Lessons on Corporate Governance Directly From Japan

I am currently studying my LL.M. degree at UC Berkeley University, in California. During my studies, I had the privilege to be invited and admitted into a course named “Advance topics on corporate governance between Japan, USA and China,” taught by Mr. Zenichi Shishido, a truly remarkable Japanese scholar, and even more remarkable human being.  

After many articles read and studied, but mainly after all the generous wisdom shared with us by Mr. Shishido, we had a better understanding of corporate governance in Japan, its challenges, and more importantly, the solutions Japan has implemented. Back in 2000, Mr. Shishido wrote an article for the Delaware Journal of Corporate Law in which he described the apparent paradox of Japanese corporate governance: despite having a legal system aligned with shareholder primacy (similar to the United States, emphasizing residual rights and control), in practice it was employee-centric and shareholder-dilutive; yet, it drove a remarkable economic success until the bubble burst in the 1990s. Mr. Shishido proposed a "Company Community" model — a social norm where core employees form a quasi-ownership collective, sharing identity and incentives with management. This community stabilized firms and companies via lifetime employment, seniority-based egalitarianism, and internal promotions, fostering loyalty and relation-specific investments without formal equity stakes.

Mexico's corporate landscape, dominated sometimes by family-owned conglomerates, state-influenced firms, and huge export-oriented corporations, faces and has faced governance challenges akin to Japan's pre-bubble era: weak minority protections, mistreatment and underpayment of employees, insider entrenchment, and tensions between short-term shareholder returns and long-term human capital investment.

With a civil-law tradition (like Japan's), Mexico can draw profound lessons from Japan's "Company Community" model. This fosters employee quasi-ownership for motivation, cross-shareholding for stability, and tiered monitoring for accountability — balancing autonomy with oversight while aligning money and human capital. These elements propelled Japan's postwar miracle (GDP growth averaging 10% in the 1960s), offering replicable tools for Mexico. Below, I outline a few key lessons, detailing adaptations and success cases like Toyota.

Lesson 1: Cultivating a "Company Community" for human capital alignment. Japan's genius strategy lies in treating core employees as quasi-owners: granting implicit residual claims via profit-linked bonuses (up to 20-30% of salary), lifetime tenure signals, and status elevation, without diluting shareholder equity. This solves the hidden problem of motivating human capital (a big challenge within Mexican corporations) for firm-specific investments, as employees internalize company success as personal. It is not just about increasing the minimum wage as a public policy, or increasing the salary of the employees in general, it is about creating a true and honest culture or treating them as owners of the company in which they work, regardless of the size of the corporation. In Mexico, where labor turnover exceeds 40% in manufacturing (versus Japan's <10% historically) and skills gaps hinder productivity (Mexico's labor productivity is 25% of the OECD average), emulating this practice could potentially build a bullet-proof loyalty in the human capital of all types of corporations.

A replicable case for this lesson could be Toyota's Production System (TPS). Since the 1950s, Toyota has embedded employees in a community, via kaizen (continuous improvement circles), where blue-collar workers suggested efficiencies, earning quasi-ownership through skill-based bonuses and job security. This slashed inventory costs at almost 90% [1] and boosted quality in the production cycle (defects <1 per million), enabling Toyota's rise from near-bankruptcy to become a global leader (2023 revenue: over $275B). In Mexico, Toyota's Tijuana plant (since 2004) replicates TPS, employing 2,000-plus people with community training, yielding 20% higher output than comparable US peers. Mexican firms can also adapt to this model in different industries, granting unit-specific bonuses to align human capital without eroding shareholder control, mirroring Japan's employee’s treatment success.

Lesson 2: Leverage cross-shareholding for managerial stability and strategic alliances. Japan stabilizes management via keiretsu crossholdings (sharing mutual 1-5% stakes among partners, including banks), deterring hostile takeovers while enabling a crisis "voice" (main-bank rescues, for example). This balances monitoring (autonomy for long-term projects) with oversight, as partners evaluate "total transactions" (equity + trade). In Mexico, where a big percentage of the listed corporations face activist pressure, real and strategic cross-alliances with stakeholders, banks, and relevant partners could shield corporations against volatility, without the need to implement in critical situations US-style poison pills, which clash with the civil-law rigidity treatment for corporations.

Lesson 3: Implement tiered monitoring for balanced oversight. Japan's three-tier system, which includes internal community self-policing, cross-shareholder voice, and outside monitoring, ensures autonomy without laxity. Mexico's corporate environment, which faces other types of challenges, with corruption perceptions at 31/100 (according to Transparency International 2023) and weak independence of boards (only 15% truly independent, as per some comments from the BMV), can layer and strengthen monitors: community audits (as opposed to governmental audits), transparent bank covenants, fair competition, and effective response to market signals in a coherent manner, aligned with a strong sense of social responsibility, and the pursuit of sustainability.

But of course, a very fair comment would be to say that the reality of Japan is not the reality of Mexico. However, adapting some of the Japanese ideas to Mexico's context is possible in practice. It will require the performance of hybrid and innovative actions seeking higher sustainability. Mexico's challenges — informality, inequality, and US dependency — require hybridization. Unlike Japan's homogeneity, Mexico's extreme diversity in labor and migrant flows demands initiative and concrete actions to generate inclusive communities. For recessions and crisis management (such as 2020, when Mexican GDP dropped around 8.5% [2] due to the COVID pandemic), the actions of Mexican corporations shall enforce new and creative norms: shareholder primacy in crises, pilot holding structures, and preserving community values, while centralizing and increasing monitors to ensure success via alliances.

Japan's lessons teach resilience: empowered communities enlarge pies and create wealth. For Mexico, replicating hybrid Japanese strategies to empower employees could add to and be a critical factor for our economic growth, fostering inclusive capitalism. Maybe it is time we consider truly treating our employees as owners of the corporations in which they work . It might sound disruptive, but we may need real corporate governance practices that prioritize human capital, without forsaking shareholder goals and objectives.