by William Pesek for Bloomberg View
It’s been a dreadful week for Japanese corporations. Toshiba is facing questions about its accounting practices, Sharp is asking lenders for another bailout and Takata can’t escape bad news about its airbags.
Each of these problems is bad enough on its own. Together, they raise serious questions about the state of Japan’s corporate governance. And at a time when the Nikkei stock exchange has been rising (it’s up 36 percent over the past year), those questions are in urgent need of answers. If Japan’s leading companies are managed as poorly as this past week’s events suggest, there’s little reason to believe the country’s stock market surge is sustainable.
Prime Minister Shinzo Abe has certainly tried to improve Japan’s corporate governance. Last year, Tokyo introduced a stewardship code encouraging investors to pressure underperforming CEOs, and launched an index of 400 domestic companies that regulators believe use their cash stockpiles well. Next month it will release a national code of conduct for executives: Companies will be asked to include at least two outside directors on their boards or explain why they shouldn’t have to. Abe is also asking companies to invite more women into the executive suite. Diversity in the boardroom, the government hopes, will enhance oversight.
In theory, says Nicholas Smith, Tokyo-based strategist at CLSA, “this should trigger a flurry of fevered business and balance sheet restructuring.” In practice, corporate Japan has barely budged in response to Abe’s reforms — after decades of running their affairs free of outside interference, their inertia has proven too powerful. Read more here.
by Jean-Christophe de Swaan for The Financial Times
Decades from now, if Abenomics turns out to be successful, economic historians will probably pinpoint Japanese prime minister Shinzo Abe’s corporate sector initiatives of 2014-15 as the era’s seminal reforms.
This set of self-reinforcing changes is fast gathering pace in pressuring corporate leaders to unlock their dormant cash. Few initiatives could be more effective in revitalising Japan’s economy.
The reforms are undervalued. Corporate governance reforms generally tend to be looked upon as peripheral to a government’s central policy thrust. Foreign investors have also lost interest in Abenomics, having seen the consumption tax rise erode growth and the initial laundry list of “Third Arrow” restructuring reforms peter out.
Rather than mandating change, Mr Abe’s corporate reforms forcefully nudge companies to focus on their capital efficiency by deploying one of the most effective tools in Japanese society — the threat to become, as the Japanese saying goes, the proverbial nail that sticks out and ends up being hammered.
The latest initiative, a new corporate governance code finalised on March 5, urges companies to engage with their outside shareholders, take on at least two independent board directors, and reconsider their cross shareholdings and anti-takeover measures. They can choose not to follow that advice, but will have to explain in detail why they are continuing to adopt policies the government is actively discouraging. Read more here.
Companies listed on the Tokyo Stock Exchange must have at least two outside board members from June, the bourse’s operator said, under new rules aimed at improving corporate governance and attracting foreign investors.
Japan Exchange Group Inc Chief Executive Atsushi Saito called the move a “cultural turning point” in a country where companies are widely criticised for prioritising employee welfare and business relationships over shareholder returns.
The announcement comes as the government of Prime Minister Shinzo Abe seeks to change corporate culture to attract double the amount of foreign direct investment by 2020. It also comes days after U.S. investor Daniel Loeb criticised the allocation of capital at robot maker Fanuc Corp.
Efforts to increase the number of outside directors have met opposition over the years. The Keidanren business lobby has long argued that appointing people who may not understand a company’s business would not necessarily boost profitability. Read more.
by Noah Smith for Bloomberg
Do you know what a “hostess” is in Japan? If you guessed that it’s a woman who greets you at the entrance of a restaurant, guess again. “Hostess” in Japan refers to a woman who works in a bar or a lounge and is paid to flirt with men. A French journalist once referred to them as “prostitutes who do not think they are prostitutes.”
Japanese corporate employees are the main customers at hostess bars. It’s a tradition in Japan to send (all-male) work teams to hostess clubs after hours, on the company dime. These sessions are often mandatory. Clients are also traditionally taken to hostess clubs by salesmen. Companies pay for these excursions , which go under the heading of “entertainment expenses.”
These entertainment expenses are quite high. Decades of slow economic growth have squeezed corporate expense accounts, so in 2013, Shinzo Abe’s government introduced a plan to make “entertainment expenses” partially tax-deductible for large businesses (as they already are for small companies).
Needless to say, this is probably not a step in the right direction for Abe’s “Womenomics” initiative. But even more importantly, it illustrates one of Japan’s biggest structural problems: poor corporate governance. Fortunately, thanks to a new set of guidelines being introduced by Abe’s administration, governance may be about to experience a revolution. Read more here.
by Nicholas Benes for The Wall Street Journal
Japanese Prime Minister Shinzo Abe has framed the Dec. 14 “snap election” as a referendum on Abenomics, yet the real referendum will come afterward. In the months ahead, international and domestic investors will vote with their money to answer one main question: Will the “third arrow” of Mr. Abe’s growth agenda deliver real reform, or is Japan’s ruling party still under the sway of labor and corporate interests that like things as they are?
Investors will have a clear litmus test to use. During the next four months, Japan’s Financial Service Agency and the Tokyo Stock Exchange (TSE) will be finalizing the country’s first corporate-governance code, which with the right components would mean real economic-reform progress. Read more here.