By Nathan Layne - Analysis
TOKYO (Reuters) - Poison pills, a lack of independent directors, and a web of capital ties between business partners that ensures management performance goes unchecked -- that's corporate governance in Japan.
Speakers at the Japan Investment Summit this week warned that lax governance standards risk deterring foreign investors from the world's second-largest equities market while also threatening the country's long-term financial health.
Some help may be on the way.
A study group chaired by the trade ministry is pushing for more independent directors in the boardroom, addressing one of the main factors behind Japan being ranked 35th among 39 nations by GovernanceMetrics International in its latest report.
The recent proliferation of poison pill anti-takeover defense schemes and the decades-old tradition of cross-shareholdings are also common practices hurting minority shareholders, critics say.
This is not just an issue for investors. Japan needs better corporate governance to boost productivity and profit margins now that its economy has matured, said Naoki Kamiyama, chief equity strategist at Deutsche Securities.
"Normally the shareholder should be the force pushing for this but for historical reasons the shareholder is in a very weak position, and that mechanism doesn't work," Kamiyama said. "Things are slowly improving but it's not enough."
Foreign investors have traditionally been the most vocal advocates of governance, pressuring management to take on independent board members or to stop hoarding cash and pay higher dividends.
Japanese institutional investors, on the other hand, tend to rubber-stamp management decisions and re-elect board members even in the face of poor performance.
This stems in part from the pervasive practice of cross-shareholding in which banks hold stock in their lending clients and don't take management to task. It also reflects the lack of independence of fund managers, most of which are units of banks, brokers or insurance firms.
Hiroaki Niihara, a director in the Ministry of Economy, Trade and Industry pushing for regulations to improve governance and protect minority shareholders, wants asset managers to disclose their voting policies, subjecting them to public scrutiny.
"They are all under the influence of their parent companies," Niihara said, citing the example of an asset management unit of a life insurer siding with management to ensure they can keep selling policies to that company's employees.
"The notion of fiduciary responsibility is very weak in Japan."
NUCLEAR OPTION
Governance advocates will have a sympathetic ear in the main opposition party, which could oust the ruling Liberal Democratic Party in an upcoming lower house election. Continued...
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