Corporate Governance for Start-Ups in Japan: Layering of Institutional Logics

In what ways has corporate governance for start-ups changed in the last two decades in Japan?  The existing literature deals primarily with corporate governance reforms for large listed companies. However, corporate governance for Japanese start-ups has changed significantly in the last two decades. We investigate in what ways the changes in the institutional logic for start-ups are related to those for the large firm sector.  Evidence is based on a series of interviews with key start-up executives and other stakeholders.

In this research, corporate governance is defined to be about ownership, commitment and control to enhance value creation, innovation, and entrepreneurship. The scope of our research goes beyond the traditional definition of corporate governance, which focused around structural characteristics (e.g. corporate board size and composition) to enhance shareholder value.

We develop a theoretical framework that focuses on the ecosystem of professionals (accountants, lawyers, venture capitalists, etc.) who work both inside and outside of start-up companies, in order to understand how they contribute to the establishment and the scale-up of Japanese start-ups. This is different from most earlier studies that deal with changes at macro level, by analyzing statistical data or a survey. Our preliminary study included interviews of the corporate professionals (e.g., CEO and other officers) and external professionals such as lawyers, accountants, venture capitalists, angel investors, event organizers, and non-executive directors. In total, we interviewed 12 professionals and organizations.

The paper begins by capturing some ‘stylized facts’ about changes in financial and labor markets surrounding the growth and sustainability of ‘venture businesses’ (i.e. start-ups in their first decade).  Further, based on the preliminary set of interviews, we discuss the following patterns of the change in corporate governance for start-ups in Japan.

Firstly, financing of start-ups is marked by a shift from bank-based to independent venture capital funds, the growth of first generation start-ups (in 1990s) which themselves are creating funds to invest in next generation start-ups, and Abenomics resulting in the injection of money (via sangyo kakushin kiko) to channel investment in start-ups along with large-firm CVC.  Secondly, in the arena of human capital and talent, we note that (a) independent venture capitalists act as equity owner plus business advisor/coach; (b) experienced entrepreneurs act as angel investors; and (c) professionals (accountants, lawyers, etc.) work both inside and outside start-up firms, playing a crucial role in sustaining the valuation and reputation of these firms.

We theorize these changes in terms of institutional change, interpreted as changes in institutional logics, or in the formal and informal rules of the game. In particular, we argue that new institutional logics are emerging in the investment behavior and employment modes in the start-up community. We conclude, in this preliminary study, by seeking grounds for considering whether or not the ‘layering’ of start-up logics on the large firm logics is likely to persist.