership of the modern governance. This board receives its working authority for its internal activities and from the stockholders of the corporate governance. The major task of the board of directors is to monitor, fire, hire and also compensating the management team besides the role of ensuring that the wealth from the shareholders are maximised (Gillan, 2006). The board of directors from China are associated with the positive returns that has been experienced in China.

Ownership and control

In China, the major shareholders consist of institutions and state and not individually owned. Most of the companies that are traded publicly are state controlled. The accounting performance of firms in China are negatively related to standards of direct state ownership. Because the state controls the major part of the companies in China, politicians and state officials make a bigger part of the board of directors (Claessens & Fan, 2002, p.83).

Financial system of China

The financial system for China has contributed largely in the economic growth of the country. The national economy has undergone a noticeable change within the last two decades. In the period of 1950 and 1978, China was having only one financial institution that was known as the people’s Bank of China and it was responsible for all the financial requirement of the country. After that error, there has been a positive improvement in the country’s banking sector (Clarke , 2006, p.186 ). There is the introduction of such initiatives such as monetary policy independence, service diversity and banking autonomy and this has allowed for the emergence of four major banks.

Corporate governance of Japan

In Japan the corporate governance has the major task of ensuring that the firms in the country are run in the interests of the country’s shareholders which is to create wealth for the country. The view is in light with the view of Adam Smith’s concept about the invisible hand of the market in corporate governance. In the case of the shareholders of the country maximising wealth and also at the same time the individuals undertake their own interests in the quest of resource allocation. Therefore no party can be made better off without making the other worse off (Scott, 1998. P.9). The case of Japan is that which the instead of the firms to concentrate in creating wealth for its owners, it is the corporate government that is alarmed that the firms are run in such a way that the society’s available resources are put in effective use by making various shareholders including employees, customers, suppliers and other shareholders are accountable for operations (Scott, 1998, p.13).

The imperfect markets that exist in Japan can be used by the board potentially to make the lives of everybody in the country better of as compared to when the focus is on purely the shareholders’ interest. For instance when an externality exist in the market such as pollution, then if the firms are to maximise their value then automatically it will lead to misallocation of resources. And on the other side if the firms were to use the broader view on the same aspect, they would may be change their behaviour in the anticipation of producing at the socially optimal recommended levels. In other words, with this system, thought it may seems impossible to obtain efficiency, but it may be used again to achieve a better allocation of resources when taken at the broader view (Allen, 2005, p.172). In this system therefore, firms are not solemnly to pursue the interests of its shareholders. This system may be also termed as codetermination system and in large companies, employees allocated equal chances in terms of the numbers in the supervisory board of the company (Allen, 2005, p.175).

The board of directors

In Japan, the board of directors are usually elected by the shareholders and it consist of a combination of both the outside and inside directors. On election, the board specifies the policies related to business in the country that will be pursued by the firms. On the firms’ side, their role is to implement what has been stated in the policies by the board. Usually the management remuneration of the firms are usually decided in the general meetings by the shareholders. Despite of these their role, shareholders do not proclaim much influence in the board of directors. The majority of directors usually originate from the company. Their structure is such that they include many people apart from the senior members of the management board and the nominations for such individuals are usually in control of the CEO of the company.

Corporate market control

Market control for Japan case is based on hostile takeovers. The hostile control takeovers works in such a way that when there arise conflict between acquirers and acquires’, over the market price, and the policy to be implemented, the hostile takeovers system allow the acquirers’ to accesses the directors of the target management and appeal directly to shareholders (Hoshi, et al., 1991, p.45). This mechanism allows for efficiency of allocation of resources. Cross shareholding was implemented in Japan to reduce or act as formidable barriers.

The corporate financial market

In Japan, there exist an equity ownership of the financial institutions in the country. Lack of the market for the corporate governance led to the implementation that the problem be solved by financial institution acting as watch dogs for the large corporations. The system of monitoring in Japan is known as main bank system (Hoshi, et al., 1991, p.48). The long term economic slump that was experienced in the banking system of Japan led to a substantial decrease in cross shareholdings between corporations and banks.


China being one of the countries that is undergoing reformation in its corporate governance, it provides one possible direction to go in. The corporate governance of China is based on a narrow view of the role of corporation in the entire economy. In Japan, a broader view of corporate governance is taken into control. This system requires that companies make efficient use of the available resources by taking the interest of the shareholders.


Allen, F., 2005. Corporate governannce in emerging markets. Oxford Review of Economic Policy, pp. 164-177.

Claessens, S. & Fan, P. H., 2002. Corporate governance in Asia. International Review of Finance, 3(2), pp. 71-103.

Clarke, D.C., 2006. The independence director in Chinese corporate governance. Delaware Journal of Corporate Law, 31(1), p.2006.

Firth, M., Fung, M.Y. & Rui, O. M., 2006. Corporate performance and CEO compensation in China. Journal of Corporate Finance, Volume 12, pp.693-714.

Gillan, S.L., 2006. Recent development in corporate govervance. Journal of Corporate Finance, 12(3), pp. 381-402.

Hoshi, T., Kashyap, A. & Scharfstein, D., 1991. Corporate structure, liquidity and investment: Evidence from Japanese industrial groups. Quartely Journal of Economics, pp. 33-60.

Scott, K., 1998. The role of corporate Governance in South Korean economic reform. Journal of Applied Corporate Finance, Volume 10, pp. 8-15.

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