July 13, 2009 / 11:18 AM / 8 years ago

Corporate governance holds Japan back

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.”


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.

Tsutomu Okubo, a leading policymaker in the opposition Democratic Party on financial issues, said cross-shareholding and the lack of independent directors were issues he would tackle.

Governance could increasingly become a political issue. Japan needs to squeeze greater returns out of its corporate sector to protect a pension system under strain from its aging population.

It is also vital to attract foreign investors who sold about $40 billion worth of Japanese stocks last year and may turn to China or other faster growing economies for growth.

“The Japanese stock market is not attractive to foreign investors, and governance is one of the problems,” Okubo said.

Last month a study group chaired by the trade ministry issued a report calling for companies to have either an independent director or independent auditor, and Niihara said he expected the Tokyo Stock Exchange to put these changes into its listing rules.

The report fell short of requiring an independent director by giving the choice to opt for the less powerful auditor. It also does not meet the call for at least three external directors made by the Asian Corporate Governance Association last year.

But analysts said it still marked an important step in a country where less than half of listed firms have an outside director and companies tend to promote internal staff or invite executives from business partners or their banks to the board.

Niihara also told Reuters he wants to introduce British-style takeover rules that would eliminate the need for the poison pills that have proliferated over the past few years due to managers fearing hostile takeover attempts.

Governance advocates were also encouraged by the toppling of the board of wigmaker Aderans Holdings 8170.T in May, when shareholders sided with U.S. activist fund Steel Partners against a deal struck between Aderans management and another fund.

Proxy advisory firms Glass, Lewis & Co and RiskMetrics Group RMG.N had both recommended shareholders support board members proposed by Steel Partners.

Takeyuki Ishida, head of Japan proxy research at RiskMetrics Group, said his company in principle only opposes board appointments when there is clear mismanagement or abuse of authority, given the potential disruption to the company.

But he said they would likely be taking a more critical look at board selections in the future as increasingly this is the most effective way for shareholders to voice their discontent.

“It is the nuclear button. It’s the last card to play,” Ishida said. “Who monitors company performance is very important, and board selection will become increasingly important in Japan.” (For blogs from the Reuters Investment Summit, click on:

blogs.reuters.com/summits/ ) (Reporting by Nathan Layne; Editing by Hugh Lawson)

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