Corporate Governance Reforms: How the Way Japanese Corporations Take Decisions is Changing
SJCC Swiss-Japanese Chamber of Commerce Friday 12 October 2018, 18:30-19:45, JETRO Office Geneva
Prime Minister Abe’s corporate governance reforms are arguably one of the biggest success stories of his reform program to promote Japan’s economic growth. Japan’s Government in coordination with the Tokyo Stock Exchange and the Financial Services Agency changed the legal and regulatory framework for the supervision of management for stock market-traded companies, faster than many thought this could be done.
Japanese corporations are changing their governance structure, bring in independent Board Directors with fresh ideas and independent views and experience. The share of foreigners on Japan’s Board of Directors is still low (0.5%) but increasing as they bring global expertise to the top level of increasingly globalizing Japanese companies.
The presentation is based on Gerhard Fasol’s experience as Board Director and Member of the Supervisory and Audit Committee of a stock market listed Japanese group. It will explain some details of how Japanese stock market listed corporations take decisions, the different models for management supervision available under Japanese law, and how this works in daily practice.
Understanding how Japanese corporations take decisions, is a key success factor for companies seeking to achieve agreements with Japanese corporations that need Board approval, e.g. for investments, M&A, partnerships or large purchases, as well as for investors in listed Japanese company stock, and employees of Japanese companies. Knowledge about Japanese Corporate Governance is also crucial for the success of Foreign subsidiaries in Japan.
About the speaker
Dr. Gerhard Fasol, of Austrian origin living in Tokyo, graduated with a PhD in Physics of Cambridge University. He first came to Japan in 1984 to help build a research cooperation with NTT. In 1997 he founded the company Eurotechnology Japan KK and has been working with hundreds of Japanese and foreign companies on cross-border business development and M&A projects. For four years he served as Board Director of a Japanese stock market listed company.
He is also Guest-Professor at Kyushu University and was tenured faculty at Cambridge University, Fellow and Director of Studies at Trinity College Cambridge, and also Guest Professor in Physics at the École Normale Supérieure in Paris. In recent years he has been focusing on questions of Corporate Governance at Japanese companies, a topic about which he is frequently presenting at a wide range of organizations in and outside Japan. He served on the Advisory Board to the former Chairman of JETRO Mr Noboru Hatakeyama.
Date Friday 12 October 2018
Time From 18:45 to 19:45 (registration opens 18:30)
Venue JETRO Office Geneva, Rue de Lausanne 80, 1202 Geneva, Switzerland
Fee SJCC/JETRO/JCG Members and Guests: CHF 20, Non-Members: CHF 30
Organization SJCC Swiss-Japanese Chamber of Commerce
Corporate governance reforms: making Japanese corporations great again?
Understanding how Japanese Boards of Directors function helps you close deals Monday, May 28, 2018, 19:00-21:00 at CCIFJ
Stimulating Japanese companies’ growth is a key element of Prime Minister Abe’s economic growth policies. For companies to grow, management needs to be improved, Boards of Directors need to bring in diverse experiences and new ideas, and Boards need to control executive management effectively. Corporate governance is important for investors, and also for those aiming to achieve major decisions from Japanese companies. If you want to make a major sale, an M&A transaction or create a partnership with a Japanese company, you need to understand how Japanese companies take decisions at Board of Directors level.
The speaker is one of a limited number of foreigners with several years experience as Board Director and member of the Supervisory & Audit committee of a Japanese stock market listed company. His presentation will aim to give you a hands-on understanding of Japanese Board of Directors work from an insider with several years Japanese Board experience. He will illustrate this with an example, where he helped a European industrial group achieve agreement to cooperate from a large Japanese industrial group within 12 hours, by applying his Japanese Board Director experience.
He addresses C-level executives aiming to close deals with Japanese corporations, and to fund managers who have new duties to interact more closely with Japanese Boards under the new stewardship code of the FSA. He will also prepare you for coming changes to these rules.
About the speaker
Gerhard Fasol graduated with a PhD in Physics of Cambridge University, Cavendish Laboratory, and Trinity College. He founded the company Eurotechnology Japan KK in 1997 and has been working with hundreds of Japanese and foreign companies on cross-border business development and M&A projects. He first came to Japan in 1984 to help build a research cooperation with NTT. For four years he served as Board Director of the Japanese stock market listed cybersecurity group GMO Cloud KK.
He is also Guest-Professor at Kyushu University. He was tenured faculty at Cambridge University, Fellow and Director of Studies at Trinity College Cambridge, and also Guest Professor in Physics at the Ecole Normale Superieure in Paris.
Date Monday, May 28, 2018
Time From 19:00 to 21:00 (doors open at 18:30)
Venue CCI France Japon, 1F Meeting room
Admission Fee (to be paid in cash at the door or online via PayPal)
JPY 4 000 for members of the French Chamber
JPY 6 000 for non-members
Deadline for registration/cancellation Thursday, May 24, 2018, 17:00
Monday, March 12, 2018, 12:00 – 13:30 at the Foreign Correspondents Club in Japan FCCJ
While many Japanese corporations are still admired around the world, too many have for years suffered sluggish growth and low profitability. A string of corporate scandals and failures have shocked the pubic and corroded confidence in Japanese business.
The government of Prime Minister Shinzo Abe has spearheaded reforms. A corporate governance code has been introduced to improve supervision of management and increase the number of independent outside directors. Change is happening faster than many expected and the reforms are generally regarded as successful. Yet, much still needs to be done to bring more diversity into Japanese boardrooms.
Gerhard Fasol is one of a tiny number of foreigners in the boardrooms of listed Japanese corporations. A physicist and entrepreneur, he has been in Tokyo for quarter of a century. For four years he has been Board Director, and since last year additionally a member of the Supervisory and Audit Committee of the Japanese cybersecurity group GMO Cloud KK, which is listed on the Tokyo Stock Exchange.
With years of experience of mergers and acquisitions and cross-border business development projects in Tokyo, Fasol is well placed to explain what’s happening inside Japan Inc. He will come to the FCCJ to discuss what we might expect from Japan’s corporate governance reforms.
Daiwa Anglo-Japanese Foundation, London, Tuesday 16 January 2018, 6:00pm
Topic: Japanese Corporate Governance – The Inside Story
Speakers: Gerhard Fasol and Sir Stephen Gomersall
Program: Tuesday 16 January 2018, 6:00pm – 7:00pm, Drinks reception from 7:00pm
Location: 13/14 Cornwall Terrace, Outer Circle (entrance facing Regent’s Park), London NW1 4QP, Organised by the Daiwa Anglo-Japanese Foundation
Registration and further details
While many Japanese corporations are greatly admired around the world, certain aspects of Japanese management style are believed to be holding back Japan’s economic growth. The media focus mainly on extreme cases and fraud, but the responsibilities of Directors go far beyond these defensive, compliance-type duties. Preventing fraud alone is not sufficient to ensure growth and long-term success; it is just the baseline!
Based on several years of direct experience as a non-Japanese Director of a Tokyo Stock Exchange-listed Japanese company, Gerhard Fasol will discuss the reforms to Japanese corporate governance made in recent years, and what, in his view, still needs to be done. He will also discuss issues of diversity and its importance for the quality of management in Japanese corporations.
About the contributors
Gerhard Fasol founded the M&A and cross-border advisory firm Eurotechnology Japan in 1997, and has worked on a large number of M&A and cross-border projects in Tokyo over the last 20 years. Since 2014 he has been a Board Director and Member of the Supervisory & Audit Committee of the Japanese cybersecurity group GMO Cloud KK, listed on the first section of the Tokyo Stock Exchange, and since April 2017 he has been a Visiting Professor at the University of Kyushu. He gained a PhD in Physics at Trinity College, Cambridge, and then became a Lecturer at Cambridge University, based at the Cavendish Laboratory, while also being a Research Fellow, Teaching Fellow and Director of Studies at Trinity College. He has worked as a research scientist at the Max Planck Institute, Stuttgart, on semiconductor and solid state physics research, as Manager of the Hitachi Research Laboratory in Cambridge, and as an Associate Professor in Electrical Engineering at Tokyo University.
Sir Stephen Gomersall
Sir Stephen Gomersall studied at Cambridge and Stanford University, and joined the Foreign and Commonwealth Office in 1970. He served in Japan as Political Officer (1972-1977), Economic Counsellor (1986-1990), and Ambassador (1999-2004), and also in the United States as Political Officer in Washington and as Deputy Permanent Representative to the United Nations in New York. From 2004 he became Chief Executive for Europe in Hitachi, and was the first non-Japanese to serve on the company’s main Board from 2011-2014. He is currently a Director of Hitachi Europe and Hitachi’s main UK subsidiaries investing in railway manufacturing and nuclear power development. He was knighted by the British Government in 2000, and in 2015 received the Grand Cordon of the Order of the Rising Sun from Japan for services to UK-Japan economic relations.
More on the topic of corporate governance reforms in Japan
The wealth and welfare of everyone living in Japan is based on the success of Japanese companies, how well companies are managed, and how managers are encouraged, supported and controlled.
Therefore corporate governance reforms are an important part of the “Abenomics” economic reform program. Many think that the corporate governance reforms of recent years have been the most successful part of Abenomics, and the former Chairman of the Tokyo Stock Exchange even said that these reforms happened much faster than he had thought.
Corporate governance mainly refers to the responsibilities of Board Directors who take part in the major decision making of every company, who supervise and support the executive management including the CEO/President of the company, and this make essential contributions to the success of companies.
Another aspect of corporate governance is the “stewardship code”, which refers to the influence of investors on company’s executive management.
Understanding decision making and the control of management, the way Japanese companies reach decisions and how this decision making is supervised, is essential knowledge for everyone who works to persuade Japanese corporations to take desired decisions, e.g. to achieve sales, partnerships, investments, or even Mergers and Acquisitions (M&A), who invests in Japanese corporations. Employees should also understand how the companies they work for are run.
This talk will explain the major components and fundamentals of corporate governance and its reforms in Japan based on several years of practical hands-on experience on the Board of Directors and on the Supervisory & Audit Committee of a stock market listed Japanese corporation.
Speaker: Gerhard Fasol
Gerhard Fasol graduated with a PhD in Physics from Cambridge University and Trinity College. He worked as research scientist at the Max-Planck-Institute Stuttgart on semiconductor and solid state physics research. He was tenured Faculty in Physics at the Cavendish Laboratory of the University of Cambridge, and he was Research Fellow, then Teaching Fellow and Director of Studies in Natural Sciences at Trinity College Cambridge. He was Manager of the Hitachi Research Laboratory in Cambridge, Associate Professor in Electrical Engineering at Tokyo University, and is founder of the advisory firm Eurotechnology Japan. He is Board Director of GMO Cloud KK, and since April 2017 he is Visiting Professor at the University of Kyushu.
Copyright (c) 2017 by Eurotechnology Japan. All Rights Reserved.
Japan’s economy grows five quarters in a row, and Japan Post books losses of YEN 400.33 billion (US$ 3.6 billion) for an acquisition in Australia
Japan GDP growth, growth of 2%/year. Still, Japan’s economy is the same size as in 2000, while countries like France, Germany, UK today are double the size as in the year 2000
Japan GDP growth: We have seen 5 quarters of economic growth in Japan, for the January-March 2017 quarter the consensus is that the Japanese Government is likely to announce economic growth corresponding to an annual growth rate of around 2%/year (update: Japan’s Government announced an annual growth rate of 2.2%/year).
Generally the business mood in Japan is optimistic now, personal consumption and industrial orders are growing. We see investments in preparation for the 2020 Olympics. Venture start-ups and venture investments are growing, while still at a low level, we see venture businesses developing not only in Tokyo, but also in regional centers around Japan.
One mid-term risk to Japan GDP growth is the potential implementation of the postponed consumption tax rate increase.
The big picture however is, Japan’s economy today is approximately the same size as 17 years ago in 2000. During the same 17 years most major economies, e.g. France, Germany, UK have doubled in size. France, Germany, UK’s economies today are about twice the size as in 2000, while Japan’s economy today is about the same size as in 2000. Quarterly GDP figures just measure the short term fluctuations of this long term behavior.
Rico Hizon: so what would Japan have to do to restart long term growth?
Gerhard Fasol’s answer
Japan would have to do three things to restart economic growth long term:
Population: Implement policies to make it easier for families to have children, shift spending from the aged to children, improve eduction, shorter work hours, build children’s day care centers, gender equality
Implement Prime Minister Abe’s “third arrow”, the reforms. Deregulation not just in a few “special zones” but nation wide.
Improve corporate governance to improve company’s growth, globalization and management.
Japan Post trips up on globalization: books YEN 400.33 (US$ 3.6 billion) losses due to an acquisition in Australia – with a Toshiba connection
Japan Post announced a loss of YEN 400.33 (US$ 3.6 billion), and a resulting net loss of YEN 28.98 billion (US$ 260 million) for the fiscal year ending March 31, 2017.
Japan Post Holdings was launched on the Tokyo Stock Exchange with the IPO on Nov 4, 2015.
Investors expect major growth of Japan Post Holdings into a global business, such as Deutsche Post has with privatization and later the acquisition and merger with the global logistics group DH about 20 years ago.
Around the time of the IPO Japan Post announced the acquisition of the Australian logistics group Toll for about YEN 620 billion (US$ 5.5 billion), while Toll’s market cap previous to the acquisition was about YEN 410 billion (US$ 3.7 billion).
Japan Post’s recent write-down at Toll is about equal its pre-acquisition market cap, or about 65% of the acquisition prize.
The deep problem of Japan Post’s steep write-downs at the Australian acquisition Toll, is that this casts doubts on Japan Post’s developments into a global business.
The Toshiba connection: Japan Post’s former CEO, Taizo Nishimuro (西室 泰三), previously served as CEO and Chairman of Toshiba
CEO of Japan Post at the time of the questionable Toll acquisition was no other than Mr Taizo Nishimuro (西室 泰三), former CEO and Chairman of Toshiba, now honorary advisor of Toshiba, who spent all his career at Toshiba, working at Toshiba since 1961. Toshiba is currently in severe difficulties caused primarily by Toshiba’s acquisitions of US nuclear construction firms, however Toshiba’s fundamental problems go back much much longer.
Japan Post Holding 
Japan Post Holdings was founded on 23 January 2006, following the path to privatization of Japan’s national Post Office initiated by Prime Minister Koizumi.
Japan Post Holdings is listed on the Tokyo Stock Exchange (No. 6178), IPO was on 4 November 2015, and has five divisions (since October 2012 three divisions):
Japan Post Service (日本郵便株式会社): mail delivery. Merged on October 1, 2012 with Japan Post Network to form Japan Post Co. Ltd.(日本郵便株式会社). Japan Post Co. Ltd is a 100% subsidiary of Japan Post Holdings (Tokyo Stock Exchange: 6178)
(Japan Post Network (郵便局株式会社): Post Offices = retail and real estate. Merged with Japan Post Service to form Japan Post Co., Ltd. on October 1, 2012).
Toshiba’s market cap today is YEN 1024 billion = US$ 9.6 billion.
Toshiba is expected today to announce write-off provisions on the order of US$ 6 billion.
Toshiba owes about US$ 5 billion to main banks as follows:
Mizuho YEN 183.4 billion
SMBC YEN 176.8 billion
Sumitomo Mitsui Trust Holdings YEN 131.0 billion
BTMU YEN 111.2 billion
Total YEN 602.4 billion = US$ 5.3 billion
Toshiba is on notice for delisting by the Tokyo and Nagoya Stock Exchanges, and faces the risk of being delisted by March 15, 2017, i.e. in about 4 weeks from now.
Toshiba is trying to raise capital e.g. by seeking investment in the IC/flash memory division, however, Toshiba seeks to keep control, so Toshiba is trying to raise a minority share, or non-voting shares or similar, in order not to lose control.
How did Toshiba get into a situation to potentially need to write off US$ 6 billion?
Toshiba acquired 87% of the US nuclear equipment manufacturer Westinghouse.
While Westinghouse is a famous name, what Toshiba actually acquired seems to have gone through a period of restructuring.
In 2015 Toshiba acquired the construction company SHAW’s assets from the Chicago Bridge & Iron Company CB&I for US$ 229 million plus assumed liabilities. CB&I had acquired SHAW for US$ 3.3 billion in July 2012, and SHAW has on the order of US$ 2 billion annual sales.
Why did Toshiba acquire a company for US$229 million, which has US$ 2 billion annual sales, and which was in 2012 acquired for US$ 3.3 billion? Which factors reduced the value of this company from US$ 3.3 billion to US$ 229 million within the 3 years from 2012 to 2015?
Presumably because there are large liabilities arising from nuclear construction, which Toshiba now seems to have to assume.
What is likely to happen now with Toshiba? Is Toshiba too big to fail?
Difficult to say what will happen. Toshiba is a huge corporate group with about 200,000 employees and many factories in many countries, so clearly Toshiba is not going to disappear without trace.
The immediate risk is that Tokyo Stock Exchange carries out its warning, and delists Toshiba, which will further increase Toshiba’s ability to raise capital. In the case of a delisting, private equity, and/or government might invest and restructure, and Toshiba might be split up. For example, Toshiba’s nuclear Westinghouse division is totally separate from its very successful flash memory division, there is not much business logic in having both under one holding company.
Impact on UK
Toshiba acquired 60% of UK based NuGeneration with the view to build nuclear power stations in the UK. This project requires Toshiba to contribute to the funding of the nuclear project, for which Toshiba would probably need a financially healthy partner.
What is the big picture? How did Toshiba get into this crisis?
Toshiba’s crisis has been building up for 20 years, and is in my view a consequence of corporate governance issues over a long time.
Essentially, Toshiba should have been reformed 20 years ago from the top down.
Japan’s 8 electronics giants have had essentially no growth and no profits for 20 years. This tragedy has been obvious for many years now, and was a big contributing factor for Japan’s government to reform Japan’s corporate governance laws and regulations, see:
Toshiba’s Board of Directors was exchanged in September 2015, and now includes several very capable and experienced Japanese independent Board Directors, but unlike Hitachi, even today neither Toshiba’s Board of Directors, nor Toshiba’s Executive Board include one single foreigner.
One might think that a huge global group like Toshiba with complex businesses around the globe might benefit from a variety of view points and experiences from different countries at Supervisory Board and Executive Board level – not all just from one single country. Japanese corporations including Hitachi, SoftBank, Nissan and a small number of others are now recognizing the benefits of diversity of experience and viewpoints at Supervisory Board and Executive Board level.
We can only hope that Toshiba’s executives and Board Directors have the experience and ability to solve the extremely complex issues deep inside the bowels of the US nuclear construction industry – far away on the other side of the world.
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.
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
In summary, I said that its not just about SHARP’s current predicament, but its about corporate governance reform in Japan, about reinventing Japan’s electronics sector, and that its more likely at this stage that Japan’s Innovation Network Corporation (INCJ) will take control SHARP, since INCJ is not just concerned with SHARP but with the bigger picture of restructuring Japan’s electronics sector.
INCJ has concepts for combining SHARP’s display division with Japan Display, and has plans for SHARP’s electronics components divisions, and for the white goods division, and other divisions.
SHARP governance: How and why did SHARP get into this very difficult situation?
Essentially SHARP assumed that the world market for TVs and PC displays will continue to demand larger and larger and more expensive display sizes, and thus took bank loans to build a very large liquid crystal display factory in Sakai-shi, south of Osaka.
In addition, SHARP, has a huge portfolio of many different products ranging from office copying machines and printers and scanners, mobile phones, high-tech toilets, liquid crystal displays, solar panels, and hundreds of other products. SHARP keeps adding new product ranges constantly expanding its portfolio of businesses, and rarely sells loss making divisions.
Effective and strong independent, outside Directors on the Board might have asked questions during the decision making leading to the building of the Sakai factory. They might have asked for a Plan B, in case the global display market takes a turn away from larger and larger and more expensive displays, or if the competition heats up and prices start decreasing, they might have asked about SHARP’s competitive strengths, they might have also questioned the wisdom to finance an expensive factory via short-term bank loans as opposed to issuing shares to spread the risks to investors.
Its not just outside Directors, shareholders could have also asked such questions.
SHARP has about YEN 678 billion (US$ 5.6 billion) debt, most is short-term debt, and in a few weeks, in March 2016, SHARP needs to repay about YEN 510 billion (US$ 4.2 billion), and needs to find this amount outside.
SHARP is a Japanese electronics company, founded in 1912 by Tokuji Hayakawa in Tokyo as a metal workshop making belt buckles “Tokubijo”, and today one of the major suppliers of liquid crystal displays for Apple’s iPhones, iPads and Macs.
SHARP today has about 44,000 employees, many factories across the globe, sales peaked around YEN 3000 billion (US$ 30 billion) in 2008, and show a steady downward trend since 2008.
Revenues (profits) peaked in 2008, and have fallen into the red since.
What future for SHARP? Focus vs portfolio company
SHARP (or rather, its creditors, the two “main banks” Mizuho and Mitsubishi-Tokyo-Bank, and others controlling the fate of today’s SHARP) needs to decide whether it focuses on a group of core products, in which case it needs to be No. 1 or No. 2 globally for these products. Successful examples are Japan’s electronic component companies.
Or on the other hand, SHARP could be a portfolio company, in which case this portfolio must be actively managed.
What future for Japan’s US$ 600 billion electronics sector?
These 8 electronics conglomerates are portfolio companies, and they need to manage these portfolios actively, such as General Electric (GE) or the German chemical industry are doing. Germany’s large chemical and pharmaceutical industries started active and drastic product portfolio management in the 1990s, and are continuing constant and active portfolio optimization via acquisitions, spin-outs, and other M&A actions, and so is GE.
Why “let zombie companies die” is beside the point
Concerning SHARP some media wrote headlines along the lines of “let zombie companies die”. Thats easy to write, however, SHARP is a group with 44,000 employees, many factories, about US$ 30 billion in sales annually.
“Let this zombie die” is not an option, SHARP has 100s of products, and divisions, and the best solution for each of these divisions is different. And that is exactly what the Innovation Network Corporation of Japan seems to be considering in its plans for SHARP.
I think the way forward is not “to let zombies die”, but to develop private equity in Japan
I think the move of Atsushi Saito, one of the key drivers of Japan’s corporate governance reforms, from CEO of Tokyo Stock Exchange/ Japan Exchange Group, to Chairman of the private equity group KKR is a tremendously important one in this context.
Will there be native Japanese private equity groups with sufficient know-how and ability to take responsibility of restructuring Japan’s electronics sector? Thats maybe the key question.
Why its not really about nationalism
Some media bring a nationalist angle into SHARP’s issues. However, Nissan was rescued by French Renault, UK’s Vodafone acquired Japan Telecom, and there are many other examples, where foreign companies acquire Japanese technology companies.
I don’t think nationalism is an issue here. The key issues is to create and implement valid business models for Japan’s huge existing electronics sector, and more importantly, create a basis for the growth valid new companies – not just reviving old ones.
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.
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’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
Corporate governance reforms in Japan are one component of “Abenomics” to bring back economic growth to Japan.
Corporate governance reforms in Japan 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.
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”
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”.
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.
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?
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.
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.
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:
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.
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:
According to the new Corporate Governance Code, the Board (independent which of the three options is selected) has the following three duties:
setting the directions of corporate strategy
encourage and support appropriate risk taking by senior management
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
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.
Mr Suzuki (Chairman of Suzuki Motors), wrote in his Japanese blog, that “ending the partnership with Volkswagen (Wagen-san as he calls VW) was like the relieve I feel after having a fishbone stuck in my throat removed”
No partnership works without meeting of minds, with opposite agendas and colliding expectations
by Gerhard Fasol, All Rights Reserved. 20 September 2015, updated 27 September 2015
Suzuki Volkswagen – bottom line first:
Volkswagen wanted Suzuki more than Suzuki needed Volkswagen
Volkswagen underestimated Suzuki’s strength and resolve, and didn’t do the required homework
Volkswagen overestimated its own leverage on the opposite side of the world from Wolfsburg
Partners with opposite agendas and colliding expectations, without communication and no homework can’t partner
Its not about “cultural differences”. Not at all.
On 9 December 2009 a beaming Martin Winterkorn (VW-CEO) was celebrating the new “comprehensive partnership” with Suzuki Motors, and Osamu Suzuki, the 79 year old CEO of Suzuki, was looking the other way, avoiding Mr Winterkorn’s eyes – as you can see in Reuters’ photograph of the occasion.
Reuters reported, that Mr Osamu Suzuki was asked how he would feel about a German CEO of Suzuki Motors in the future, and his answer was unambiguous: Mr Suzuki emphatically stated that Suzuki will not become a 12th brand for Volkswagen, and that he does not want anybody to tell him what to do.
Wall Street Journal reported, that Suzuki and Volkswagen would negotiate details in the weeks or months to come. We now know that these negotiations did not lead anywhere, and were never concluded satisfactorily.
It is obvious that there never was any “meeting of minds”, the expectations were colliding, and the CEOs had not a single language in common in which they could talk directly. At the press conference they looked away from each other.
Mr Suzuki (Chairman of Suzuki Motors), wrote in his Japanese blog, that “ending the partnership with Volkswagen (Wagen-san as he calls VW) was like the relieve I feel after having a fishbone stuck in my throat removed”
Professor Ferdinand Dudenhoeffer, Director of the Center for Automotive Research at the University Duisburg-Essen according to Bloomberg, summarized: “Mr Suzuki didn’t want to be a Volkswagen employee, and that’s understandable”.
Germany’s leading intellectual and business weekly Der Spiegel on 19 Sept 2011 quotes VW-CEO Martin Winterkorn about the VW-Suzuki relationship: “Da wackelt der Schwanz nicht mit dem Hund” (the tail is not going to wag the dog, which I guess has the meaning that Mr Winterkorn perceived Suzuki Motors as the junior partner who cannot have any independent power in a relationship with Volkswagen).
Suzuki Volkswagen alliance time line
9 Dec 2009: VW-CEO Martin Winterkorn and Suzuki-CEO Osamu Suzuki announced the “comprehensive partnership” at a press conference in Tokyo
9 Dec 2009: Suzuki transferred 107,950,000 treasury shares to Volkswagen AG, valued approx at 226,695,000,000 yen (= approx. US$ 2.3 billion)
15 Jan 2010: VW purchased 19.89% of Suzuki shares for about € 1.7 billion
Sept 2011: Suzuki’s Board decides to terminate the partnership
18 Nov 2011: Suzuki gives notice to Volkswagen of termination of partnership, Volkswagen does not reply (says Suzuki)
24 Nov 2011: Suzuki files for arbitration at International Court of Arbitration of the International Chamber of Commerce (ICC) in London
30 Aug 2015: ICC Arbitration Court issues judgement and holds the termination of the partnership valid, orders VW to sell all Suzuki shares back to Suzuki (or a 3rd party selected by Suzuki), and orders Suzuki to pay damages for breaking the agreement
17 Sep 2015 8:45am: Suzuki purchases back 119,787,000 of its own shares previously owned by VW via Tokyo Stock Exchange ToSTNeT-3 system for 460,281,547,500 yen (approx. US$ 3.9 billion), completing the termination of the partnership and capital alliance with VW
26 Sep 2015: Suzuki announced the transaction to sell all 4,397,000 Volkswagen shares which Suzuki owns to Porsche Automobile Holding SE, completing the termination of the partnership and capital alliance with VW
“Comprehensive partnership” without meeting of minds does not work
Partnerships are hard when CEOs on both sides don’t have any language in common, thus can’t talk to each other – and have exactly opposite expectations from the start and don’t address them until its too late
Processes and methods successful in Europe or USA often don’t work in Japan
Its not about “cultural differences”. Not at all.
Its about trust, respect, communication and “meeting of minds”, shared (not opposite) expectations and agendas.
VW made approx. US$ 1.3 billion profit on the Suzuki shares it owned from 2009-2015
Suzuki broke even approximately on selling own treasury stock to VW and repurchasing the same shares back from VW a few days ago, and on temporarily owning 2.5% of VW, but still may have to pay compensation to VW.
During the period 2009-2015 both VW and also Suzuki share prices increased substantially. The reason that VW made substantial financial profits from the VW-Suzuki share transactions, while Suzuki did not, is that Suzuki used 1/2 of the proceeds of selling Suzuki treasury stock to VW for R&D, thus had a much smaller holding of VW shares than VW did of Suzuki shares.
With cash reserves of approx. US$ 8 billion Suzuki will be just fine, and can now focus on expanding Maruti-Suzuki’s 37% market share of India’s passenger car market and other exciting growth projects.
And Volkswagen can now focus on growth markets, and Toyota – and other very pressing issues.
Quarterly financial reports: can they be the trees which obscure long term growth of the forrest?
As a Board Director of a Japanese company traded on the Tokyo Stock Exchange I have to study and approve monthly, quarterly and annual financial reports, and I share responsibility for the future success of the company.
It is obvious that the longterm success and growth of the company is the most important priority for all stake holders. So how useful are quarterly financial reports? Lets look at some recent developments and at an example below from our Report on Japan’s Telecommunications Industries.
Motivated by Professor John Kay’s report, the UK regulator removed the requirement for companies to publish quarterly financial reports.
Mark Zinkula, CEO of Legal & General Investment Management, one of UK’s largest investment management firms, around 8 June 2015 wrote a carefully worded letter to 350 UK company Chairmen, recognizing that each company has different circumstances, and encouraging them to report the most meaningful key metrics and to omit reporting quarterly financial results if these don’t contribute to longterm value creation. You can download Mark Zinkula’s letter as a pdf file here.
The European Union (EU) reduced the reporting requirements including the requirement for quarterly financial reporting.
Will Japan and other important countries such as USA follow this trend as well?
Quarterly financial reports: pro’s and con’s
Essentially all well managed companies have fine grained financial management systems which document the financial position of the company at any moment in time.
As an example, when Kazuo Inamori rebuilt Japan Airlines from bankruptcy, he created a reporting system which calculates the profit/loss of every single flight in real time: i.e. when a Japan Airlines flight from Tokyo arrives in San Francisco, the pilot and everyone else knows before landing in San Francisco whether this particular flight was profitable or not – while before Japan Airlines bankruptcy, profit/loss (mainly losses for the last years leading up to bankruptcy) was determined on a full company basis every 3 months in arrears. Read Kazuo Inamori’s talk here. Clearly Kazuo Inamori thinks that such fine grained profit/loss awareness is a crucial component for Japan Airlines’ revival from bankruptcy.
Its obvious that for today’s IT systems the creation of quarterly financial reports from such fine-grained measurement systems such as Kazuo Inamori had installed at Japan Airlines does not cause much additional effort or costs once the coding is done.
Quarterly financial reports: trees vs. the forrest
The figures below show exactly the same financial data – the net income (= profit) of Japan’s mobile operators NTT-Docomo, SoftBank and KDDI over the last 10-15 years:
Upper Figure:quarterly net income (thick curves) vs annual net income (thin curves)
Lower Figure: quarterly net income (thin curves) vs annual net income (thick curves)
It is hard to draw conclusions from quarterly income curves above. Most eye-catching is that SoftBank’s quarterly income results became much more fluctuating in the last two years. Its hard to judge the relative performance of Docomo, SoftBank and KDDI from the quarterly income curves.
Annual net income curves give a much clearer picture. Annual figures clearly show that SoftBank caught up and overtook Docomo and KDDI in net profits.
As Mark Zinkula points out that every company and every industry is different. In the case of Japan’s mobile operators, annual figures give a clearer picture.
Will quarterly financial reports become voluntary and go away? They might partly in the UK, and maybe also in other countries. As so often in finance, the UK sets the global trends.
Quarterly financial reports & the Toshiba accounting issues
Quarterly financial reports can be the trees and annual reports the forrest… seeing the forrest can be more important than seeing individual trees
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:
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.
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)
Dentsu dominates Japan’s media sector and advertising
Dentsu switches from JGAAP to IFRS accounting standards with big impact on KPIs
Dentsu dominates Japan’s advertising and media industries, and attracts some of the most creative Japanese talent, although Dentsu is not the first advertising agency in Japan – that priority belongs to Hakuhodo.
From April 1, 2015, Dentsu decided to switch to IFRS accounting standards from Japan’s JGAAP standards. For FY2014, Dentsu reports financial results both using IFRS and JGAAP standards, giving us the fascinating opportunity to compare both accounting standards for a major corporation.
So how big is Dentsu? For FY 2014 (April 1, 2014 – March 31, 2015) Dentsu reports (we have rounded the figures):
Net Sales (JGAAP) = ¥ 2419 billion (=US$ 19 billion)
Revenues (IFRS) = ¥ 729 billion (=US$ 6 billion)
For operating income, net income and other data IFRS and JGAAP measure quite different KPIs.
Disruption is on the way: CyberAgent based on blogs, Recruit based on classified advertising and HR, LINE based on sticker communications, and many more…
Managing Japan/West cultural issues via the Dentsu-Aegis-Network
As for many Japanese corporations, Dentsu’s challenge is to leverage a dominating position in Japan into a global business footprint, while managing the well-known cultural issues. Dentsu’s approach was to acquire the French/UK agency Aegis, and then via Dentsu-Aegis acquire a string of agencies all over Europe:
Dentsu dominates Japan’s advertising space, and is a very very strong force in Japan’s media industry sector, through control and management of major advertising channels with an overwhelming market share in Japan, and has been working hard to leverage its creative power and strength in Japan into a larger global footprint.
Toshiba over the last few weeks published a number of announcements, and corrections to these announcements concerning accounting issues. Toshiba also engaged internal and independent external expert commissions to analyze possible accounting discrepancies, these committees have made preliminary announcements.
At a recent Press Conference, the CEO of the Japan Exchange Group (JXP) which includes the Tokyo Stock Exchange, Mr Atsushi Saito, said that “he feels very much ashamed for Toshiba”, and that “he cannot understand how Toshiba can be so lazy about their accounting”.
To understand Toshiba in the context of Japan’s electronics industry, read our report on Japan’s electronics industry sector:
Japan’s top-8 electronics giants – including Toshiba – have essentially stagnated for the last 17 years with negligible growth and negligible profits. Japan’s top 8 electronics groups combined have sales approximately as large as the economy of The Kingdom of the Netherlands. However, the big difference is, that in the 17 years since 1998, the economy of The Netherlands has approximately doubled, while Japan’s top 8 electronics companies have not grown their sales at all over these 17 years. Expressed in Japanese YEN, the combined sales of Japan’s top 8 electronics companies in FY1998 is about the same as in FY2014.
Japan’s electronics parts makers are a very different story: similar to The Netherlands, Japan’s top-7 electronic parts makers have grown to more than twice the size over the 17 years from FY1998 to FY2014. Some of the Japanese electronics parts makers have growth targets which should allow them to overtake Japan’s current incumbent electronics groups!
The stagnation of sales growth combined with almost zero profits over 17 years of Japan’s top 8 electronics groups, of which Toshiba is one, certainly puts much pressure on Japan’s electronics groups to improve performance. This pressure might be the background of accounting issues.
Lets look at the actual Toshiba financial data in detail
The figure below shows Toshiba’s previously reported operating income/profits (blue curve), and the recently announced preliminary corrections (red curve). The combined amount of downward corrections is about YEN 50 billion (US$ 0.5 billion) in total.
Japan’s iconic electronics groups combined are of similar size as the economy of The Netherlands
Parts makers’ sales may overtake iconic electronics groups in the near future – they have already in terms of profits
In our analysis of Japan’s electronic industries we compare the top 8 iconic electronics groups with top 7 electronics parts makers over the period FY1998 to FY2014, which ended March 31, 2015 for most Japanese companies. Except for Toshiba, all Japanese major electronics companies have now officially reported their FY2014 results.
Japan’s iconic 8 electronics groups (Hitachi, Toshiba, Panasonic, Fujitsu, Mitsubishi Electric, NEC, SONY and SHARP) combined are as large as the economy of The Netherlands – but while the economy of The Netherlands doubled in size between 1998 and 2015, the sales/revenues of Japan’s iconic 8 electronics groups combined showed almost zero growth (annual compound growth rate = 0.4%) and almost zero income (profits).
Japan’s top 7 electronics parts makers on the other hand – similar to the Netherlands – more than doubled their combined revenues (sales) over the 17 years from FY1998 to FY2014, and earned healthy and increasing profits.
While several of Japan’s iconic electronics groups are fighting for survival, Japan’s parts makers have very ambitious growth plans – some of them may well overtake the traditional electronics conglomerates in sales – they have already in terms of profits. And they aggressively acquire around the world.
Detailed data and analysis in our Report on Japan’s electronics sector
Japan’s electronics parts makers combined more than doubled sales over the last 17 years
Japan’s iconic top 8 electronics groups showed almost no growth over the last 17 years
Japan’s electronics parts makers grow – the traditional electronics groups stagnate
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
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.
Corporate governance Japan: Prime Minister Abe urges reform of corporate governance
Reuters reports that Japan’s Prime Minister Abe urges company boards to reform corporate governance to include independent directors. I added the following comment.
Corporate governance Japan: exercise of shareholder power and emergency situations
The question of independent Board Directors is often framed in terms of exercising shareholder power over the company, as is the main message of the article above. Another focus of discussions on the role of outside independent directors, is during emergencies, and here the Olympus case is often cited.
Corporate governance Japan: steady state contributions of independent directors
As an example, lets compare NTT-Docomo and SoftBank. NTT-Docomo has a homogeneous pure Japanese Board, while SoftBank has independent Directors from many different countries and from many different walks of life. SoftBank recently overtook NTT-Docomo in terms of market cap, revenues, operating income and net income. https://www.eurotechnology.com/2014/05/07/softbank-overtakes-ntt-docomo-kddi/ In the end regulations have limitations, and the realities of the market decide, as is the case of SoftBank.
“Outside Directors” is only one step along the way to end the “inbreeding problem”. Bringing diversity into the management of Japanese companies is critical for growth in Japan: non-Japanese directors, women directors, non-Japanese women directors.
Corporate governance Japan: in the end the markets decide whether diversity is necessary, or whether in-breading wins
Of course the market decides: I believe that companies which do not bring in management diversity will find lower market capitalization than those which do.
I am European and independent Board Member of a Japanese company, traded on the Tokyo Stock Exchange. Since all business and all board meetings are in Japanese, full command of business Japanese is necessary, including the ability to read a big volume of Japanese reports 100s of pages long sometimes from one day to the next.
Corporate governance Japan: very few non-Japanese are capable of functioning on the Board of a Japanese corporation
There are only very very few non-Japanese people with the qualifications to serve as independent Board Directors, who have the necessary full command of Japanese. So there is a substantial bottle neck against bringing diversity into Japanese corporations even if there was a strong pull from Japanese corporations. Currently only a few excellent Japanese corporations exercise this pull, to pull in non-Japanese external Board Members.
One company which is remarkably advanced is Hitachi – Hitachi several outside and non-Japanese Board Members, including also one foreign woman recently.