Corporate governance can be defined as a system of institutions that alleviate the informational and incentive problems between corporate managers and the corporation's stakeholders, including investors, creditors, workers, suppliers, and customers. The paper builds a simple model of moral hazard that shows the complementarity between corporate finance (the institution that alleviates the problem between the manager and investors) and labor practice (the institution that alleviates the problem between the manager and workers). Japanese corporate governance has been characterized by strong bank monitoring, lifetime employment with on-the-job skill formation and long-term relation-ships with suppliers and customers. The financial aspect of the Japanese corporate governance, namely the main bank system, started to change drastically in the 1980s. It is an important research topic to examine the impacts of this change in the corporate finance on the other aspects of Japanese corporate governance.
