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Corporate Governance: Abenomics’ Hard Target

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Pacific Money

Corporate Governance: Abenomics’ Hard Target

Despite the rhetoric, little has been done since the Olympus scandal.

Japanese Prime Minister Shinzo Abe may have fired his third arrow, but for corporate governance reformers “Abenomics” is yet to hit the target. With a shrinking population and declining trade surplus increasing the need for foreign investment, the reformist leader faces a battle with his business constituency to achieve change.

Like Abenomics, the prime minister is attempting to change expectations hardened by past disappointments. As noted recently by the American Chamber of Commerce in Japan (ACCJ), “many domestic and foreign institutional investors have lost hope that standards for corporate governance in Japan will improve in the near future.”

Yet if rhetoric is any guide, Abe’s Liberal Democratic Party (LDP) has made a promising start. A recent report compiled by an LDP panel called for at least one independent director on company boards, the elimination of all cross-shareholdings and the strengthening of board oversight, among other shareholder-friendly measures.

The measures follow the Olympus scandal of 2011 and other frauds, which as noted by The Diplomat sparked a public outcry and forced government action.

On June 5th, Abe unveiled the long-awaited “third arrow” of his economic policies with a raft of deregulatory measures aimed at boosting gross domestic product, per capita incomes and investment, including the doubling of foreign direct investment by 2020.

“Now is the time that Japan becomes the driving force of the global economy,” Abe said in his speech, delivered in Tokyo.

Specific measures included cutting corporate tax on research and development; promoting merger and acquisition activity; increasing free trade agreements; setting up “foreigner-friendly” special economic zones; and supporting women workers, including childcare.

Abe’s Cabinet is expected to sign off Friday on the strategy, with the Japanese leader seeking to promote it to world leaders at the upcoming G-8 summit.

Sole independent

Nevertheless, the government has come under fire for its push for only a single outside director – a measure described as “almost totally useless” by experienced company directors.

Companies will be allowed to shirk the requirement, providing they provide a public explanation, according to Japanese media.

The ACCJ has urged the LDP to implement its campaign platform and require at least one third outside directors on listed company boards; promote the use of board committees comprised of outside directors to decide decisions with potential conflicts of interest; and ensure companies disclose policies regarding director training.

While the Tokyo Stock Exchange’s (TSE’s) listing rules require one board member to be an independent, non-voting statutory auditors are allowed to fulfil the role. The latest TSE data show that only 2 percent of companies listed on the bourse have a majority of outside directors, with 46 percent having none.

Nicholas Benes, director of the Board Director Training Institute of Japan (BDTI), told The Diplomat that despite the need for at least “two to three” outside directors, the latest proposal for a single outsider could again be blocked by lobby group Keidanren.

However, Benes said the LDP would likely force through at least one of its reforms, concerning disclosure of director training. Both Hong Kong and Singapore have increased their requirements for director standards, putting pressure on Japan to follow suit.

“Disclosure is powerful in Japan, which is a shame-based society, so forcing companies to disclose their director training may embarrass them into doing something,” Benes said.

The Tokyo-based governance advisor and trainer said a structure was also needed to encourage companies to delegate key decisions, such as on takeover bids, director nominations and remuneration, to committees comprised of independents.

Tough takeover defenses coupled with cross-shareholdings have minimized the threat of takeover. According to Dealogic, only seven of 23 hostile bids have succeeded since 2000, although foreign ownership of Japanese companies has grown to around 26 percent.

Ironically, the latest case of foreign shareholder pressure involves Sony – one of the perceived leaders in corporate governance standards.

Meanwhile, shares in Olympus regained in May a market value of 1 trillion yen for the first time since 2008, after sinking to 120 billion yen at the height of the 2011 scandal. On July 3, the Tokyo District Court will hand down its rulings on three former executives over the $1.7 billion accounting fraud.

Yet efforts by companies to “pull themselves up by the bootstraps” may also spur change, according to Benes.

“Companies such as Shiseido are doing things they don’t have to by law just to improve governance. This is showing differentiation – and the laggards won’t want to get left too far behind,” he said.