I thought it might be illuminating to others if I wrote down why I founded BDTI, why it is a nonprofit organization, and why I donated a large portion of my wealth to it.

In a country where there is almost no third-party training for directors or education about corporate governance…where most people don't even know what it is…where there are virtually no discussions about it on SNS…where three nuclear meltdowns can occur after questionable risk management practices and almost no one even raises the topic of corporate governance…where the legal framework for governance often seems to have developed into anachronistic spaghetti that is not compatible with practices or expectations of most global investors… why am I doing this?

This is why:

1) Life is not all about money. Sometimes you just want to make things better in the world, even if success is not certain. Sometimes it just plain feels good to devote yourself to doing the right thing.

2) The world is at a crucial crossroads with respect to corporate governance and its relationship to topics such as economic stabiilty, risk avoidance, social responsibility, and sustainability. It has become clear that that major advances in governance will be crucial to health, safety, prosperity, and sustainability in this century. As a manifestation of this, funds invested with reference to ESG (environmental, social, and governance) criteria have grown to represent more than 10% of all actively managed funds, and amount greater than 10 trillion US dollars.

But is as if we are still groping in the dark. ESG may be the most persuasive rallying call so far, but it is still in its early days, is less a robust model than it is a working hypothesis, and its core concepts have not been integrated into hard or soft law. Criteria are debatable and difficult to compare and investment alpha is not yet fully proven. Is ESG just the newest fad for measuring management quality? If so, could it become the newest opportunity for managers to game the system, convincing investors of quality that is only superficial?

At any rate, to make things better, governance is the driver we must look to. I believe that mankind has only achieved a small proportion, perhaps only 10%, of the advances it can make in governance practices that will result in maximum responsble behavior by managers, boards, and all types of shareholders. Conversely, the accelerating pattern of corporate governance failures worldwide shows the huge risks of not increasing from this low level.

3) Many people have become disillusioned with, or have lost confidence in, the effectiveness of the existing framework, rules, and players in the cynically viewed corporate governance game around the world — because clearly, no developed country's legal and governance framework is significantly outperforming the others. Quite the contrary, all systems seem to be underperforming minimum expectations. Quite the contrary, irrespective of industry, managerial compensation systems, or legal and regulatory framework, all systems seem to share common problems:

catastrophic failures in risk assessment

massive externalization of risk, leading to huge government bailouts

perceived inadequacies in crisis management and disclosure during crisis

perceived or actual regulatory capture, and/or inability of regulators to keep up with technology and complexity

the difficulty for any single country to regulate truly global corporations, many of which have operations that are so big they could cause significant damage in multiple markets

perceptions that conflicts of interest, and cronyistic or clubby connections between directors, executives, bankers, advisors, and regulators are making some of these things worse

This disillusionment is a dangerous thing, because it reflects a significant decline of confidence and trust in markets and our economies. The fact that the problems listed above are occurring in many major legal systems requires us to resist the temptation to do what feels good and just bash offending executives, board members, and regulators — who are, after all, merely products of the systems they operate in. Rather, these issues are of a magnitude that requires us to engage in a deep debate and a re-think of the very foundations of modern corporate law, the desirable characteristics of corporations, and the necessary preconditions for more effective corporate governance…however difficult that may seem.

There are many core issues that may need re-thinking. How do we address the limitations of regulation, and reduce its transaction costs if possible, while at the same time ensuring that much less risk is externalized? Is limited liability always justified, or should it be modified? What can investors and companies do to create natural, balanced incentives for the enhancement of both financial returns and ESG considerations? How can more actual responsibility, accountability, and dedication – rather than just appearing to go the through the paces in a highly-compensated game – be instilled in actors in governance systems? How can global corporations better manage themselves, and how can and should we regulate them? How can we better control the impact of the conflicts of interest that are popping up like mushrooms because we have created multiple layers of intermediaries, each with its own agency problem?

In short, is there a better way to do all of this governance stuff, or at least the most important parts of it? We may not be able to come up with all the answers at once, but I think we have to start a deeper discussion, an exchange of opinions on a global level that is not blindered by the received wisdom, vested interests, and existing infrastructure of any one system. Right now, such blindered viewpoints represent 90% of the exchanges on these topics. Many observers remain in their own national silos, largely unaware of the others.

Therefore, I thought it important that BDTI provide an open discussion forum for this purpose, in addition to facilitating more humdrum exchanges of information about best practices, recent legal developments, and the like. I thought it would be even more meaningful if the forum could be bilingual and bring in the perspectives of both Japanese and English-speaking persons. After all, there are some aspects of Japanese corporate governance that I believe are truly superior to many other systems (such as full access to the proxy, and approval of board (executive) compensation); and there are some aspects of US or European systems that I see as truly superior (such as board composition requirements, attention to inherent conflicts, and flexible delegation to committees). Wouldn't it be wonderful if we could learn from each other? And even if we do not agree and converge, in the process we will probably come to understand governance dynamics more deeply. That can only be a good thing.

4) My children and wife are Japanese. I am a permanent resident here and will probably become a citizen someday. I care about this economy because I have come to love Japan, and because my children want to (or anyway, will have to) live here for the next 60-odd years. So, this is my way of repaying Japan for the rich career and life experiences I have had here, while also maybe helping my kids' future a bit.

5) Japan is one of the developed countries where training of managers and board members (both internal and external) about corporate governance and ESG considerations can bring the greatest benefits. Japanese people are diligent. Once they understand and accept the need for certain practices across the organization, Japanese managers and employees are usually fairly good at implementing them. Precisely because of the difficult factors I listed in paragraph 2, there is huge upside to the Japanese economy from BDTI's activities.

Imagine how the Japanese stock market's price book ratio (PBR) would be re-rated upwards if both domestic and foreign investor came to respect Japanese boards as being at or above a global standard. (The average PBR is now well less than 1, which means that the market believes most Japanese managers will make less than their cost of capital when they reinvest.)

Suppose most major Japanese corporations IR materials and web sites not only had a bunch of governance structure boxes and verbiage about internal control systems, but also outlined concrete policies regarding training about governance and related management topics (such as finance and capital allocation) for each level of the organization, e.g.: a) E-Learning and seminars for Section Chiefs; b) longer seminars and certificate courses for General Managers who may become candidates for board positions; and c) orientation and continuing education for board members, both internal and external. A company with policies like these is one that take corporate governance seriously, and is much more likely to implement it rigorously. At such a company, employees are more likely to stand up and speak when something is awry, their feet firmly planted on infrastructure and corporate culture that allows them to do so.

6) In my career as an investment banker, M&A advisor, and board member, I have seen many cases where inadequate knowledge of corporate governance, or insufficient dedication to its basic principles or just doing the right thing, resulted in deterioration of company value, job losses, bankruptcy, squandered opportunities, weakened competitive positions, and lawsuits. As an M&A advisor or as a board member, one sees what goes on behind the curtain, and often it is far from optimal. It is not fun to see (from the inside) a company slowly go bankrupt, or dwindle to half its former market position, or lose a life-saving opportunity and then get liquidated a year later. Nor it is fun to see internal matters such as sexual harassment go unattended. After a while, one wants to stop seeing these things happening so much.

Over time, one also notices that a big reason that such things occur is that there is a gap between the long-term orientation of Japanese employees in their 30s and 40s – who need the company to exist and expand over the next few decades – and the relatively shorter-term orientation of many board members. Senior Japanese executives at some Japanese companies are fond of saying that they their perspective is long-term and their highest priorities are employees and other stakeholders, but when you look at their actual decisions on the toughest issues, it often seems clear that they are mainly thinking about their own positions over the next few years. Understandably, deep down, if possible they would prefer to serve as directors for a few more years and retire with nice bonus, with few bothersome disruptions. For this reason, many boards have a pronounced tendency to postpone the toughest decisions. In such cases, when one reverts to the younger General Manager and tells him about that result, he complains about his seniors.

In other words, there are generation gap and hierarchy dynamics in many Japanese companies that undermine governance and decision-making that is in fact optimal over the long-term.

7) In Japan it is common to talk about having stakeholder capitalism — even though that is not what the Company Law prescribes. Despite this dissonance, concepts of stakeholder capitalism can work reasonably well if directors make a sincere, continuous and rigorous effort to actually understand the balance needed between all stakeholder interests in order to maximize sustainability and value of the enterprise for everyone. For well-managed companies, the end result is not that different from shareholder capitalism. All companies have stakeholders and have to live up to their obligations towards them; that is a large part of what management is all about.

However, in the absence of rigorous thinking about such issues, stakeholder capitalism can all too easily turn into an excuse to trump any proposal or postpone any decision by simply appealing to the presumed requirements of some other stakeholder.

In order for Japan's economy to recover to it fullest potential, and in order for many Japanese companies to become true multinationals that can integrate the employees and offshore firms they are now acquiring, executives and managers at many companies will have to better resolve such confusions. This cannot be done by issuing an order or writing a memo. It requires lots of deep thinking and discussion, and the involvement of younger people, foreigners and outsiders, — not just board members. Training by third-party organizations can play a a vital role here.

Moreover, if the legal infrastructure is modified in Japan, it will suddenly become all the more important for companies to address the human knowledge software that will be needed to make those new legal rules effective.

8) Japan is now trying to make a transition to a more charitable giving-based society, even though it does not have many traditions in that regard. To that end, the law was recently amended here so as to allow nongovernmental nonprofits to apply for preferential tax status as public interest organizations. I thought to myself, wouldn't it be great if training about corporate governance, which obviously is in the public/national interest, could be acknowledged as such by the government? – thereby making BDTI eligible for tax-deductible donations, legitimizing it, and attracting more attention to its activities from the public? Hence, BDTI' certification as a public interest organization marks the first time the Japanese government has ever confirmed that director training and eduation about corporate governance are important for society. This by itself is an important first step.

Next, I thought it would be good to give all those foreign institutions and investors who have been complaining about Japanese corporate governance for many years, a place to put their money where their mouth is in a way that will be perceived as utterly benign and non-threatening by Japanese citizens. As for domestic institutions and investors, even if many have not been critical, they should welcome the opportunity to help improve Japanese corporate governance and management.

Nicholas Benes Representative Director, The Board Director Training Institute of Japan

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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