8.2.1 The Japanese Reception of Western Legal Norms

The modern layers of Japanese fiduciary norms were laid down by the French-inspired Civil Code (1896) and the German-modeled Commercial Code (1899).Footnote ⁵ Although the term “fiduciary” did not immediately become a part of the Japanese legal lexicon, these codes contained a series of rules equivalent to present-day fiduciary principles. At the core of Japanese law on fiduciaries is section 644 of the Civil Code, which prescribes an agent’s obligation to manage the principal’s affairs “with the care of a faithful manager.”Footnote ⁶ This provision applies, mutatis mutandis, to partners,Footnote ⁷ guardians,Footnote ⁸ and executors under the Civil CodeFootnote ⁹ and extends to corporate directors under the Commercial Code.Footnote ¹⁰

The Civil Code prohibits an agent from engaging in self-dealing and the representation of both parties in the same transaction.Footnote ¹¹ Similarly, context-specific regulations of conflict-of-interest transactions apply to guardiansFootnote ¹² and directors of charitiesFootnote ¹³ under the Civil Code, and commercial agentsFootnote ¹⁴ and corporate directorsFootnote ¹⁵ under the Commercial Code.

The Commercial Code also prescribed corporate governance structure for for-profit corporations that parallel the German-style two-tier board (duale Führungsstruktur). Just as the German supervisory board (Aufsichtsrat) provided for the monitoring of the managing board (Vorstand), Japanese statutory auditors (kansayaku) were expected to monitor the business decisions and accounting practices of directors (torishimariyaku). Herman Roesler, the German architect behind the Japanese Code, referred to not just the German example but also to French and British legislation, ensuring that the Code matched the needs of the time in Japan.Footnote ¹⁶ Notably, the Japanese statutory auditors’ position was weaker than that of their German counterparts in that, although they had the power to require directors to produce accounting documents for review and conduct inquiries on their business execution, they lacked the power to appoint or remove directors.Footnote ¹⁷

On top of the civil law basis for Japanese private law, common law trust was introduced by the Trust Act of 1922.Footnote ¹⁸ Under the Act, the trustee must carry out the work of the trusteeship “with the care of a faithful manager,”Footnote ¹⁹ a language that parallels the Civil Code’s agency provision. Extending the agency-based regulation, the 1922 Act prohibited the trustee from engaging in self-dealing under any name involving any proprietary or personal rights.Footnote ²⁰ While ensuring consistency with the Civil Code, the drafters of the Trust Act incorporated certain remedies against the breach of trust that track the common law approach and that are more extensive than those available for agency arrangements.Footnote ²¹

Thus, by the 1930s, fiduciary principles were prescribed under separate codes drawn from different legal traditions. There was no general “duty of loyalty” provision, and the provisions mostly exhibited a rule-based format by listing conflicted transactions, which were prohibited unless there was specific authorization or an independent representative was appointed, depending on the context. The rule-based regulation was not unique to Japan at the time. English fiduciary law had long been largely rule-based, using no-profit, no-conflict formulas.Footnote ²² The general formulation of the duty of loyalty in the United States was broadly accepted only in the 1930s, after the publication of Austin W. Scott’s Treatise on Trusts and the Restatement on Trusts, for which he served as a reporter.Footnote ²³ In Anglo-Commonwealth jurisdictions, more systematic consideration of fiduciary law came later in the twentieth century.Footnote ²⁴

8.2.2 Modernization in Civil Law East Asia

In China, after a number of military and diplomatic setbacks against the Western colonial powers, the late Qing Empire embarked on the internal reform to modernize its government system.Footnote ²⁵ Part of the reform that began at the turn of the nineteenth century was the introduction of Western-style legal system and the codification in various areas of law. One of its first products was the Company Law of 1904. Codification efforts continued under the Republican government that took over in 1912, which included replacing the 1904 Law with new Company Regulations in 1914. Another Company Act was introduced in 1929 along with the Civil Code from 1929 to 1930. Japanese legal advisors and Chinese students who had returned from their studies in Japan assisted the drafting process.Footnote ²⁶ Through their involvement, Chinese legislation was influenced by civil law, especially German and Swiss civil law.Footnote ²⁷ Nonetheless, the impact of Western transplants remained marginal. The traditional kinship-based entities – that is, professionally managed commercial enterprises organized in the form of the family – retained their vitality and received recognition by the court during the Republican period.Footnote ²⁸ With the ouster of the Republican government by the communists and the establishment of the People’s Republic of China (PRC) in 1949, the 1929 Act ceased to affect mainland China, although it was carried over to Taiwan where the Kuomintang, which had formed the Republican government, retreated.Footnote ²⁹

Japan was responsible for direct colonial rule in Taiwan and Korea. After the First Sino-Japanese War (1894–95), Taiwan was ceded to Japan by the Qing Empire. After it defeated Russia in the Russo-Japanese War (1904–05), Japan extended its sphere of influence over Korea, ultimately annexing it in 1910.Footnote ³⁰ To modernize the legal system within its territories, the Japanese government mobilized some of its leading scholars to investigate local customs.Footnote ³¹ Eventually, however, the idea of codifying local customs was abandoned. The Japanese government, instead, imposed its laws and industry regulations in Taiwan and Korea.Footnote ³²

It is no apology for colonialism to point out that it laid the foundation for the transnational evolution of fiduciary law in South Korea and Taiwan. The Civil and Commercial Codes under civil law continued to form the basis of the national private laws of both jurisdictions after World War II. Although Japanese rule ceased, its postwar economic development provided a model for many developing economies in the region. In addition, common law influences arrived through trust legislation, securities regulation,Footnote ³³ and the corporate governance doctrine.Footnote ³⁴

In South Korea, the Japanese codes remained in effect until the introduction of new codes in the 1950s and 1960s, in part because of the Korean War. A new Civil Code was enacted in 1958 following the German model,Footnote ³⁵ and the Trust Act was introduced in 1961 with the Japanese legislation serving as the main source of reference.Footnote ³⁶ The Commercial Code of 1962 introduced the German-Japanese style of a two-tier structure of corporate governance comprising the board of directors and statutory auditors. In 1969, securities investment trust legislation was introduced.Footnote ³⁷ Since the mid-1960s, South Korea was undergoing a rapid economic development, which was largely orchestrated by the industrial conglomerates known as chaebol working closely with the military government. Chaebol’s concentrated ownership structure with complex cross-holdings created unique challenges for corporate governance even after the political democratization in 1987.Footnote ³⁸

Postwar Taiwan came under the rule of Kuomintang and remained so when they retreated from mainland China in 1949 following their defeat by the communists. The legislation imposed during Japanese colonial rule was replaced by the laws of the Republic of China that had been introduced in 1929 and 1930. Despite the formal change in the Taiwanese legal regime, Tay-sheng Wang observed that the old Japanese codes were preserved in substance because most of the newly introduced codes had been modeled on Japanese legislation as drafted in the late 1920s.Footnote ³⁹ Although Taiwan’s public life remained under martial law until 1987, as its economy took off in the 1960s, corporate and commercial activities flourished.Footnote ⁴⁰ Within these fields, American influence became prominent, with the Company Act amended in 1946 and the Securities and Exchange Act enacted in 1968.Footnote ⁴¹

8.2.3 American Law’s Influence on Japanese Fiduciary Law

In Japan, the influence of American law became pronounced after World War II in light of the dominant role played by the United States in the military occupation by the Allied Powers. A number of New Deal–inspired legislations were introduced, including antitrust law, securities law, and labor standards law, as well as a new Constitution. American concepts of fiduciary law were introduced at this time, but the transplantation efforts met at least two obstacles.

First, Japanese lawyers struggled to incorporate the American notion of duty of loyalty into the preexisting statutory framework.Footnote ⁴² The concept was ultimately considered redundant, while its remedial implications were not fully appreciated. In 1950, the Commercial Code was amended to introduce section 254-2, which provided the following:

A similar statutory duty of loyalty was imposed on the managers of securities investment trustsFootnote ⁴⁴ and investment advisors.Footnote ⁴⁵

During the 1960s, Japanese courts expanded the restriction on the directors’ disloyal conduct by interpreting the preexisting rules in both Civil and Commercial Codes against conflict-of-interest transactions broadly.Footnote ⁴⁶ This left no room for the 1950 statutory duty of loyalty to do any independent work. The Supreme Court held as such in 1970:

The second, and perhaps more significant, obstacle related to the task of reconciling the American concept of corporate governance with the Japanese style of corporate management. By the 1970s, Japan’s rise to the status of the world’s second-largest economy attracted international attention toward some of the unique features of its corporate management and labor relationships. These features comprised lifetime employment and a steep seniority wage progression that secured employees’ loyalty to such an extent that the companies would operate as the communities of employees.Footnote ⁴⁸ The boards of directors almost exclusively included senior managers who had devoted their entire careers to their companies.Footnote ⁴⁹ Shareholders seemed content to have their interests subordinated to other stakeholders’ interests, justifying their investments in terms of wider business interests rather than just investment returns.Footnote ⁵⁰

American business leaders took the position that the Japanese corporate sector was closed to outsiders and lacked transparency. From their point of view, Japan’s corporate governance was inadequate. Curtis Milhaupt summarized Japan’s corporate governance as follows:

While both Japanese and American business leaders would have agreed to the substance of this summary, the assessment as to whether the Japanese system needs fixing was beginning to diverge by the late 1980s.

In 1989, a government-level negotiation, known as the US–Japan Structural Impediments Initiative, commenced. To alleviate a mounting trade imbalance between the two countries, the US government demanded that Japan remove a wide range of trading impediments, including corporate governance norms. Following the negotiations, some reforms were introduced to expand shareholder rights. The 1993 revision of the Commercial Code and related statutes expanded the shareholder right to review corporate books,Footnote ⁵² made shareholder derivative suits more accessible,Footnote ⁵³ and sought to enhance the independence of statutory auditors.Footnote ⁵⁴ The introduction of independent directors was discussed during the negotiations but did not become a part of the reform package, in anticipation of resistance from the industry. This became a hotly debated issue from the late 1990s onward.

8.2.4 Developments in Common Law East Asia

While the modernization of corporate governance in Japan focused upon the civil law, in Southeast Asia, Hong Kong and Singapore incorporated norms from English common law and tracked major statutory developments in the UK and Commonwealth nations.

Singapore, a trading post for the British Empire since 1819, was ceded to the East India Company after the 1824 Anglo–Dutch Agreement. English common law and equity became applicable under the 1826 Second Charter of Justice, although Singapore came under the direct control of Britain as part of the Straits Settlements in 1876. The Companies Ordinance was introduced in 1889 after the model of the UK Companies Act 1862.

Meanwhile, Hong Kong, initially occupied by the British in 1841, formally became a British colony in 1842 after Qing China’s defeat in the First Opium War. Principles of English common law and equity were gradually transplanted after the Charter of the Colony of Hong Kong in 1843, and the first Companies Ordinance was enacted in 1865, also based on the UK Companies Act 1862.Footnote ⁵⁵

Both Singapore and Hong Kong updated their company laws by generally tracking the legislative developments in the United Kingdom throughout the remainder of the nineteenth century and much of the twentieth century. In the field of trust law, apart from the general reception of equity, the statutory foundations in both jurisdictions were based on the UK Trustees Act of 1925. Subsequently, both jurisdictions updated their trust statutes largely in line with developments in the United Kingdom.Footnote ⁵⁶

In Hong Kong, a small number of wealthy merchant families were directly involved in managing Hong Kong’s economic affairs for over a century and a half. Their influence in the legislative policymaking made Hong Kong’s social and legal structure sensitive to the interests of the users of Hong Kong as a port for trade or a market for trading financial instruments and services.Footnote ⁵⁷ The Companies Ordinance 1932 was modeled after the UK 1929 Act and served as the basic framework of Hong Kong Company Law until it was replaced by the Companies Ordinance 2014, an extensive reform with a view to enhancing Hong Kong’s status as a major international business and financial center.Footnote ⁵⁸

The growth of wealth in mainland China following its opening up in 1979 supported economic growth in Hong Kong. Since the 1990s, an increasingly large number of Chinese companies have been listed on stock exchanges in Hong Kong. In the 1990s, Hong Kong’s securities market regulator, the Securities and Futures Commission, engaged with the PRC Commission for Restructuring of the Economic System to negotiate a Memorandum of Regulatory Cooperation.Footnote ⁵⁹ Today, Hong Kong’s Rules Governing the Listing of Securities contain a special chapter 19A, which specifically applies to issuers incorporated in mainland China to ensure protection for security holders. The UK-style company and trust laws have continued to apply in the Special Administrative Region following the 1997 handover under the constitutional principle of “one country, two systems.”Footnote ⁶⁰

Singapore attained self-government in 1959, joined the Federation of Malaysia in 1963, and achieved independence in 1965.Footnote ⁶¹ In 1967, the Companies Act was introduced to follow the Australian Uniform Companies Acts of 1961–1962. In pursuit of the government’s objective of becoming Asia’s financial center, Singapore frequently amended its company legislation. In 1976, the Code on Takeovers and Mergers was introduced. While the Code followed the London City Code’s self-regulatory tradition, it was given statutory backing along with an administrative implementation mechanism, the Securities Industry Council, which had the power to enforce the Code and resolve disputes in a nonjudicial setting.Footnote ⁶²

One unique feature that differentiates Singapore from Hong Kong is the role of government-linked corporations in the development of the Singapore economy. The Temasek Holdings, incorporated in 1974 with the Government’s Minister for Finance as the sole shareholder, has played a vital and unique role in promoting transparent governance in its portfolio companies.Footnote ⁶³ This illustrates the ingenuous way in which Singapore explores comparative advantage on the basis of the common English legal tradition.

Both Hong Kong and Singapore faced a unique corporate governance challenge associated with the concentrated shareholding by either families or the State in both local and incoming Chinese companies. Strong family or State control, which can be observed across East Asia,Footnote ⁶⁴ creates a tension with the Anglo-American corporate governance model premised on dispersed shareholder ownership. This tension is one of the principal themes of the transnational processes of legal ordering to which this chapter now turns.Footnote ⁶⁵

8.3.1 American Corporate Governance in Civil Law East Asia

By the 1990s, global debates on corporate governance seemed to be dominated by the American model, which emphasized shareholder primacy, the prominent role of independent directors in fiduciary governance, and judicial enforcement of fiduciary rules through derivative suits or securities litigation.Footnote ⁶⁶ Optimism reigned that corporate laws and regulations around the world would converge on this model, which many (at least in the West) deemed the most efficient and effective.Footnote ⁶⁷

South Korea felt the impact of American-style corporate governance when it was hit by the East Asian financial crisis after the 1997 currency crisis in Thailand. After the bailout package mandated by the International Monetary Fund (IMF), South Korea introduced some reforms that mirrored American-style corporate governance. In 1998, the Commercial Code was revised to introduce the notion of the duty of loyalty,Footnote ⁶⁸ expand the scope of derivative suits,Footnote ⁶⁹ and enhance the minority shareholders’ exercise of their rights.Footnote ⁷⁰ The revision in the following year introduced the American-style committee system where independent directors played a key role, and the audit committee replaced the traditional statutory auditor.Footnote ⁷¹ After a series of changes in the Securities and Exchange Act, Bank Act, and Insurance Business Act, large companies and financial institutions in South Korea are now required to have at least three independent directors constituting the majority of the board, although the original statutory auditor remains an option for smaller companies.Footnote ⁷²

Although the changes in Taiwan were less drastic, the American influence became increasingly apparent, as its government pursued economic globalization strategy. In 2001, the Taiwanese Company Act was amended to specifically provide for the duty of loyalty.Footnote ⁷³ In 2006, the Stock Exchange Act was amended to introduce independent directors and the audit committee.Footnote ⁷⁴ The appointment of independent directors was required only for financial institutions and large listed companies; most publicly held corporations were given the additional option of retaining the two-tier system or appointing both corporate auditors and independent directors. The Financial Supervisory Commission expanded the scope of companies that were required to appoint independent directors.Footnote ⁷⁵

As in Japan, inscribing fiduciary norms into the civil law statutory foundation proved to be a major comparative law conundrum in South Korea and Taiwan. In both jurisdictions, the implications of introducing the duty of loyalty provision remain unclear.Footnote ⁷⁶ Commentators questioned whether the mandatory independent director regime was functioning as intended by its proponents.Footnote ⁷⁷ Corporate governance debates were often affected by idiosyncratic factors. Among the salient factors in Taiwan was the ambivalent and often politicized relationship between the businesses that pursue growth across from the booming mainland China, and the government that still maintain regulatory and ownership control over major financial and business sectors in the postmarital era.Footnote ⁷⁸ In South Korea, the dominance of large groups of related corporations known as chebol, which operate under concentrated family or individual control, posed a unique challenge for corporate governance.Footnote ⁷⁹

8.3.2 The Rise of the Corporate Governance Code in Common Law East Asia

Although American and English laws share common law origins, there are differences in their approaches to corporate governance. Company legislation in the UK and Commonwealth nations relies more on ex ante measures such as disclosure and board or shareholder approvals, and less on derivative suits to regulate related party transactions.Footnote ⁸⁰ The British regulatory approach relies more on self-regulation such as the Stock Exchange rules and the City Code on Takeovers and Mergers than the binding legislative provisions in the United States.Footnote ⁸¹ Finally, the Company Law debate in the 1990s in the United Kingdom began to consider broader interest groups as part of the corporate stakeholders, to which corporate directors owe a fiduciary duty.Footnote ⁸²

When the Cadbury Report developed a set of principles of good corporate governance to be incorporated into the London Stock Exchange’s Listing Rules in 1992,Footnote ⁸³ Hong Kong quickly introduced the Code of Best Practice as part of the Stock Exchange’s Listing Rules the following year. When the Combined Code of Corporate Governance was made applicable to all UK listed companies in 1998, the Hong Kong stock exchange updated the listing rules the same year.Footnote ⁸⁴ Singapore followed suit, adopting the Corporate Governance Code as part of the Singapore Exchange Listing Rule in 2001.Footnote ⁸⁵

These corporate governance codes have been updated regularly in Hong Kong and Singapore, earning them consistently high scores and rankings in international indexes of corporate governance.Footnote ⁸⁶ As the two jurisdictions vied with each other to attract foreign investments, they sought to signal attractiveness to capital by updating their corporate governance codes. In the run-up to the introduction of the Corporate Governance Code, Singapore’s Corporate Governance Committee made it clear that its goal was to attract international capital in listed companies to Singapore by making it a financial hub of international standing.Footnote ⁸⁷ Some recent scholarship has criticized this strategic signaling to the extent that it is prone to overlook unique challenges brought about by the local conditions. As David C. Donald observed in the context of Hong Kong’s securities market regulation,

The prevalence of block-holding by family-dominated corporations or Chinese State-owned enterprises means that the agency problem arose not so much from the separation of ownership and management as from the failure of the large shareholder to act faithfully for the minority shareholders. In other words, the real challenge presented to the court and policymakers often requires different kinds of solutions than are offered by the American or the British models of corporate governance that presuppose dispersed shareholdings.Footnote ⁸⁹

Similar patterns of cross-border competition and local calibration of legal doctrines can be observed in the field of trust law. Unconstrained by either the comparative law conundrum in civil law jurisdictions or English conservativism, both Hong Kong and Singapore have displayed remarkable agility in law reform, driven by the entrepreneurial spirit typical of common law lawyers and client demands from China and across the globe. Both jurisdictions have generally followed Anglo-Commonwealth developments to trust doctrine and, at the same time, competed with each other in offering global services using offshore trusts.Footnote ⁹⁰ If the proximity to mainland China gave Hong Kong an advantage in developing its capital market, the relative distance from China meant a greater sense of security for the high net-worth individuals, which Singapore could exploit to promote itself as a prime wealth management center.

8.3.3 Japanese Reception

In 1991, the Japanese bubble economy collapsed, leading to a long-lasting recession. Japanese corporate law in the 1990s and 2000s was characterized by extensive reform debates and frequent legislative revisions. Statutes were amended almost annually, including the introduction of a freestanding Companies Act in 2005 to replace the corporate law section of the Commercial Code.Footnote ⁹¹

The American approach dominated in the 1990s and early 2000s. After the 1993 revision of the Commercial Code reduced filing fees,Footnote ⁹² derivative suits increased in number, revealing a series of mismanagement and accounting irregularities in major Japanese companies.Footnote ⁹³ Derivative suits also contributed to the development of case law on the range of duties owed by the directors of banking institutions and other for-profit companies. In the 2000s, the Japanese courts adopted the American business judgment rule with certain modifications.Footnote ⁹⁴

Requiring independent directors on boards was a controversial proposition in Japan, where companies were still seen as communities of employees.Footnote ⁹⁵ During the preparation for the 2002 corporate law reform, a proposal was made to require each company to appoint at least one independent director. Eventually, the proposal was defeated, and instead, the company was given an option to replace the statutory auditor with committees for audit, nomination, and compensation.Footnote ⁹⁶ Each committee had to have at least three members, and the majority had to be independent directors. This optional approach reflected the policymakers’ ambivalence toward American-style corporate governance.Footnote ⁹⁷ Its impact was limited, with only 1.7 percent of listed companies choosing this option by 2014.Footnote ⁹⁸ The link between independent directors and good corporate performance remained elusive.Footnote ⁹⁹

The corporate law reforms of the mid-2000s began to see greater use of a soft law approach. As mergers and acquisitions increased in number and attracted attention,Footnote ¹⁰⁰ a series of nonbinding guidelines were published by the Ministry of Economy, Trade, and Industry to supply guiding principles and ensure fairness.Footnote ¹⁰¹ As Curtis Milhaupt observed, the policymaking report underlying these guidelines:

The policymakers’ ambivalence toward American-style corporate governance extended to both substance and approach and continued for much of the 2000s.

8.3.4 Developments after the Financial Crisis in 2007

The global financial crisis in 2007 brought about a shift in the debate over the proper forms of corporate and market governance. The debate that had been dominated by the American model of statutory law and derivative litigation began to shift to the British approach of greater self-regulation.Footnote ¹⁰³ After the Kay Review expressed critical views regarding short-termism in equity markets,Footnote ¹⁰⁴ the UK Financial Reporting Council published the UK Stewardship Code in 2010 to encourage institutional investors to engage in corporate governance in the interest of their beneficiaries.Footnote ¹⁰⁵ The Code’s soft law approach, where the regulated company may either comply with the requirement or if they do not comply, explain publicly why not, became quickly popular around the world.

Japan was the first to follow the United Kingdom’s lead by introducing its version of the Stewardship Code in 2014. The Code encouraged institutional investors to engage constructively with the companies in which they invested.Footnote ¹⁰⁶ The motive behind the Japanese shift, however, may not have been the same as the one that drove the UK Stewardship Code.Footnote ¹⁰⁷ Institutional investors’ engagement with the investee companies was not just for the prevention of myopic excessive risk-taking but was also key to achieving a long-term increase in corporate value in Japan.Footnote ¹⁰⁸ This was apparent in an influential report published by Professor Kunio Ito, his fellow academic experts, and representatives from institutional investors and the corporate sector.Footnote ¹⁰⁹ While echoing the Kay Review’s emphasis on the dialogue between companies and institutional investors, the Ito Review stressed that Japanese companies should aim for a return on equity of 8 percent to receive recognition from global investors.Footnote ¹¹⁰

The term “fiduciary duty” began to seep into Japanese financial regulation. In 2014, the Financial Services Authority (FSA) began to use the term in its guidance document that set out the FSA’s approach to inspection and oversight over financial institutions.Footnote ¹¹¹ The “Japan Revitalization Strategy” published by the Cabinet in 2016, emphasized that action must be taken “to ensure that all entities engaged in the formation of assets by customers … fulfill their fiduciary duties (customer-oriented management of operations).”Footnote ¹¹² The FSA followed up by publishing “Customer-first Business Practices,” which set out seven principles to encourage financial service providers to develop best practices to serve their customers’ best interests.Footnote ¹¹³ These principles were expressly nonbinding and created an expectation that any financial institution deviating from any of the principles should provide a full explanation.

Stewardship codes have been introduced in at least ten jurisdictions and the European Union. Investor-led best practice guidance has been introduced in at least nine jurisdictions, including the United States.Footnote ¹¹⁴ Corporate governance codes have been adopted in a greater number of jurisdictions. The United Kingdom’s initiative in 1992 was quickly followed by similar initiatives in other Commonwealth jurisdictions. The OECD developed the Principle of Corporate Governance in 1999 and encouraged its adoption through mutual assessment and policy discussions. According to the 2019 OECD report, nearly all forty-seven jurisdictions surveyed had a national Code or Principle of Corporate Governance, with the notable exceptions of China, India, and the United States.Footnote ¹¹⁵

Japan was late in introducing the Corporate Governance Code. In 2015, the FSA and the Tokyo Stock Exchange published the Japanese Corporate Governance Code.Footnote ¹¹⁶ Japanese corporate lawyers soon found the UK notion of enlightened shareholder value and the “comply or explain” approach conducive to their culture. The Code had a tangible impact. The 2015 Code stated that listed companies should appoint at least two independent directors.Footnote ¹¹⁷ As of 2014, only 21.5 percent of the companies listed in section 1 of the Tokyo Stock Exchange satisfied this provision, but by 2019, the number reached 93.4 percent.Footnote ¹¹⁸ It was only in December 2019 that the Companies Act was amended to require listed corporations to appoint one independent director.

On August 19, 2019, the Business Roundtable, a group of American CEOs, issued a statement announcing that it had decided to retract its long-standing commitment to the principle of shareholder primacy. Nikkei Shinbun, the Japanese equivalent of the Financial Times, reported this on its front page with a tone of incredulity: “US Businesses Reconsider ‘Shareholder Primacy’: Declares to Give Due Regard to Employees.”Footnote ¹¹⁹

8.3.5 Chinese Participation in the Transnational Development of Fiduciary Norms

In 1993, China enacted its first Company Act since the Communist Party came into power in 1949. Consistent with China’s civil law tradition, the Act required a supervisory board comprising representatives of the shareholders and employees to supervise directors and managers.Footnote ¹²⁰ The drafters avoided the Anglo-American formulation of corporate fiduciary duties.Footnote ¹²¹ The directors were obliged to “faithfully perform their duties” so as not “to use their position and power of office in the company to seek personal gains” and not “to exploit their power of office to accept bribes or other illicit gains” or “to seize the company’s property.”Footnote ¹²²

The common law fiduciary formulation was arriving just as the 1993 Act was being prepared.Footnote ¹²³ Earlier in 1993, nine State-owned enterprises were preparing for listings on the Hong Kong stock exchange. To appease the overseas investors’ skepticism toward their governance structure, the PRC Commission for Restructuring of the Economic System (CRES) issued a letter to the Hong Kong Securities and Futures Commission clarifying that the obligation of honesty (誠心責任) held to be owed by the PRC joint-stock company in an earlier official statement had “the same type of meaning as a fiduciary duty under Hong Kong law.”Footnote ¹²⁴ When the 1993 Act was promulgated, CRES issued a regulatory addendum reiterating that directors and senior management of PRC-domiciled issuers with overseas listings owe the same obligation of honesty, and thus seeking to assure investors that Hong Kong’s fiduciary duty jurisprudence is applicable.

In 2002, the China Securities Regulatory Commission and State Economy and Trade Commission jointly promulgated the Code of Corporate Governance for Listed Companies. The Code contained provisions incorporating Delaware-style corporate fiduciary duties of care, loyalty, and good faith. The listed companies were required to implement corporate governance through committees, and the majority of the directors to fill each committee were required to be independent.Footnote ¹²⁵ Since the 1993 Act was also applicable to listed companies, the combined effect was, in Jiangyu Wang’s words, that “Anglo-American jurisdictions install independent directors on the board, Germanic-Japanese jurisdictions provide a supervisory board or kansayaku, but listed companies in China must have both.”Footnote ¹²⁶

Thus, when the Company Act was overhauled in 2005, the common law-style fiduciary law was a part of the listed companies’ obligations. A newly introduced section 148 provided for corporate directors’ and officers’ “duty of loyalty and duty of care to the company.”Footnote ¹²⁷ It was followed by the new section 149, prohibiting the misappropriation of company funds, direct and indirect self-dealing, corporate opportunities and competing businesses, and a list of conflicted transactions that is more detailed than any other corporate legislation under civil law.Footnote ¹²⁸

The Company Act also contains provisions distinct to China. In addition to abiding by laws and administrative regulations, Chinese companies are exhorted to “observe social morality,” “accept supervision by the government and the public, and bear social responsibilities.”Footnote ¹²⁹ They must protect the lawful rights and interests of their employeesFootnote ¹³⁰ and provide the necessary conditions for the activities of the labor union and Communist Party organizations.Footnote ¹³¹ These provisions are conspicuous not just for taking a broad conception of corporate constituencies but also for expressing, in Ruskola’s words, “the extraordinary moral optimism of the Confucian tradition” that everyone’s interests are ultimately expected to harmonize.Footnote ¹³² Insistence on the role of the Party organization in for-profit entities has increased in recent years and has an impact on both domestic and foreign businesses.Footnote ¹³³ The Code of Corporate Governance was revised in 2018 to require establishing Party organization within listed corporations and incorporating Party building work into the articles of association of State-owned enterprises.Footnote ¹³⁴

A similar mixing of civil and common law fiduciary norms with local conditions against an international background can be seen in the field of trust law. Whereas the Chinese Trust Act of 2006 follows the civil law style of trust legislation in Japan, South Korea, and Taiwan, it is the trust services offered from Hong Kong and Singapore that cater to the demands of wealthy Chinese capitalists.Footnote ¹³⁵ Reflecting their preference for retention of control over trust assets, the Chinese Trust Act gives settlors a strong influence over trust management.Footnote ¹³⁶ Offshore jurisdictions have also reacted to their demands by introducing special trust legislation that allows settlors to reserve various powers over the management of trusts by the trustee.Footnote ¹³⁷ The statute in both Hong Kong and Singapore expressly provides that a trust cannot be declared invalid when the settlor reserves to himself the power of investment and asset management decisions.Footnote ¹³⁸ This development has questioned the basic notion of common law trusts as a fiduciary relationship between the trustee and the beneficiaries, from which the settlor drops out once the trust has been created.Footnote ¹³⁹

8.4.1 Mechanisms of Transnational Fiduciary Ordering

The major driver of the development of a fiduciary order in late nineteenth-century East Asia was modernization through transplantation of the Western legal system and ideas. The efforts made by Japanese lawyers and policymakers to introduce civil law codes and mix them with common law inspiration foreshadowed the dynamic development of the fiduciary order in Taiwan and South Korea. Hong Kong and Singapore adopted the common law tradition as a result of British rule.

The history of colonization in the region was inseparable from modernization. All of the jurisdictions discussed were, apart from Japan, colonized to some extent by Japan and Britain. The United States did not colonize any of the jurisdictions discussed here; however, its economic dominance in later years created a pressure that the policymakers in the receiving jurisdictions found impossible to resist. Nonetheless, the receiving jurisdictions did not just remain passive. After colonial rule ended, East Asian jurisdictions employed different comparative law strategies to achieve economic competitiveness and attract cross-border investment. In the past several decades, the greater presence of Asian wealth within the world economy has begun to affect the evolution of fiduciary norms in the region and beyond.

Legislative imitation and the academic exchange of ideas also contributed to these transformations in fiduciary norms. The early experience in civil law jurisdictions in East Asia suggests that codes travel better than case law, with the code-based duty of care and specific prohibition of conflicted transaction more readily accepted than common law formulation, including duty of loyalty. However, in common law jurisdictions in East Asia under British colonial rule, equity jurisprudence based on English case law was influential along with the legislation modeled after the UK and Commonwealth legislation. Although the divide between civil and common law systems was tangible in earlier years, the interactions between them became more frequent and dynamic in and after the 1990s. Within common law jurisdictions, American and Anglo-Commonwealth approaches had important differences, and vacillation in intellectual leadership between them shaped the trends of fiduciary norms and governance structures across East Asian jurisdictions.

The increasing movement of people, services, and capital across national borders also is a factor driving the transnational development of fiduciary norms in East Asia. This became prominent particularly in the 1990s and onward, with Hong Kong and Singapore spearheading the trend with their quest to be international financial centers. South Korea and Taiwan also carried out corporate governance reforms out of a desire to attract foreign investments.Footnote ¹⁴¹ Even in Japan, sensitivities to corporate governance arose with the rise in foreign investors in Japanese capital markets and the concomitant decline in cross-holding among domestic companies.Footnote ¹⁴²

Finally, regional and global crises have had unpredictable but profound consequences, operating as precipitating conditions of transformative change and bringing about the transnational uptake of fiduciary norms in East Asia. The Asian financial crisis led major Asian jurisdictions to introduce American-style fiduciary norms. The global financial crisis in 2008 provided momentum for the UK-style corporate governance norm to garner wider acceptance in East Asia and across the globe.

8.4.2 Normative Settlement and Institutional Factors

Transnationalization does not automatically lead to uniformity or the universal enforcement of the law.Footnote ¹⁴³ A conspicuous feature of fiduciary law is that its core notion of loyalty has almost universal appeal as both a moral and a legal principle. This is so even though fiduciary law is often considered common law in origin. Although civil law jurisdictions did not use the terms “fiduciary” or “duty of loyalty” in earlier times, their equivalents could be found in the form of regulation of conflicted transactions by certain categories of entrusted persons. Yet, the different formulations or perceptions of fiduciary norms have created tensions both within the domestic and in cross-border contexts. The indigenous notion of loyalty supposedly overridden by modern fiduciary law would sometimes surface unexpectedly, leading to debates and complications in reform processes.

The ubiquity of a basic concept of fiduciary loyalty may explain the relatively weak presence of institutional bodies that operate transnationally to enhance harmonization and uniformity. This was particularly true until the 1980s. Even when the IMF and the OECD began to operate in the field of corporate governance in the 1990s, their role was more limited than that of, for instance, the Basel Committee in banking regulationsFootnote ¹⁴⁴ or the International Organization of Standardization in industry regulations.Footnote ¹⁴⁵

Given this background, at least three factors characterized the evolution of fiduciary law in the region. The first is a change in the pattern of social interactions. Tamar Frankel explained the rise of fiduciary law in terms of the shift in social relations from status-based ones to more particularized and functional relations of reliance, although she carefully noted the danger of overgeneralization.Footnote ¹⁴⁶ Both in Japan and East Asia, the status-based notion of loyalty held sway for a long time, but gradually lost its grip as the influence of the household abated and corporate dominance declined toward the end of the twentieth century.Footnote ¹⁴⁷ The greater mobility of the population, both within and across national borders, accelerated the trend in recent years.

Second, fiduciary norms have shifted from rule-based to standard-based forms.Footnote ¹⁴⁸ This is significant because the shift can facilitate the application and cross-fertilization of such rules across broader subject matters and across different jurisdictions with different social and legal backgrounds. For civil law East Asia, there has been an observable shift from the predominance of individualized rules that regulate various conflicting transactions to a gradual acceptance of the American duty of loyalty across many areas of law. A similar shift from particularized rules to broader principles happened in common law jurisdictions, in which more theorizing of fiduciary law took place toward the end of the twentieth century.Footnote ¹⁴⁹ These developments may have been affected by the greater acceptance of the unified conception of “fiduciary-like duties” in recent years in European civil law jurisdictions.Footnote ¹⁵⁰

Third, a shift in the regulatory approach from the reliance on hard law to a greater use of soft law facilitated a broader reception of fiduciary norms. In the Japanese context, for instance, the ambivalence of the American-style fiduciary governance that emphasized shareholder primacy and court enforcement led to the adoption of an optional approach to corporate governance. The UK Corporate Governance Code and Stewardship Principles proved more attractive because they allowed for a divergence from the standard model. The soft law regulation allowed relevant actors to deviate from the norm, but when pressed to explain the deviation, they often chose to adopt the standard model. This allowed legislators, regulators, exchanges, and sometimes the court to wait for the general acceptance of the norm and then give them binding effect, hardening the intended norms.

Despite these general trends in gradual acceptance, the motivations of domestic policymakers in East Asia often varied from what the overseas proponents of fiduciary regulations intended. At the same time, these regional divergences and gaps could serve as an opportunity to reconsider the prevailing fiduciary norms.Footnote ¹⁵¹ For most of the period reviewed earlier, Asian jurisdictions were on the receiving end of the conveyance of fiduciary norms. Despite the rise in its economic power, Japan played, at best, a modest role in promoting legal unification or transnational ordering.Footnote ¹⁵² Nevertheless, the rise of Asian wealth created an opportunity to reconsider some of the broadly accepted notions of fiduciary models outside Asia. Whether this will lead to positive changes in the cross-border dialogue or offer an alternative that has universal appeal remains to be seen.

8.4.3 Fiduciary Norms in Distinct Areas of Law

The discussion so far was mostly concerned with corporate and trust laws. The global and transnational transformation is beginning to influence areas that have been less susceptible to such changes, namely family, guardianship, succession, and nonprofits.Footnote ¹⁵³

In Japan, over the past few decades, fiduciary rules and “duty of loyalty” provisions were newly introduced in statutes governing pensions,Footnote ¹⁵⁴ trusts,Footnote ¹⁵⁵ and nonprofits,Footnote ¹⁵⁶ as well as professional responsibilities applicable to lawyers.Footnote ¹⁵⁷ It should be noted that Japanese society is rapidly aging. When the Japanese age-old guardianship system was reformed in 1999,Footnote ¹⁵⁸ the use of guardianship increased, but abuse also skyrocketed. Beginning in 2010, a broader cohort of the Japanese population is looking to trusts as an alternative to guardianship and wills.Footnote ¹⁵⁹ Similar social changes in East Asia may portend the broader application of fiduciary norms. The populations in the region are also aging, with Japan closely followed by Hong Kong, Singapore, South Korea, and Taiwan. The Chinese population aged sixty-five years and above will grow from 136.9 million in 2015 to an estimated 348.8 million by 2030.Footnote ¹⁶⁰

Another notable change is the realignment of the relationship between the government and civil society. In Japan, criticism of bureaucratic overbearing on charitable institutions led to the overhaul of nonprofit legislation in 2006.Footnote ¹⁶¹ Broadly in East and South East Asia, there has been a tide of nongovernmental organizations (NGOs) mushrooming in policy areas such as environmental protection, human rights, and women’s rights since the 1990s and onward, although the relationship between the State and civil society has remained complex.Footnote ¹⁶² Civic activities have flourished in post-military regimes in South Korea and Taiwan, and China also introduced new charity legislation in 2016.Footnote ¹⁶³ The vitality of Hong Kong’s civil society manifested itself in recent years, although it suffered a setback from the crackdown by Beijing in 2020.Footnote ¹⁶⁴ Hong Kong has operated without a charity commission, and a reform proposal to introduce one had failed in 2013.Footnote ¹⁶⁵ In Singapore, charities have long been neglected, but recent years have seen greater interest in part because of the rise in philanthropic momentum, and in part owing to some publicized scandals implicating major charities.Footnote ¹⁶⁶

At a more conceptual level, there has been a greater appreciation of the trust and its equivalents in civil law jurisdictions around the turn of the last century.Footnote ¹⁶⁷ Comparative inquiries into both common and civil law jurisdictions have shown that trusts can be understood as constituting a part of organizational law enabling asset partitioning and fiduciary governance.Footnote ¹⁶⁸ Although some European jurisdictions have been slow to introduce trusts in noncommercial settings, the East Asian experience can complement academic inquiries in Europe by indicating that trusts can be used as an alternative to guardianship and testamentary instruments.Footnote ¹⁶⁹ All this opens up the possibility of recursive development of fiduciary norms across civil law and common law jurisdictions and across various problem areas in which a person entrusted with certain properties or powers is under an obligation to act solely in the interests of the beneficiary and to avoid, or at least manage, any conflicts of interest.