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Japan & UK Accounting Standards & Corporate Governance

Corporate governance

Basically, corporate governance is concerned with the manner in which power is exercised in safeguarding resources of an organisation with the aim of increasing and maintaining shareholders’ wealth. Corporate governance is important in bridging the gap between economic and social goals as well as communal and individual goals. In addition, it is used to ensure efficient use of resources and accountability in exercising their powers.

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In Japan, corporate governance is mainly concerned with a group of stakeholders including suppliers, employees, and customers unlike the UK model, which mostly focuses on the shareholders only. It ensures that the communal resources are efficiently used. According to Smith (1776), corporate governance ensures that firms are run efficiently while considering the interests of stakeholders. This section focuses on philosophies that shed light on the manner in which corporate governance manifests itself in both Japan and the United Kingdom (UK). Consequently, the aspects investigated include the Board of Directors, compensation for the executives, market for corporate control and the manner in which firms are monitored by financial institutions.

Board of directors


The board of directors is elected to office by shareholders. This board consists of both internal and external directors. Once elected, the board outlines the policies to be pursued by the firm. The management is charged with the responsibility of implementing these policies, as directed by the board (Scott, 1998). Other than electing the directors, the shareholders bear no other duty. The external directors are nominated by the incumbent management; therefore, they are answerable to the Chief Executive Officer (CEO).


Essentially, the shareholders do not have much influence on the board of directors. The Japanese boards are much larger, with the majority of board members coming from within, as opposed to the British model which is essentially narrow. The CEO is concerned with the responsibility of supervising the process of nomination of the directors; this role gives the CEO a very influential position over the board members. All together, in Japan, many organisations are forming small sized boards due to pressures from the process of international integration.

Executives’ compensation


In the UK, Investors ensure that compensation of the managers is pegged on the performance of the company. Therefore, they gather information regarding the stock market prices with the aim of gauging the performance of the company – this also reflects performance of the management. In addition, it is believed that stock prices are very predictive; hence, they can be used to forecast profitability levels for companies. As such, management of companies uses these stock prices to create an impression, to the shareholders, that they are effectively safeguarding their wealth. Even though compensation is pegged on the performance of the company, top executives from the UK are handsomely compensated.


Contrary to directors from the UK, their counterparts from Japan are poorly remunerated. Also, their remuneration does not depend on the performance of the company. Aoki (1990) found significant differences between the ancient UK hierarchical firm, the “H- mode”, and the current Japanese structure, the “J-mode”.

Market corporate control and how firms are monitored by financial institutions

A notable difference between the UK and Japanese market corporate control is the UK hostile takeovers, which is unheard of in Japan. Essentially, Japanese companies practice cross-shareholding approach to guard against hostile takeovers. In Japan, lack of market for corporate control solves the agency problem through financial institutions, which keeps an eye on the corporation. This structure is known as a main bank. Monitoring and fighting of the agency problem, between managers and the firm, is entrusted on bank.

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The above review of mechanisms for corporate governance in both the UK and Japan shows their fundamental differences. The Japanese model of corporate governance is broad and takes into account the interests of a wide range of stakeholders unlike the UK model. Therefore, efficiency is expected from this system as opposed to the case with imperfect markets, which has a narrow outlook.

Financial reporting council (FRC)

This council is an independent regulator charged with the responsibility of promoting corporate governance and reporting in the UK. This body operates under the auspices of code of corporate governance, which fosters quality standards. This body, also, operates an independent disciplinary arrangement for cases involving accountants; for the purposes of public interest.

Accounting Standards Board of Japan

The Accounting Standards Board of Japan (ASBJ) complements the efforts of Financial Accounting Standards Setting Board (FASB) and International Accounting Standards Board (IASB) in development of globally applicable accounting standards. More so, it is still working to find harmony between the International Financial Reporting Standards and the Japanese Generally Accepted Accounting Principles.

Other accounting information/policies

The UK financial reporting standards are grouped into chapters, which are then broken into parts. Interestingly, the International Financial reporting Standards (IFRS) is not arranged in numbers as the UK financial Reporting Standards. Some firms prefer adopting the UK financial standards rather than IFRS. The Japanese Accounting Standards are grouped into chapters, which are further broken into parts. Most Japanese firms prepare their annual reports based on the Japanese accounting standards despite the popularity of the International Accounting Standards.


Aoki, M. (1990). Toward an Economic Model of the Japanese Firm. Journal of Economic Literature, 28, 1-27.

Scott, K. (1998). The Role of Corporate Governance in United Kingdom Economic Reform. Journal of Applied Corporate Finance, 10, 8-15.

Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. Dublin: Whitestone.

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