This Article analyzes the origins, persistence, and current evolution of a series of nonlegal rules (norms) that have played an important role in Japanese corporate governance. The central features of the governance environment examined here include: (1) the main bank system, in which banks voluntarily 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

more »

... re of the board of directors. I show that, despite virtually ubiquitous claims to the contrary, these norms do not enjoy a long history of practice in Japan, but rather emerged only in the immediate postwar period. I hypothesize that they emerged for two reasons: First, they seined as a low-cost substitute for a troubled formal institutional environment beset by the "transplant effect" that imperils legal reform in transition economies today. Second, they provided private benefits to the small number of interest groups that emerged intact from World War ff. The flow of private benefits to norm adherents explains the persistence of the norms despite clear evidence of their inefficiency over the past decade. I demonstrate that current models of norm reform, which emphasize the role of exogenous shocks, the workings of norm entrepreneurs, and increased information, explain why the norms ofJapanese corporate governance are currently evolving. Finally, extrapolating from Japan's experience, I suggest how norm analysis can contribute to the two most pressing questions in comparative corporate gov-.rnance today: whether law matters to corporate governance and whether diverse Aystems of corporate governance are converging toward the Anglo-American model. As to both questions, closer attention to norms reveals shortcomings in the existing literature. Specifically, the empirical model underlying the "law matters" literature is shown to be inconsistent with historical experience and overly attentive to formal