Creative norm destruction: The evolution of nonlegal rules in Japanese corporate governance

This Article analyzes the ar gins, persistence, and current evolution of a series of nonlegal rules (nom) that have played an important role in Japane se corporate governance. The central features of the governance environment examined here include: (1) the main bank system, in which banks voluntaril y restructure loans to some distressed borrowers, (2) a social distaste for hostile takeovers, (3) implicit promises of employment stability, and (4) belief systems about the proper role and structure of the board of director s. I show that, despite virtually ubiquitous claims to the contrary, these nor ms do not enjoy a long history of practice in Japan, but rather emerged onl y in the immediate postwar period. I hypothesize that tho emerged for two r easons: First, they served as a low-cost substitute for a troubled formal i nstitutional environment beset by the "transplant effect" that imperils leg al reform in transition economies today. Second, they provided private bene fits to the small number of interest groups that emerged intact from World War II. The flow of private benefits to norm adherents explains the persist ence of the norms despite clear evidence of their inefficiency over the pas t decade. I demonstrate that current models of norm reform, which emphasize the role of exogenous shocks, the workings of norm entrepreneurs, and increased info rmation, explain why the norm of Japanese corporate governance are currentl y evolving. Finally, extrapolating from Japan's experience, I suggest how norm analysis can contribute to the two most pressing questions in comparative corporate governance today: whether law matters to corporate governance and whether diverse systems of corporate governance are converging toward the Anglo-Ame rican model. As to both questions, closer attention to norms reveals shortc omings in the existing literature. Specifically, the empirical model underl ying the "law matters" literature is shown to be inconsistent with historic al experience and overly attentive to formal rules enforced by courts. Bold claims that we are witnessing rapid convergence toward a shareholder-cente red ideology, which in turn will drive convergence of corporate law and pra ctices, are only partially supported by the Japanese experience to date. Ra ther than the "end of history" for corporate law, we are witnessing an ongo ing struggle to align the formal and informal components of the governance regimes of many transition economies, including Japan's.