In December 2014, Japan’s Financial Services Agency (FSA) published a draft for public commentary of a new corporate governance code (hereafter referred to as “the code”). The voluntarily adopted code, which the government hopes will come into effect in June 2015, takes aim at a number of prickly issues such as the rights of shareholders, capital policy, cross-shareholdings, anti-takeover measures, whistleblowing, disclosure, board diversity and structure, just to name a few. Long viewed by investors as a global pariah for its poor treatment of corporate shareholders, the Japanese government hopes this new initiative will help improve the image of corporate Japan, and make its markets more palatable to foreign capital. But can it really work? This article aims to take a closer look. (To read of another initiative being undertaken by Japan’s government to improve the country’s economic standing, see article: Japan’s Strategy To Fix Its Deflation Problem.)
Corporate governance is defined as a system of rules, practices and processes by which a company is directed and controlled. It entails balancing the interests of the many stakeholders in a company, and involves a large array of parties, often with conflicting interests. Hence, what constitutes “good practice” in this context is very much a matter of perspective. In this article we make no secret that we are addressing this debate from the perspective of the shareholder, if for no other reason than that this is the very group of people whose concerns the code appears to address. (See video: Corporate Governance.)
Unfortunately, from this perspective the picture has generally been considered rather bleak. Though Japan is a global powerhouse in manufacturing and technology, with brands that are instantly recognizable almost anywhere in the world (e.g. Toyota (TM), Sony (SNE), Panasonic, Sharp, Hitachi, etc.), ask just about any long-term observer of Japan how they feel about the country’s governance record, and they won’t be short of negative anecdotes. Take Olympus as an example, where the company sacked its new foreign president after only six months when he began asking questions about management’s attempts to conceal massive investment losses dating back to the 1980’s. Read more here.