You can go a long way in Japan with $10 trillion. It buys you a suite at an upmarket Tokyo hotel from now until the end of time. It buys you an ocean of Asahi beer. It probably buys a sushi mountain the size of Mount Fuji. But does it buy you improved IR?
This was the question posed recently by members of the International Corporate Governance Network (ICGN), a coalition of leading institutional investors that use their combined assets of $10 trillion to push for improved corporate governance worldwide. ICGN members include such well-known good governance advocates as Calpers, TIAA-Cref and Hermes.
This year’s ICGN annual conference, held in Tokyo in July, aimed to persuade Japan’s faltering companies to embrace established principles of good corporate governance and high IR standards.
The conference attracted over 450 mostly local delegates. ‘The large attendance for ICGN’s first meeting in Asia since our founding in 1995 underscores the interest in good governance as a way to alleviate some of the economic malaise in the region,’ says Peter Clapman, director of corporate governance for the $275 bn institutional investor, TIAA-Cref, and chairman of the ICGN.
Yoshiko Sato, head of research at the Japanese Investor Relations Association (Jira), was also impressed with the delegate list. ‘It reflects the interest of the IR community,’ she says. ‘The conference will focus the minds of executives and IR practitioners of Japanese companies.’ Tatsuya Imade, an investor relations consultant with Tokyo-based SRIC, agrees: ‘The conference was very good for the Japanese corporate community.’
But the high level of local interest does not mean that Japan is ready for western standards of openness and accountability. Japan’s corporate culture, which regards the interests of stakeholders as being just as important as those of shareholders, will pose a difficult obstacle. The conference proved that Japanese companies are willing to change, but that progress will be slow.
Turning to equity
In the past Japanese companies could safely ignore their equity investors. Finance was largely supplied by – and companies held accountable to – dominant insider banks and fellow firms in a network of cross-shareholdings. Minority investors were the beggars at the feast and they were treated accordingly – financial reporting was poor and shareholder rights were thin on the ground. Investor relations, as practiced in the west, was non-existent. Few investors minded, however, so long as share prices continued to climb.
The old order came to an end in the early 1990s, with the bursting of Japan’s bubble economy. The banks, brought to their knees by non-performing loans, were forced to give up their traditional insider role, and the cross-shareholding structure started slowly to unravel. [See The unwinding of Japan Inc] Share prices went into free fall, and the Nikkei index plummeted from a high of around 49,000 to its current level (as of August 2001) of 12,000.
Japanese companies are desperate to tap new sources of capital, so they are turning to the equity markets. However, the world’s investors – or at least those represented by the ICGN – want something in return: greater transparency and accountability, a commitment to shareholder value and improved IR.
Overcoming panic
Some companies appear to be getting the message. ‘Governance reform is necessary to ensure the survival of Japanese companies,’ says Nobuo Tateisi, chairman of technology group Omron. Yoshihiko Miyauchi, chairman of financial services group Orix and co-chairman of the Japan Corporate Governance Association, echoes this view. Japan, he says, ‘tends to panic’ when new ideas are imported, ‘but on corporate governance, Japan should take the initiative.’
‘We are heading in a very desirable direction,’ adds Tateisi. ‘I already see action being taken, with better supervision and monitoring, and greater transparency.’ He suggests that a good start would be for companies to publicly set return on equity (ROE) targets and to answer to the market if they aren’t met.
A few companies are adopting a progressive approach. NEC, for example, which just a few years ago was embroiled in a major government contracting scandal, is now rebuilding investor loyalty and marketplace reputation. ‘They’re concentrating on their perception in the marketplace,’ says Anthony Zaloom, a Japan-based US lawyer and chair of the commercial code task force of the US Chamber of Commerce in Japan. NEC has listened to investors’ demands for a more independent board; and it now ‘has something that looks like a nominations committee,’ says Zaloom.
SRIC’s Tatsuya Imade says that the growing importance of investor relations is reflected in the fact that senior executives now take responsibility for selling the company to the market. ‘In the past two to three years, it is the CEOs who have started to take on the role. They go out on roadshows – to New York, London, and within Japan as well.’
Imade continues: ‘The Japanese corporate community is now paying much attention to corporate governance. Many companies have become aware of how important market reputation is.’
It is not only overseas investors who are ringing the changes; domestic institutions are getting in on the act as well. Tomomi Yano, executive managing director of the Japanese Pension Fund Association, says his members intend to vote all their shares. Thoughtful proxy voting is currently all but impossible since, fearing disruption by criminal groups, about 1,800 Japanese companies hold their shareholders’ meeting on the same day [see Gangs busted, Investor Relations, January 2001]. Yano is calling for reform of this proxy bottleneck.
Legal reform
Japan’s politicians and regulators appear to have caught the new pro-governance and pro-investor mood, and are promising to revamp the country’s corporate structure. New prime minister Junichiro Koizumi (so popular, according to the local press, that his campaign poster is a regular feature in schoolgirls’ bedrooms) plans to further reduce the influence of the banks and expose companies to global competition.
Central to those reforms is a revised commercial code, which seeks to bring improved practice to the black hole of Japanese governance: the board of directors. Japanese boards are unwieldy – until recently, many had up to 60 members – and purely honorific. Board members are usually long-serving insiders who have won a seat through seniority and loyalty. As a body for overseeing management, the Japanese board is a non-starter.
The revised code, currently in draft form, proposes that all companies appoint at least one independent director. This is seen as a first step – companies are encouraged to appoint several non-executive directors and create a formal structure of independent sub-committees charged with overseeing audit, pay and nominations.
Slow progress
But while first steps have been taken, the road to western-style shareholder capitalism is a long one. It remains to be seen, says Anthony Zaloom, whether Japanese companies will embrace the spirit of the revised commercial code and radically reshape their boards. Japanese management ‘doesn’t like to be interfered with,’ he says. The notion of external oversight is also a tricky concept in a culture famed for its introspection. Zaloom sums up the response of Japanese managers to outside directors: ‘They don’t like it.’
Other core governance practices still leave a lot to be desired. Accounting and financial reporting have improved, but ‘audit practices are still pretty awful’ according to Zaloom. ‘You’d have to be crazy to buy a Japanese company on the basis of its public disclosures,’ he says.
And those disclosures that are made seldom live up to investors’ needs. Tatsuya Imade says that many companies set a general ROE or ROC objective, but view it as an aspiration rather than a hard target. ‘Goals and commitments are different, right?’ she says. ‘Some CEOs say, I would like to achieve 20-30 percent ROE as a goal, but that’s not his commitment.’
Perhaps the key test of effective corporate governance is whether an underperforming management team can be replaced, either by takeover or by an activist board of directors. By this measure, Japan has a long way to go; management purges remain all but impossible in Japan. ‘There is no market for corporate control in Japan,’ says Zaloom, and the power of the company president ‘borders on the absolute.’
Stakeholder value
The biggest obstacle to improved accountability to shareholders is Japan’s view of the corporation as a social entity with far-reaching duties to stakeholders such as employees and society at large. Japanese managers will strongly resist attempts to water down this stakeholder culture in favor of a system that focuses solely on the interests of shareholders.
This was made abundantly clear in a speech to the ICGN by Hiroshi Okuda, chairman of Toyota and of the Japan Federation of Employers’ Associations. So important is the social dimension of corporate activity, he says, that it is taught to junior high school students, and is explored in Japanese textbooks. Any approach to corporate governance that fails to take this deeply ingrained attitude into account ‘could cause major problems,’ he says. Japanese managements’ commitment to their stakeholders ‘is in our DNA.’
Of course managers must be held to account, he says, but such monitoring must come from ‘different perspectives… It’s important that managers have their performance checked by as many people as possible,’ that is, by stakeholders as well as shareholders. The views of labor, he says, are particularly important as companies must compete in the labor markets. ‘In addition to shareholders, the input from employees needs to be considered too… Labor unions are absolutely indispensable.’
Okuda’s speech made depressing listening for Toyota investors, who want more of the company’s cash mountain returned to shareholders. ‘We prefer to aggressively promote R&D,’ he says.
‘We aren’t ignoring ROE but we must balance it with R&D.’
Yotaro Kobayashi, chairman of Fuji Xerox and also chair of the Japan Association of Corporate Executives, was similarly defensive of Japanese mores. Focusing exclusively on shareholder value, he says, is short-termist and ‘not desirable for Japan.’ He noted that the OECD’s globally applicable corporate governance principles call for the interests of all stakeholders to be taken into account. ‘This too is my position,’ he said.
Growth industry?
But the two executives may be out of step with modern Japanese thinking. Imade criticized them for ‘presenting a backwards view.’ Jira’s Sato says ‘the situation has changed. Even companies that think they are accountable to stakeholders have been changing their minds. They have begun to place importance on shareholders.’
John Plender, leader writer with the Financial Times and veteran observer of the Japanese economy, told the ICGN that he hopes investor relations will become a ‘growth industry’ in Japan. He will have to be patient.
One problem is the current recession that western observers believe has been exacerbated by the absence of shareholder rights. Sato notes that most Japanese companies ‘don’t have enough of a budget for investor relations activity. IR will grow and grow, but we cannot expect rapid growth. Companies understand the importance of good governance, but they would like to implement it steadily. They need the consensus of the whole company.’
Anthony Zaloom believes that Japanese companies’ desperate need for capital and improved competitiveness means that market forces will drive improved governance and investor relations. ‘This is coming to Japan whether [Japanese managers] like it or not. They’re going to have to adapt to it. It’s just a matter of time.’
Kit Bingham is the editor of Governance (www.governance.co.uk)
Networking
The International Corporate Governance Network (ICGN) was founded by many of the world’s leading investment institutions in 1995 to lobby for improved corporate governance in global markets. The ICGN is now ‘the premier organization in the world when it comes to discussing international corporate governance,’ claims Peter Clapman, director of governance at TIAA-Cref and ICGN chairman.
The ICGN’s seventh annual conference in Tokyo was the first time that the conference has been held outside Europe or the US, marking an effort to take the good governance message to a new audience.
The ICGN has also undertaken initiatives to improve governance standards worldwide. It has established working parties to explore the difficulties of cross-border proxy voting, to push for greater harmonization of global accounting standards, and to develop an international investor consensus on linking executive pay and performance. See www.icgn.org.
Governance Oscars
At its seventh annual conference in Tokyo, the ICGN recognized three individuals for outstanding contribution to corporate governance. ‘The chosen nominees,’ said the ICGN’s co-chairman, Andre Baladi, ‘include two giants of the field who deserve equal and long-past-due recognition, as well as a personality who strives to develop adequate practices in a challenging emerging corporate governance environment.’ This year’s awards went to:
-Sir Adrian Cadbury, whose UK committee report in 1992 has served as a template for governance reform worldwide.
-Ira Millstein, senior partner with the New York firm of Weil Gotshal & Manges. Millstein was an early advocate of improved board practices, and is associated with many pro-governance bodies such as the World Bank/OECD’s Global Corporate Governance Forum, and the Global Corporate Governance Advisory Board.
-Professor Hasung Jang, who has campaigned for improved accountability at South Korea’s chaebols or conglomerates.
