The rash of U.S. corporate scandals has rocked the Japanese business community, which until recently admired the success of the American business model.

Now many Japanese business managers are reassessing the values of Japanese-style corporate management, which was criticized as inefficient and inflexible in the decade following the collapse of the country's bubble economy.

"It's wrong to accept without criticism the American way of thinking that emphasizes only stockholders," Masatoshi Kishimoto, chairman of Olympus Optical Co., said during a recent summer seminar of the Japan Productivity Center for Socioeconomic Development.

Experts reckon the American corporate system lacks control over pay and incentives for executives. During the stock market boom in the last decade, the system encouraged many executives to boost stock prices -- which were closely related to their pay -- even by cooking the accounting books of their firms.

But at the same time, many Japanese experts believe the Japanese corporate system needs reform.

"America and Japan are at two extreme poles, " said Mitsuhiro Fukao, a professor of international economics and finance at Keio University.

Glen S. Fukushima, president and chief executive officer of Cadence Design Systems Japan, said he believes the corporate governance of American firms is fundamentally sound except for some extreme cases, including Enron and WorldCom.

But many Japanese top executives appear to believe the scandals reveal fundamental defects in American corporate governance, he said.

"Some of these people seem pleased to see these problems emerge in the United States," said Fukushima, former president of the American Chamber of Commerce in Japan.

This is not the first time people's views on Japanese and American corporate systems have swung from one extreme to the other.

In the 1980s, Japanese management, coupled with cross-shareholdings among group firms, was praised as invincible; it allowed emphasis to be placed on the employee community and setting long-term strategies.

But in the 1990s, the same corporate features came to be blamed as shortcomings while American firms were touted as the champions of the shareholder.

The pendulum has swung back again in the past year, as the U.S. media expressed concern over lost confidence in corporate America and many Japanese executives renewed support for more traditional methods.

The cautious stance of Japanese executives toward the U.S. way of doing business can be seen in their reaction to the revision of the Commercial Code in May.

The law was revised to allow Japanese firms to adopt American-style corporate governance by transferring power from the board to operating officers and setting up three committees with outside board members to strengthen audit functions.

"Before Enron, the U.S. system was considered the best," said a senior official at the Justice Ministry, explaining why the revision was modeled on the system in the U.S., rather than Europe or elsewhere.

The new option is theoretically designed to expedite the corporate decision-making process by empowering the management team. Slow decision-making has been considered one of the most serious defects in the Japanese consensus-building, all-executive board system.

But Japanese managers are reluctant to switch. Of 1,076 Japanese firms that responded to a recent survey by the Japan Corporate Auditor Association, only four said they are introducing the U.S. style under the revised law.

But Fukao of Keio University said people should observe the situation more calmly, saying both the Japanese and American corporate governance systems have their shortcomings.

Between 70 percent and 80 percent of the reactions can be linked to current economic conditions, Fukao argued, saying people are inclined to praise the corporate system of a country that is prospering.

"There's no single ideal corporate governance system," he said, adding that structures differ from one country to another given differences in historical and social backgrounds.

On the current problems in the U.S., Fukao blamed excessive pay and incentives for executives.

"At an American company, the shareholders' meeting can't check the pay of top executives, and there's no incentive for outside board members to curb it either," he said.

Alan Greenspan, chairman of the U.S. Federal Reserve Board, also stands hard against America Inc. "Too many corporate executives sought ways to 'harvest' some of those stock market gains," he said in a July report to Congress.

"As a result, the highly desirable spread of shareholding and options among business managers perversely created incentives to artificially inflate reported earnings in order to keep stock prices high and rising."

In contrast, salaries for Japanese executives, who are often promoted from rank-and-file workers, are in general far lower than those of their American counterparts.

According to a 2001 survey of manufacturers by Towers Perrin, a U.S.-based salary-consulting firm, the average Japanese top executive earned only 11.6 times more than the average worker, while an American CEO received 41.3 times more -- the highest out of 26 countries covered.

One shortcoming of Japanese corporate governance may be the lack of board members from outside companies.

"A majority of Japanese managers still don't want to switch to American-style management because they don't want to be affected by outsiders," said a senior official at the Justice Ministry, which drew up the revised Commercial Code.

At an average U.S. publicly traded company, the board of directors has about 13 members, only two or three of whom are from inside the company. The remaining are appointed from outside.

However, having outside board members does not guarantee effective governance, as the U.S. accounting scandals show. Many pundits argue that measures should be bolstered to secure their neutrality.

But at an average company in Japan, there are no outside board members. The board often has more than 20 members and usually they all are executives engaged in daily operations of the company.

The board rarely dismisses the president because members have long been subordinate to the president, who effectively has the final say in appointing board members, subject to approval at a shareholders' meeting.

Cross-shareholdings also still account for much of the total outstanding shares of Japanese companies, and there are fewer institutional investors on the market than in the U.S.

Management teams thus feel relatively low pressure from the stock market and shareholders, a situation that allows them to operate at low return-on-equity ratios.

According to U.S.-based consulting firm McKinsey & Co., the average ROE of listed Japanese companies, excluding financial institutions, has fallen from a peak of 16.6 percent in 1969 to 2 percent in 1999. The ROE of U.S. firms, on the other hand, has gradually increased over the same period, hitting 23 percent in 1999.

Tatsuya Tamura, president at Global Management Institute Inc., a Tokyo-based consultancy, said Japanese firms would not be able to survive global competition.

"Unless Japanese companies focus more on profits, they will not be able to keep up with drastically changing competitive environments," said Tamura, a former director of the Bank of Japan.

Some are advocating a mixture of the American style with less emphasis on executive pay, and the Japanese style with more stress on monitoring from outside.

Teijin Ltd., a leading chemical fiber maker based in Osaka, boasts such a hybrid system.

The company reportedly suffered from the dictatorial rule of its former president, Shinzo Oya, for 26 years to 1980.

In 1999, it introduced a powerful seven-member advisory board, including John A. Krol, former chairman of the board of U.S.-based chemical firm DuPont Co., and Ronald Hampel, who chaired the U.K. Committee on Corporate Governance. Hampel's final report was reflected in the listing rules of the London Stock Exchange.

The advisory board, five of whose members are from outside, nominates a candidate for presidential successor -- a right usually considered the privilege of a Japanese president -- and assesses performance and decides how much the incumbent president should be paid. It also aims to improve accountability for shareholders.

Toru Nagashima, Teijin CEO and president, said Japanese companies should disclose more information and be more open to checks from outside.

He said he wants to retain Japanese "virtues" and thus does not want an excessively large paycheck like American executives.

"The American system of granting such huge payments to certain executives is too aggressive, and I don't think it serves a company in the long term."