Corporate governance reforms in Japan: a talk at the Embassy of Sweden

Corporate governance reforms in Japan

Changing the way Japanese corporations are managed: Can it make Japanese iconic corporations great again?

A talk by Gerhard Fasol at the Embassy of Sweden organized by the Embassy of Sweden, The Swedish Chamber of Commerce in Japan (SCCJ), and the Stockholm School of Economics

Abstract: Changing the way Japanese corporations are managed

The Executive Management Board and the Supervisory Board are normally independent and composed of different people – except in Japan. In Japan traditionally Executive Management Board and the Supervisory Board are one and the same, ie the Executives of traditional Japanese companies supervise themselves – no surprise that the CEO seldom fires himself!

It is obvious that such self-supervision has big disadvantages, and may be one of the major reasons for Japan’s weak economic growth, and several recent corporate scandals. Companies in basically all other countries are managed by an Executive Management Board, which is supervised by a Supervisory Board, which approves or vetoes all major decisions of the company, and evaluates the performance of the Executive Manager, including the Chief Executive/CEO, and if necessary fires executives including the CEO, and selects and approves the new CEO.

To remedy this problem with the governance of Japanese corporations, Japan’s Government, the Tokyo Stock Exchange, and the Financial Services Agency have been changing the rules to improve the supervision of Japanese companies.

Speaker profile

Dr. Gerhard Fasol is one of a microscopic number of foreigners who is an independent Director on the Management and Supervisory Board, and also a Member of the Audit Board of a stock market listed Japanese corporation, and he will talk from several years of first-hand experience of how Japanese companies are supervised, which changes are on the way, and which further improvements are necessary to improve the management and supervision of Japanese corporations.

Date: Thursday October 6th, 2016, 18:30

Place: Alfred Nobel Auditorium, Embassy of Sweden, 10-3-400 Roppongi 1-chome, Minato-ku, Tokyo 106-0032

Details and registration

Further details here.

To register please contact the Swedish Chamber of Commerce in Japan.

Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016
Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016
Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016
Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016
Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016
Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016
Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016
Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016
Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016
Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016
Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016
Gerhard Fasol on corporate governance reforms in Japan at the Embassy of Sweden on 6 October 2016

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Association of Foreign Board Directors of listed Japanese Corporations – inauguration meeting

INNOVATE GOVERNANCE The Association of International Board Directors of listed Japanese Corporations

The co-founders of the Association of Foreign Board Directors of listed Japanese Corporations held the inauguration meeting on Thursday 14 April 2016 in Hong Kong.

Gerhard Fasol, Co-Founder and Co-Chair
Jason Sausto, Co-Founder and Co-Chair

Copyright·©2015-2016 ·Eurotechnology Japan KK·All Rights Reserved·

SHARP governance and Japan’s electronics sector

SHARP governance is challenged to ensure the group's survival. Innovation Network Corporation of Japan INCJ and Honhai (Foxconn) compete for control

SHARP and Governance

SHARP is a Japanese electronics company with 44,000 employees and YEN 3000 billion (US$ 30 billion) in sales, many factories and a product portfolio ranging from rice cookers, office copiers, solar panels, robots, mobile phones, to supplying APPLE with displays.

SHARP faces repayment of YEN 510 billion (US$ 4.2 billion) in short-term debt to its two main banks in March, and Taiwan’s Honhai Precision Engineering (Foxconn) and the semi-Government Innovation Network Corporation of Japan INCJ are competing for control of SHARP’s rescue.

SHARP’s Board now face decisions directly impacting the survival and the future shape of the company, including the possibility of spinning out different divisions, including electronic components, white goods, displays, electronic components, POS terminals etc.

The big picture issues are:

  1. the urgent need for corporate governance reforms in Japan
  2. the future of Japan’s US$ 600 billion electronics sector.

The need for new business models:

While Japan’s electronics components makers are thriving, Japan’s old conglomerates are languishing. They need energetic active governance, and they need to make a choice between two models:

  1. focus on a small number of key products, or
  2. actively manage a portfolio of businesses.

Innovation Network Corporation of Japan INCJ’s dilemma

Japan has a good record in turning around companies, e.g. Kazuo Inamori’s turnround of JAL, or Haruo Kawahara’s turnround of Kenwood, however, according to its website, INCJ’s mission is “to promote the creation of next generation businesses through open innovation”.

The world’s biggest financial daily, NIKKEI, calls attention to INCJ’s dilemma: is the rescue of an old established conglomerate compatible with INCJ’s mission to create next generation businesses through open innovation?

Private equity funds would be the private sector & free market alternative to INCJ. The move of Atsushi Saito, emeritus CEO of Tokyo Stock Exchange/Japan Exchange Group, to chair the Japan branch of a major private equity fund is an interesting step in this direction.

Read or detailed analysis: “SHARP and the future of Japan’s electronics

SHARP: falling revenues and negative income over 14 years

SHARP’s revenues (sales) peaked in 2008 around YEN 3000 billion (US$ 30 billion), and show a downward trend ever since
SHARP’s revenues (sales) peaked in 2008 around YEN 3000 billion (US$ 30 billion), and show a downward trend ever since
Averaged over the last 14 years, SHARP shows average annual net losses of around YEN 38 billion per year (US$ 380 million per year)
Averaged over the last 14 years, SHARP shows average annual net losses of around YEN 38 billion per year (US$ 380 million per year)

Market report: “Japan electronics industries: mono zukuri

Copyright·©2016 ·Eurotechnology Japan KK·All Rights Reserved·

Japan corporate governance 2016

Outlook on Japan's corporate governance reform and economic growth for 2016. Fiscal policy cannot deliver economic growth, ventures and restructuring do.

Japan corporate governance and economic growth for Japan in 2016?

Economic growth: Almost everyone agrees that economic growth is preferred over stagnation and decline. Fiscal policy and printing money unfortunately can’t deliver growth.

  1. Building fresh new successful companies,
  2. returning stagnating or failed established companies back to growth (see: “Speed is like fresh food” by JVC-Kenwood Chairman Kawahara), and
  3. adjusting the structure and business models of existing companies to the rapidly changing and globalizing world (see: “Japanese management – why is it not global?” by Masamoto Yashiro)

deliver growth.

Governments best help economic growth by reducing friction, and by getting out of the way of entrepreneurs building, turning-round, and refocusing companies.

Some required action is counter to intuition: for example, in many cases reducing tax rates increases Government’s tax income, a fact known for many years. Effective education and research are key to create, understand and apply such non-obvious knowledge.

Japan corporate governance reforms in 2016

Companies need efficient leadership, leadership needs feedback, wise and diverse oversight by Boards of Directors, who ring alarm bells long before a company hits the rocks, or fades into irrelevance. Corporate governance reform may be the most important component of “Abenomics”. Read a Board Director’s view on Japan’s corporate governance reforms:

Japan corporate governance reforms for Japan’s electronics conglomerates

Japan’s electrical conglomerates are some of the poster children motivating Japan’s corporate governance reforms. In an interview about Toshiba’s future on BBC-TV a few days ago, I explained that Japan’s electrical conglomerates showed no growth and no profits for about 20 years, and the refocusing Toshiba has announced now should have been done much much earlier, 10-20 years ago (“Speed is like fresh food“). Refocusing Japan’s established corporate giants will release resources for start-ups, spin-outs and growth companies.

Japan can be very good at restructuring and turn-rounds, e.g. see

Happy New Year!

Gerhard Fasol

Copyright·©2016 ·Eurotechnology Japan KK·All Rights Reserved·

Corporate governance Japan: practical views of a foreign Board Director

Corporate Governance in Japan - decision making at Japanese companies

corporate governance Japan: A Board Director’s view

Corporate governance reforms in Japan progress faster than even one of their key promoters expected, and cost almost no tax payers money

Author: Gerhard Fasol

corporate governance Japan: reforms of Japan’s corporate governance practice are one component of “Abenomics” to bring back economic growth to Japan.

Corporate governance Japan reforms are driven at least in part by the spectacular stagnation of Japan’s top 8 electronics conglomerates, which 25 years ago dominated world electronics, but largely failed to adapt to the changes driven by much more agile Silicon Valley or South Korea based competitors. The right type of Board Directors, could potentially have rung the alarm bells much earlier, and woken up executive management under their supervision.

A welcome factor is that corporate governance reform costs Japan’s heavily indebted Government almost no money – unlike public works programs, and similar traditional ways of stimulating the economy.

The speed with which Corporate Governance Reforms in Japan are being implemented surprised even one of their main promoters, emeritus Group CEO of the Japan Exchange Group, Atsushi Saito, as expressed in his recent talk.

In March 2014 the shareholders appointed me as independent Board Director of the Japanese cybersecurity company GMO Cloud KK, which is listed on the First Section of the Tokyo Stock Exchange. Our main business are internet security solutions, cybersecurity, digital identity management solutions, and cloud hosting and related services and solutions.

Read an article on Corporate Governance Reforms here in the Journal of the American Chamber of Commerce in Japan (ACCJ), and more below in this post – from my experience practicing corporate governance in Japan as a Board Director.

Corporate governance Japan: The main components of corporate governance reform in Japan

The main components of Japan’s corporate governance reform are:

  1. The revision of the Company Law (会社法(平成十七年七月二十六日法律第八十六号)), Law No. 816 of July 26, 2005. The latest revision is No. 63 of September 4, 2015 (平成二七年九月四日法律第六三号).
  2. The Corporate Governance Code of the Tokyo Stock Exchange (TSE), issued on June 1, 2015, “Seeking Sustainable Corporate Growth and Increased Corporate Value over the Mid- to Long-Term”
  3. Japan’s Stewardship Code, issued by Japan’s Financial Services Agency (FSA) on February 26, 2014, “Principles for Responsible Institutional Investors ≪Japan’s Stewardship Code≫- To promote sustainable growth of companies through investment and dialogue”

What is corporate governance and why?

Japan’s Corporate Governance Code, which was issued by the Tokyo Stock Exchange on June 1, 2015, defines Corporate Governance as “a structure for transparent, fair, timely and decisive decision-making by companies, with due attention to the needs and perspectives of shareholders and also customers, employees and local communities”.

The subtitle of Japan’s Corporate Governance Code is its mission statement: “Seeking sustainable corporate growth and increased corporate value over the mid- to long-term”.

Corporate governance has been analyzed in great detail in Professor John Kay’s analysis of UK’s capital markets: “The Kay Review of UK Equity Markets and long term decision making“, which was triggered by certain M&A transactions among other factors, and published on 23 July 2012.

“The Kay Review of UK Equity Markets and Long-Term Decision Making” has been archived in UK’s National Archives here.

The Kay Review analyzes UK’s capital markets in depth, and argues that its companies’ duty to be successful in the long-term, and its only the success of companies that brings wealth to all stake holders and people who invest in companies, in many cases pensioners. Over the years a fine grained system of specialized service providers has developed between companies on one side, and individual investors on the other side. Professor Kay argues that this system of intermediaries (fund managers, analysts etc) can be seen as “overhead” and needs to be as efficient as possible.

Overall the capital market system needs to be built on long term trust and stewardship, not on anonymous one-time monetary transactions.

The Kay report had important impact, for example it led to the end of the requirement of quarterly financial reports by UK companies, as we discussed here.

Martin Lipton, of the NY law firm Wachtell, Lipton, Rosen & Katz, in an article published on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog encourages the US Securities and Exchange Commission (SEC) to keep the UK developments in mind, when reforming the reporting requirements for US corporations, and also calls for an end to the requirement of quarterly reporting.

Why end the requirement of quarterly financial reports? Because short term focus on quarterly financial performance may cloud the view on long-term success and investment. Intense discussions between fund managers and management are strongly encouraged.

Will the end of quarterly financial reporting reach Japan?

Corporate governance Japan: Why Japan’s focus on corporate governance?

GNP as a measure of economic size has many flaws – however many signals, not just GNP, indicate that Japan is the only major economy that does not grow.

While there are many excellent Japanese corporations, overall it is no secret that Japan’s economy has the potential to do much much better.

Japan’s decline was even deplored by Keidanren and Toray Chairman Sadayuki Sakakibara at the 2015 Kyoto Bank New Year Gala event. Stanford Economics Professor Takeo Hoshi has analyzed the factors which caused Japan’s economy to stop growing after catching up with the developed economies, see Professor Hoshi’s recent talk about Abenomics for the Stockholm School of Economics.

A case in point are Japan’s 8 large electronics conglomerates which combined are approximately the same size as the economy of The Netherlands. Unlike The Kingdom of the Netherlands, Japan’s top 8 large electronics conglomerates have not grown for the last 20 years, while on average reporting losses over these 20 years. While Japan’s top 8 electronics conglomerates dominated the global electronics sector, they have been faded, and today Apple alone is about 10 times bigger in market cap/value than all top 8 Japanese electronics conglomerates combined, see: “Japan’s electronics giants – FY2012 results announced. 17 years of no growth and no profits.

There is much hope that outside directors supervising executive management will bring outside expertise, and improve the performance of company-insider executive management, and if necessary also insist on replacements.

Much faster than expected

One of the most outspoken promoters of corporate governance reform is emeritus Tokyo Stock Exchange Chief Executive Atsushi Saito. In a recent talk, Atsushi Saito expressed his great surprise that corporate governance reform was implemented in Japan must faster than he had expected.

The cheapest part of “Abenomics” – corporate governance reform comes at essentially zero cost to tax payers

Many measures of Premier Minister Abe’s “Abenomics” stimulation programs pump borrowed Government Bonds (JGB) money into the economy, thus cost money and ultimately increase Japanese very large Government debt.

By comparison, corporate governance reforms cost essentially zero cash and don’t further increase government debt.

Theory and practice

Non-diversity: about 0.6% of Japanese Board Directors of listed companies are non-Japanese

As of 17 December 2015 Japan has 3504 listed companies on the exchanges operated by the Japan Exchange Group:

  • TSE 1st section: 1933 (incl. 6 foreign companies)
  • TSE 2nd section: 544 (incl. 1 foreign company)
  • Mothers: 219 (including 1 foreign company)
  • JASDAQ Standard: 750 (including 1 foreign company)
  • JASDAQ Growth: 44 (including 0 foreign company)
  • TOKYO PRO Market: 14 (including 0 foreign company)
  • Total: 3504 (including 9 foreign companies)

In addition there are three regional exchanges:

  • Fukuoka Stock Exchange
  • Nagoya Stock Exchange
  • Sapporo Stock Exchange

Assuming there are about 10 Board Directors per company, there are about 35,000 Board Directors of listed companies in Japan. Of these approximately 200 are foreigners, ie. about 0.6% of Directors of listed Japanese companies are foreign (I am one of these).

Maybe 10-20 of Japan’s public companies are “Englishized” such as Rakuten or SoftBank, or hire simultaneous interpreters at Board Level (you’ll see Directors with headphones listening to the interpreted/translated version of what is being said – of course slowing and filtering understanding and communication)

All other approx. 3490 Japanese Stock Exchange listed companies are run 100% in Japanese language at all levels including Board level – and almost exclusively by Japanese men.

In a rapidly globalizing world, these companies desperately need global input from many nationalities, different backgrounds, and genders at Board level in Japanese language, but the number of people providing this depth of diversity, having the qualifications and being able to function at Board level in Japanese in addition to several other languages is severely limited – this is one of several factors limiting Japan’s growth after having caught up with developed countries in the 1980ies.

What are the main issues?

Diversity delivers better decisions and better results

Japan has many outstanding leaders, such as SoftBank’s founder Masayoshi Son, or Kyocera’s founder Kazuo Inamori, who also founded part of today’s KDDI, and who turned around Japan Airlines from bankruptcy in his 80s.

Some Japanese Executives are outstanding leaders, however, many are not, but function more like chief administrators – as in any other country.

Outstanding leaders don’t fear working with excellent people and will attract top leaders. However, chief administrator type executives will fear for their power and will assemble teams who fear to speak out, as can be observed in many recent corporate scandals in Japan, and many other major countries. Corporate scandals and corporate governance failures may happen anywhere, not just in Japan.

Diversity at top management levels and Board levels has many benefits, as has been proven in many studies. Diversity delivers better decisions and better results. Boards of Directors are one way to bring diversity to decision making.

Overcoming stagnation

Many major Japanese corporations show no growth and no income for the last 20 years.

A showcase example are Japan’s top-8 electronics conglomerates. Combined they are as large as the economy of the Netherlands, but contrary to The Netherlands, they have shown no growth for the last 17-20 years, as well as losing money on average over all these years. Of course, as a consequence the market capitalization = value of these top-8 electronics companies has decreased dramatically. While Japan’s top-8 electronics companies dominated 60% or more percent of the global electronics industry in the 1980, they have fallen steep. Clearly a dramatic example of failed corporate governance, and surely a big push for Prime Minister Abe to put so much priority on improving Japan’s corporate governance, together of course with the need to improve employment, and returns for pension funds to fund Japan’s aging population.

Three forms of corporate organization: splitting supervision and execution

Traditionally, executives supervised themselves at Board level

Traditional Japanese corporation have a Board of Directors composed of corporate executives, i.e. the executives supervise themselves without external supervision or input. Supervision is done by the Kansayaku Board (corporate auditor’s Board) which however has limited powers on corporate decision making.

Japan’s corporate government reforms now give Japanese companies options to split execution (executives, 執行役員) and supervision (Board Directors, 取締役).

Japanese corporations now can chose between three forms of organization

  • company with Kansayaku Board
  • company with Supervisory Board
  • company with three committees:
    • Nomination Committee
    • Audit Committee
    • Remuneration Committee

According to the new Corporate Governance Code, the Board (independent which of the three options is selected) has the following three duties:

  1. setting the directions of corporate strategy
  2. encourage and support appropriate risk taking by senior management
  3. supervise Directors and executive management, including senior executives (執行役員)

Connecting the dots: the link between accounting issues and the space shuttle Challenger disaster

Toshiba’s recent accounting issues reflect much deeper fundamental problems – of course.

I see parallels between Toshiba’s accounting issues and the space shuttle Challenger disaster: Nobel Prize Winner Richard Feynman determined that the cause of the space shuttle Challenger disaster was the failure of top management to communicate with the people doing the work (“genba”, 現場): “Appendix F – Personal observations on the reliability of the Shuttle, by R. P. Feynman“.

Space shuttle Challenger’s top management was insisting to keep the planned launch date fearing public relations issues, while the workers and engineers on the ground, “genba”, knew that they were not ready. But top management at space shuttle Challenger did not listen to “genba”.

My advice to Japanese corporations: embrace and learn to love diversity!

Embrace and learn to love diversity! Diversity delivers better results overall. We all learn from each other.

My advice to foreign investment funds seeking more influence on Japanese companies

Shouting at the CEO or Boards of Japanese companies will not help – many foreign activist investors have already proven this fact many times. Insisting on your superior knowledge will not make you many friends – as anywhere else.

You need to develop trust and relationships. You need to start by learning Japanese, understanding Japan, and earn trust and contribute with achievements, or partner with people who have: KKR hired Japan Exchange Group emeritus CEO Atsushi Saito.

There are no increasing numbers of examples, where outstanding Japanese corporations careful listen to outside advice from investors, and thus become even more outstanding: SONY and robotics maker FANUC come to mind.

My advice to foreign companies operating in Japan

Your subsidiary in Japan is a Japanese corporations and needs corporate governance. There have been a long list of corporate governance failures leading to huge problems and losses at foreign subsidiaries in Japan, in the financial sector, the elevator sector, the pharmaceutical sector and several others.

Make good use of the Board of Directors of your Japanese subsidiary corporation.

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Toshiba income restatement: corporate governance issues

Toshiba income restatement: corporate governance issues

Toshiba’s income restatement announced by the independent 3rd party committee

Independent 3rd party committee chaired by former Chief Prosecutor of Tokyo High Court

On 12 June, 2015, Toshiba announced corrections to income reports, and at the same time engaged an independent 3rd party investigation committee headed by former Chief Prosecutor at the Tokyo High Court, Mr Ueda, to investigate. This independent 3rd party committee submitted their report yesterday, and held a Press Conference this evening.

Lets look at the announced Toshiba financial data in detail. The figure below shows:

  • Toshiba’s previously reported operating income/profits (blue curve),
  • corrections announced by an internal committee on June 12, 2015 (green curve),
  • corrections announced by the independent 3rd party committee on July 20, 2015 (red curve).

The combined amount of downward corrections determined by the independent 3rd party committee is YEN 151.8 billion (US$ 1.22 billion) in total.

Lets put this amount into context:

  • annual sales: approx. YEN 6000 billion (US$ 60 billion)
  • annual operating income (average over last 17 years): YEN 148 billion (US$ 1.5 billion)
  • annual net income (average over last 17 years): YEN 19 billion (US$ 190 million)

Therefore the downward correction summed over the years corresponds to:

  • approx. 2.5% of average annual sales
  • approx. 103% of average annual operating profits, ie more than a full year of average operating profits
  • approx. 8 years of net profits

Toshiba – typical for Japan’s large electronics corporations – operates with razor-thin profit margins: Toshiba’s net profit margin averaged over the last 17 years is 0.25%.

Therefore, the downward correction corresponds to 8 years of average net income/profits.

Toshiba's corrections: internal investigation (June 12, 2015, green) vs independent 3rd party committee (July 20, 2015, red)
Toshiba’s corrections: internal investigation (June 12, 2015, green) vs independent 3rd party committee (July 20, 2015, red)
  • Blue curve shows Toshiba’s initially reported operating income.
  • Green curve shows corrections determined by an internal examination, announced on June 12, 2015. Corrections amount to approx. YEN 50 billion (= approx. US$ 0.5 billion).
  • Red curve shows corrections determined by the independent 3rd party commission, chaired by former Tokyo High Court Chief Prosecutor Ueda and announced on July 20, 2015. Corrections amount to YEN 151.8 billion (= approx. US$ 1.22 billion)

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Japan Exchange Group CEO Atsushi Saito: surprised about the speed of implementation of corporate governance reforms in Japan

Japan Exchange Group CEO Atsushi Saito: surprised about the speed of implementation of corporate governance reforms in Japan

New Dimensions of Japanese Financial Market

Only with freedom and democracy, the values of open society and professionalism can the investment chain function effectively

The iconic leader of the Tokyo Stock Exchange since 2007, now Group CEO of the Japan Exchange Group gave a Press Conference at the Foreign Correspondents Club of Japan on June 12, 2015, a few days before his retirement, to give an overview of his achievements and to review the status of Japan’s financial markets today.

Atsushi Saito expresses his satisfaction and pride and surprise about the big improvements in corporate governance and the mind change happening in Japan now.

Atsushi Saito has worked as equity analyst in the USA, experienced the US pension fund debate, and when he was pushing for reform of corporate governance in Japan around 1990 was ignored or even criticized. He is surprised to see that these changes he has been keeping pushing for since 1990 are actually implemented now.

Atsushi Saito directly expressed his shame about the accounting problems recently revealed at Toshiba, and contracts Hitachi, which has independent outsiders, women and non-Japanese foreigners on the Board of Directors, with Toshiba which has not. Atsushi Saito directly said: “I am very puzzled why Toshiba is so lazy to check their accounting”.

Atsushi Saito – leading the Tokyo Stock Exchange since 2007

Leading the Tokyo Stock Exchange since 2007, Atsushi Saito aspired to create an attractive investment destination in Tokyo for investors from all over the world with the following achievements:

  • modernized the trading systems
  • developed a self regulatory body
  • merge with Osaka to create Japan exchange group

Reform corporate governance to improve capital efficiency and corporate value of Japanese companies

The most imperative challenge has been left untouched for far too long: reform of corporate governance in Japan to improve capital efficiency and corporate value of Japanese companies.

Recently we introduced the Corporate Governance Code and we see a shift of mindset in Japanese companies.

Structural impediments remain remain in Japan’s financial market

Structural impediments remain remain in Japan’s financial markets, indirect finance from Banks remain a significant force in corporate finance.

Japanese investment bankers continue to fall way behind European and US rivals.

The post financial crisis regime under Basel 3 puts breaks on excessive leverage.

When global economy returns to high growth, we are not able to rely solely on money centered banks – banks will not be able to provide enough capital satisfy demands in a growing world economy.

Foresee demands for international organizations WorldBank, ADB and new AIIB and private equity funds.

With FinTec, we expect unbundling across separate financial service lines

With fintec, combining financial services and technology, we expect increasing unbundling across separate service lines for banking services, between settlement, wire transfers, loans and other services.

We will see more financial services.

Over dependence on main banks, risk aversion, lack of sense of duty by corporate managers led to the death of Japanese equity as an asset class

In Japan, as a consequence of dependence on indirect finance by money centric main banks, deep involvement of the main banks in corporate management, Japanese companies grew increasingly risk averse shied away from dynamic investment, and ultimately damaged corporate value.

There was a demise of the sense of duty by corporate managers use equity capital efficiently, and as a consequence of these factors, we saw a global divestment from Japanese stocks, eventually leading to the death of Japanese equity as an asset class.

Pushing since 1990 for reform of corporate governance in Japan, Atsushi Saito was not only ignored but even criticized

Atsushi Saito working as an equity analyst in the USA, followed the US pension debate, and started to push for reform of corporate governance in Japan around 1990, he was not only ignored but criticized.

Japan’s recent miraculous turn on corporate governance took Atsushi Saito by complete surprise

Today Japan addresses corporate governance, there is a miraculous turn of mindsets and regulatory framework. We saw:

  • amendment of companies act
  • corporate gov code
  • stewardship code

That these changes could happen came as a complete surprise.

Atsushi Saito hopes that this momentum can be maintained, and fiduciary duties of pension fund managers towards beneficiaries will be strengthened to nurture greater professionalism among Japanese institutional investors, similar to The Employee Retirement Income Security Act of 1974, or ERISA act in the USA.

Only with freedom and democracy + values of open society + professionalism can the investment chain function effectively

Only with freedom and democracy, the values of open society and professionalism can investment chain function effectively. This pattern is what defines truly advanced economy

The recent transformation has brought Japan back into the focus of professional investors globally and a new dawn beckons for Japan.

All stakeholders must remain focused to follow through these early signs of change to ensure that Japan welcomes a brighter future.

Questions and answers

Q: Japan not joining the Asian Infrastructure Investment Bank (AIIB) will deprive Japan of opportunities?

A: The Japanese Government did not say that it will not join the AIIB, but today there is no clear set of rules for the AIIB, the governance structure is unclear. To use tax payers money our government needs to be prudent before they make a decision on investment. There are about 20 international banks and similar organizations, 19 of them have clear governance rules. All except AIIB have clear governance rules. In case of AIIB China will have about 30% holding. Probably our Government will wait before making a decision, and Atsushi Saito thinks this is reasonable.

Q: Will Tokyo Stock Exchange enter into international alliance?

A: Stock Exchange business is a very nationalistic business – only USA has multiple exchanges. All other states have one single Exchange totally under control, regulations, culture by single states. Theoretically Exchanges between different countries can merge, but none succeeded. We saw no case in the world were Exchanges from different countries merged successfully, all such cooperations failed.

Q: Plans of Toyota to have non-traded convertable shares?

Its up to their shareholders. Legally they did not violate any rule.

Japan does not have any priority on special stocks.

I see a discrepance in the USA: The US aggressively raises the voice for rights of shareholders, and corporate governance elsewhere. At the same time US companies are the largest issuer of special stocks for special owners, e.g. for Google or Facebook, more than 50-60% of voting power is dominated by the founders of these companies. –
I see a discrepancy, its an ironical discrepancy. I am talking to the leaders of US : US is very nosy about our corporate goverance, protection of shareholders, but how do they protect shareholders of Google or Facebook?

Q: What is your advice for Japanese economy to regain vitality and energy, for Japan to become No. 1 in the world?

A: I am very concerned about efficient capital use and corporate governance. When I was securities analyst in USA, I was always asked about financial data of Japanese corporations.

  • Fuji Film had huge cash on the balance sheet – their competitor, the yellow-color photo company was always diligent with share holders, paid dividends, did share buy-backs. Fuji spent much R&D on pharmaceuticals and diversification. The Yellow color photo company disappeared, and Fuji Film is very healthy. Accumulation of sleeping capital is useless. But efficient use of capital is crucial.
  • when GM went bankrupt it was discovered that they had great technology, like electrical car projects which had been stopped. GM had stopped these R&D projects, because shareholders had insisted to stop R&D spending, and pay hire dividends, and ultimately went bankrupt.
  • Toyota had 3 trillion yen cash. This was heavily criticized. Toyota was secretely developing electric cars – now LEXUS electric car is bestseller in USA.

We are concerned to respect shareholders, but shareholders’ short term wishes are not always best for the company.

Even BlackRock wants long-term enterprise development rather than short term cash benefits.

Q: Impact of weak YEN on Stock Exchange

A: Even with weak yen, our trade balance is negative. Yen rate is not pushing export from Japan. Japan is manufacturing outside of Japan. Trade account is negative, capital account is black, currency account is black. Overseas subsidiaries are sending dividends back to Japan at the yen rate of 120. Its smart return in the capital account. Our industry structure has changed, we are not exporting on the back of weak yen, so we are not criticized.

Q: plans after retirement

A: I decided: no job – I will take rest.

Q: Disclosure. Often financial data are exposed early in Nikkei or Japanese press prior to official disclosure.

A: I am often asked about this. I don’t know how the press gets their information, its a free market for the press. As long as they don’t do any insider trading or use this information privately, I don’t see anything wrong with early public disclosure. Its a competitive issue between journalists, we cannot critisize competition among journalists. Very sharp journalists pick up information, we are not the police we cannot stop them. Its a competitive world – even for journalists.

I live far outside from Tokyo, sometimes journalists wait at the door to my home in the suburbs. I think this is an invasion of my privacy, and I don’t tell them information at my home.

Q: Trust in the stock market, low Japanese retail investor participation.

A: Advanced states have 60-70% own domestic investors, not outside foreign investors.

Foreign professional investors have immediately responded to the logic of our corporate governance reforms. Especially US and UK pension managers have immediately responded to the improved efficiency of our markets. Investment professionals in London, New York, Scotland can evaluate the meaning of our regulatory changes.

Japanese professional or private investors could not understand the improvements we have done, they did not react.

Mutual funds however are at record hights and we have 8 million ELISA private pension investments in Japan now. People start to build their own pensions now, so retail investors are coming into the market.

We have a normal quiet market now here in Japan regarding sales of equities.

Q: Tokyo as a financial center?

A: If you ask the same question to London, they will say that with IT all transactions are global. There may be arbitrage on the prices. If you compare Shanghai and NY, the trading volume in Shanghai is higher than in NY, but Shanghai not a global financial center, because they are not liberalized in capital in and outflow, they are No. 1 only in volume.

The definition of Financial Center of the World has changed.

We want to be one of the better places in financial business globally. We want to offer convenient and friendly conditions for financial people to come to Tokyo, as one of the centers for financial business.

Tax plays a very important role to define financial centers. London or NY or Tokyo cannot follow a city state like Singapore. We cannot have the same tax system. Tokyo is far bigger than Singapore.

“Global financial center” is a vague subject for me.

Q: Do current prices accurately reflect corp performance. Foreign investors: speculative short-term gains? will foreign investors pull out when Bank of Japan money flush ends?

A: I don’t think the Japanese market is overheating at all. I think the short term speculators have already left Japan.

Long term investors have long asked for change in Japan, Japan did not listen, but now for the first time Japan is listening and changing, and I am feeling longterm investors are understanding this change. We have long term investors here now in Japan.

Q: is high-frequency trading a danger for Stock Exchange?

A: Flash Crash in US was due to the diversity of exchanges. There are 50-60 markets in US. Flash Crash artificially made, not becaue of speed of trading.

Our rules for pricing system here in Japan, we learnt this since the Edo era, we cannot have flash crash, we limit the price changes, we are cooling the trading. Our system of pricing is different than in the USA.

We have many high-frequeny traders from abroad, and they appreciate our system. US high frequency traders critized us up to 10 years ago, but today they appreciate our pricing system here in Japan, they want to learn our Stock pricing system. This has really been a big change for us.

Q: False accounting at Toshiba. Impact on trust in Japan’s stock market.

A: I feel very ashamed for Toshiba. Toshiba should be the mentor or leader of Japanese industry – not the opposite.

Hitachi is a huge contrast to Toshiba. Hitachi aggressively introduced outside board members, foreign and women board members. Hitachi is investigated by outside and foreign board members.

Toshiba is a total contrast to Hitachi.

I am very puzzled by that – why is Toshiba so lazy to check their accounting.

We hope that auditors and accounting houses are more professional and more serious. They told us that their subsidiaries have different accounting system. They must have intentionally checked that point.

My answer: my feeling is one of shame. We should definitely not repeat this type of thing.

Q: Why do Japanese company accumulate so much cash reserves.

A: One reason is that Japanese labor laws compel Japanese companies to have reserves to pay for restructuring. We introduced changes in corp governance, and many companies now use the cash for M&A to acquire foreign companies, or e.g. Fanuc has increased dividents.

I am optimistic for Japanese companies, because they are using cash more efficiently now.

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