Author: John West, Sophia University
Japanese companies, especially those in the automobile and electronics sectors, played a strong role in the country’s exceptional rise from the ashes of World War II.
Still today, Toyota is the biggest passenger car manufacturer in the world and is also placed among the world’s 50 most innovative companies. It is also ranked among the world’s most valuable brands alongside Honda, Sony, Lexus, Nissan and Uniqlo.
And yet Japanese companies typically compare poorly to their Western counterparts when it comes to productivity — about 30 per cent lower on average than US companies. Many have also struggled to respond quickly to market environment changes.
This has led many analysts and observers to question Japan’s system of corporate governance as one of the factors undermining Japan’s corporate performance. Other issues include rigid labour mobility, traditional work culture and quality of leadership.
Japan’s corporate governance has been characterised by close relationships between main banks and large corporations. This provided long-term stability, as did cross-shareholdings within corporate groups — corporate board members were typically insiders coming from a main bank, the corporate group and the corporation itself.
This system seemed to serve Japan well during its high-growth period leading up to the burst of the asset price bubble that hit the country in the early 1990s. But in reality, poor corporate governance probably contributed to some of the bad lending that led to the crisis and to the sluggish response that followed. The ‘insider dominance’ of boards also limited their capacity to hold management to account. This meant that companies were substantially protected from mergers and acquisitions, especially from overseas companies, which may have injected new dynamism into corporate Japan.
The Organisation for Economic Cooperation and Development (OECD) has stressed the potential for better corporate governance to improve capital allocation and firm performance monitoring. This would lead to the better use of Japan’s business research and development (R&D) and human capital, as well as facilitate more high-productivity activities.
This is why corporate governance reform was adopted as a key plank of the Japanese government’s Abenomics program to revitalise the economy.
A number of different corporate governance initiatives have since been implemented. In 2014, a Stewardship Code was introduced aimed at encouraging investors to improve their investee companies’ corporate value and foster sustainable growth. Then in 2015, a Corporate Governance Code was created urging companies to use better business strategies to enhance their mid- to long-term earnings power with appropriate cooperation with stakeholders.
While the impact of these initiatives is only slowly filtering through, corporate boards are already opening up to outside directors. The OECD reports that ‘the share of companies in the first section of the Tokyo Stock Exchange (2,021 in total) with two or more outside directors increased from 22 per cent in 2014 to 91.3 per cent in 2018’.
In 2018, a revision of the Corporate Governance Code and the Corporate Governance System Guideline addressed the issue of cross-shareholdings, diversity of corporate boards, the appointment of CEOs and independent advisory committees. Earlier this year, the government unveiled new mergers and acquisitions (M&A) guidelines.
As impressive as these initiatives may seem, genuine reform will require more than just legal and institutional changes. Mindsets and behaviour will also have to change. This will take time.
Japan’s corporate governance reforms were also critically assessed in the biennial Corporate Governance Watch report by the Asian Corporate Governance Association and CLSA Limited, a Hong Kong-based capital markets and investment group. They questioned the effectiveness of the focus on soft law rather than hard regulatory change and faulted Japanese regulators for not doing enough to improve minority shareholders’ rights. Japan slid from fourth to seventh place in the widely watched report — tying with India but languishing behind the likes of Thailand, Taiwan and Malaysia.
Improving Japan’s corporate governance would also help tackle corruption. While Japan is ranked in the same ballpark as many other advanced countries in Transparency International’s Corruption Perceptions Index — 18th out of the 180 countries covered — cases of corporate corruption stand out for their long duration and the apparent inability of corporate governance systems to detect them early. For example, in 2017 Kobe Steel admitted to falsifying data on the strength and durability of its products, a problem that had been going on for nearly five decades.
The spotlight has also shone sharply on Japan’s shaky corporate governance over the past year with the arrest of Carlos Ghosn, formerly CEO of Nissan and chairman of Mitsubishi Motors, on allegations of financial misconduct.
A new report by the OECD Working Group on Bribery highlights further measures that could help Japan strengthen its efforts to combat bribery. It recommends better enforcement of foreign bribery laws and strengthening the capacities of its law enforcement agencies to detect, investigate and prosecute foreign bribery offences. A more proactive culture of investigative journalism, civil society surveillance and whistleblowing could also help.
Japan’s future economic and political health depends crucially on succeeding with fundamental reforms to its corporate governance, along with the many other structural reforms proposed in the government’s Abenomics program. This is particularly important given the country’s low productivity and ageing population.
For now, the jury is still out as to whether the current efforts will be enough to revive Japan’s corporations.
John West is Adjunct Professor at Sophia University, Tokyo. He is author of Asian Century… on a Knife-edge (2018, Palgrave Macmillan).